3 Years Maxing for Comfortable 30+ year retirement

timthebin

Afternoon all,

I have been thinking an awful lot about retirement / Financial Independence for the past year and thus far have focused on paying off all non-mortgage debt - which has been done. I also have an emergency fund in place. The next part of my plan is to ensure my retirement is both possible at the earliest opportunity (I'd like the option) and comfortable. I have what I think is a sound plan but would love to sense-check what I'm doing. Thanks in advance for your comments/thoughts.

A little about me - I'm 30 years old and earn £70k gross - currently have around £30k in two DB pots so its fair to say pensions haven't been at the forefront of my mind in my 20's. I am a fairly frugal person and can happily live off much less than this. Much less. This means that if I forfeited £35k plus my employer £5k contribution into my pension, I'd have a gross income of £35k - I'd save a shed load of tax and be able to retain my Child Benefit payment.

Using a compound interest calculator if I save £40k for the next 3 years (on top of my current £30k pots) I would have roughly £164k in 3 years (I thought 5% interest inflation adjusted was fair). I then calculated even if I didn't contribute a penny to the pot until my 60th birthday (I guess would be the minimum age by the time I am 60); then this post would be worth £630k (27 years @ 5%). Obviously I would continue to contribute the minimum to get my employer match from this point and then invest in ISAs to get to early retirement in my 50s - Of course I'd try to resist the temptation to OP the mortgage (which is small as I live north of Manchester).

Anyway rather than bang on about my life story - can I just ask am I missing something here? Or is this plan actually viable? Thanks again in advance!:beer:

Dazed_and_confused

Think you would get comments if you explained what you actually intend doing as this is (to me at least) as clear as mud!

This means that if I forfeited £35k plus my employer £5k contribution into my pension, I'd have a gross income of £35k

timthebin

Dazed_and_confused wrote: »

Think you would get comments if you explained what you actually intend doing as this is (to me at least) as clear as mud!

This means that if I forfeited £35k plus my employer £5k contribution into my pension, I'd have a gross income of £35k

Thanks for that.

Apologies - as you say I could have been clearer here. As I earn £70k gross as a salary, my plan would be to channel £35k into my DC pension, my employers additional £5k means I'll be putting the annual allowance of £40k into my DC pension each year.

As I am personally putting £35k into the pension pot, this means my (taxable) salary will be £35k (£70k gross - £35k pension contributions) = £35k.

Hopefully my plan isn't too unrealistic!

Dazed_and_confused

What other taxable income do you have in addition to your salary?

How have you decided to reduce income to that extent, the 40k contribution limit?

What made you reduce it past the 40% tax threshold rather than be less extreme for an extra year (or two)?

kidmugsy

I suggest you contribute only enough to (i) gain max employer contribution, and (ii) avoid higher rate tax. You can carry forward the unused bit for three years, and use it in a big splash if you want to. But it will also be available to avoid 40% tax if you get a bumper pay rise or bonus; you won't have frittered it away on gaining just 20% relief. Meantime the extra dosh could be bunged into an ISA, including a LISA if you like.

The likeliest change in tax relief on the horizon is probably an equalisation of the relief for 40% and 20% taxpayers. You'd probably gain, therefore, from delaying contributing anything that at present gains only 20% relief.

P.S. "currently have around £30k in two DB pots": no you don't. That's not how DB pensions work.

timthebin

Dazed_and_confused wrote: »

What other taxable income do you have in addition to your salary?

How have you decided to reduce income to that extent, the 40k contribution limit?

What made you reduce it past the 40% tax threshold rather than be less extreme for an extra year (or two)?

Thanks D&C - to answer your points. (i) I have no other sources of taxable income unfortunately.

(ii) I suppose I want to 'make hay whilst the sun shines' with respect to my income - I work in Financial Services and whilst I do not hate my job - I certainly don't want to be working in the industry for the next 30 years.

(iii) As above really, whilst there's no reason to think my job is at risk I would just feel 'warm' knowing my later years are taken care of - I did not consider the tax implications too much.

kidmugsy wrote: »

I suggest you contribute only enough to (i) gain max employer contribution, and (ii) avoid higher rate tax. You can carry forward the unused bit for three years, and use it in a big splash if you want to. But it will also be available to avoid 40% tax if you get a bumper pay rise or bonus; you won't have frittered it away on gaining just 20% relief. Meantime the extra dosh could be bunged into an ISA, including a LISA if you like.

The likeliest change in tax relief on the horizon is probably an equalisation of the relief for 40% and 20% taxpayers. You'd probably gain, therefore, from delaying contributing anything that at present gains only 20% relief.

P.S. "currently have around £30k in two DB pots": no you don't. That's not how DB pensions work.

Thank you for this insight KM - I concur with your view especially when accounting for the most likely of tax changes. With respect to my role, there is a good chance of promotion but I don't think I could handle the stress!!

Lastly you are correct, all my pots are DC (typo above)!

Thanks again for taking the time.

AlanP_2

You mention Child Benefit - do you have a partner, what is their pension situation?

Ideally you both want to at least use up tax free allowance each year when drawing on pensions.

timthebin

Thanks Alan,

I do have a wife who is a P/T teacher - as you can imagine he is on a DB (average salary scheme). I decided to leave her out of the equation for simplicity but I fully acknowledge that we must plan for retirement together.

To be honest she thinks I'm a little extreme with what I described above (as I'm always talking about a new(er) car) however my mind is already moving onto what should be the next financial goal once the pension is set up to get me down to the 20% tax bracket - i.e. invest through an ISA or pay off my £180,000 (1.9% APR (60% LTV) home....

For me, whilst I don't work excessive hours because of my child (35 hours a week) I do see my 30's as a decade to build a really strong financial base. I would ideally like to reduce hours in my 40's and ensure I'm never in a situation where I have to take a particular job to pay the bills at the expense of coming home each night at 5:30 to see my family... sorry for my O/T ramblings there....

Andy1977

timthebin wrote: »

This means that if I forfeited £35k plus my employer £5k contribution into my pension, I'd have a gross income of £35k - I'd save a shed load of tax and be able to retain my Child Benefit payment.

Can I just check about the child benefit payment bit - I've never really been clear on how that works. I know that the benefit tapers once one parent's income hits 50k, is it correct that you can keep increasing your pension contribution to a level that ensures you retain the full benefit ( assuming you don't exceed the maximum annual contribution allowed)?

timthebin

Hi Andy,

Yes that is correct - The amount of Child Benefit (CB) that you must pay back is dependant on your taxable income - this is where salary sacrifice comes in so handy .

If your taxable income, as per your p60, is under £50k you can retain 100% of CB payments; once you hit £60k you retain 0% i.e. you have to pay it all back. The tapering is even so if you earned £55k then you pay 50% back...

Hope that helps!

Dazed_and_confused

The child benefit is not linked to taxable income. If it was sipp/personal pension contributions would not affect it as they do not reduce taxable income whatsoever.

Child benefit is based on adjusted net income which is totally different.

Basically you can be taxed on £60,000 and retain your child benefit if your adjusted net income is £50,000 or less.