Is starting a pension like taking a gamble on the future?

lonewolf123

Hi all

I am looking into opening a SIPP especially since I will be getting a pay rise soon that will push me into the higher rate tax band and getting relief on that 40% tax is looking very tempting.

However I was wondering if taking out a pension is kind of like gambling on what happens in the future as I still have another 30 odd years of working left and so much can change in that time.

My employer does offer contributions to my pension (only up to 2% of pay) but the pension options are quite limited with average returns (pretty much tracks inflation) and I feel I can do better investing into a SIPP which I can tailor my investment to my risk levels. Therefore I will NOT be eligible for employer contributions due to opting out.

Lets make one assumption, that I am very very good at saving money so the advantage of "a pension makes sure you have money to spend when you retire" is not relevant.

Here I am sat at the cross roads of should I take the money now and take the tax hit but I know this money is mine or should I pay into a pension and get that relief and take the tax hit when I retire?

Currently for example I have retired and I take money out of a pension I will be taxed at basic rate of 20% (presume I stay in threshold) but who knows what will happen in 40 years, what if basic rate in 40 years rises to 40% or if pension rules change and you can only take out pension money under certain conditions?

I'm slightly cynical about the whole pension thing as I'm paying NI but I can honestly see that I would not be getting that state pension in 30-40 years as people are living longer and its becoming more and more impractical for the government to pay that large sum of money out. So I always feel a bit bitter when I look at my pay slip and see NI deductions (I am also aware that my NI payments are not only for the state pension, but I hope you get my jist).

Can anyone offer me some insight on this or tell me outright that I'm being stupid and I should start a pension pot right now

chiefie

If you can save and make sure you don't spend it then carry on doing that. But a pension with 40% tax relief is really a no brainier. Why not do both and hedge your bets ��

Triumph13

lonewolf123 wrote: »

Can anyone offer me some insight on this or tell me outright that I'm being stupid and I should start a pension pot right now

Happy to oblige. You're being stupid.


Do NOT opt out of your employer's pension unless you have to make some outrageous level of contribution to get the 2% from your employer. Turning down free money is daft. By all means start a separate SIPP or PP for further contributions, but join your employer's scheme and pay in the minimum needed to get the maximum employer contribution. Even if the funds on offer are limited, if it's a 2% from you, 2% from employer deal that's an instant 100% return on your investment. You can always transfer it out to something with better choices when you change employer.

OldBeanz

In 1987 people were complaining about Mrs T messing about with pensions and not to rely on the state pension.
Those who did nothing about saving, regret it now.
The next Labour Government (may not be for a few years to be fair) will knock 40% tax relief on the head. Use it while you can.
Things will change in the next 30 years but money in a pension will still be required.

edinburgher

I'm happy to take a gamble on the future, 90% sure it will happen

Thrugelmir

lonewolf123 wrote: »

However I was wondering if taking out a pension is kind of like gambling on what happens in the future as I still have another 30 odd years of working left and so much can change in that time.

Rather than gamble. Why not influence the future through your own actions.

bigadaj

It's a gamble but unusually one very heavily weighted in your favour.

joujou

Saving your money in cash is a huge gamble on its value in the future. Cash is extremely risky.

dunstonh

However I was wondering if taking out a pension is kind of like gambling on what happens in the future as I still have another 30 odd years of working left and so much can change in that time.

How is it a gamble?
Put money in tax wrapper 1 and the money is there
Put money in tax wrapper 2 and the money is there
Leave the money unwrapped and the money is there.

The only differences are the tax treatment and maturity process.

My employer does offer contributions to my pension (only up to 2% of pay) but the pension options are quite limited with average returns (pretty much tracks inflation) and I feel I can do better investing into a SIPP which I can tailor my investment to my risk levels. Therefore I will NOT be eligible for employer contributions due to opting out.

Most workplace schemes limit investment choice to keep things simple. However, the returns on those funds tend to be consistent with mid table averages. If you are only tracking inflation over the long term then this suggests your asset allocation or fund selection is not right.

Here I am sat at the cross roads of should I take the money now and take the tax hit but I know this money is mine or should I pay into a pension and get that relief and take the tax hit when I retire?

Do you plan on being alive in retirement? If so, you will need money for that part of your life. How are you going to fund that period and what is the best way to do it?

I'm slightly cynical about the whole pension thing as I'm paying NI but I can honestly see that I would not be getting that state pension in 30-40 years as people are living longer and its becoming more and more impractical for the government to pay that large sum of money out.

The state pension is not the big burden to the treasury and the age increases have gone some way to alleviate future issues. IIRC, the state pension is only 1/5th of expenditure on pensions by the treasury. However, the state pension situation is irrelevant to your personal provision.

Can anyone offer me some insight on this or tell me outright that I'm being stupid and I should start a pension pot right now

You are being stupid!!!
Employer contribution and higher rate relief. Nothing else will come close to beating the pension.

lonewolf123

Thanks guys will seriously consider this!

Will take advantage of the employer contributions and contribute the excess of my salary in the higher rate tax band.

cns06

Personally I think cash savings are very important. However I would not save anything (other than emergency fund) in cash if your T -40 years from retirement. Inflation will have a massive impact.

However, once you get to within a 10-15 year window I think that's the time. Most pension advisors will do the same with your pension, usually a bit closer to the time though, 2-3 years ish.

The main risk factor for me with pensions is not tax, but the actual age at which you can access it. For someone who is 18 now I would expect SIPP RA to be well into the late 60s. Pretty scary stuff IMHO.

I cant say what will happen in the future though, and no one can.

However having savings, pensions etc is almost certainly going to put you into a better position.