How much to put into a pension?

Mirey

I'm in a somewhat fortunate position.
I don't have to pay rent and I'm earning a decent salary (£80k base).

I have £35k in an ISA/LISA
My current pension is at £20k.

My employer gives me 7% pension, and I'm putting in 13% on top of that. I'm in my late twenties so I still owe a student loan under plan 1.

Now, if I make my pension contribution 42% of my salary, the amount of 40% tax I pay is basically 0, and student loan contributions half as well.
My monthly take home would then be £2.6k.

As it stands, paying 13%, my take home is £3.6k.

The thing I can't decide is whether or not it's worth getting so much in a pension I can't access for at least another 25 years (and that's if the gov decide not to change it's mind, which I think it will) at the expense of saving £1k/month now.

I am trying to save up for a deposit to buy a house, but I can't help buy feel it might be worth saving for my pension, if only for a year or two (to kick start that compound interest)

kidmugsy

Mirey wrote: »

I'm in a somewhat fortunate position.
I don't have to pay rent and I'm earning a decent salary (£80k base).

With a promotion or big bonuses you might soon be breaching £100k. From there to £100k + 2 x Personal Allowance there's effectively a tax band of 60%. After £150k you start to lose annual allowance (for pension contributions) and the £150k is calculated in a rather ungenerous way.
https://3652daysblog.wordpress.com/2018/03/05/pension-allowance-taper/

So: there might be case for keeping some of your powder dry so that you can use carry-forward annual allowance in future. (You can carry forward three years worth of unused annual allowance.)

It would be a gamble, of course, but if you feel like not maximising your pension contributions currently you could always tell yourself that you're storing ammunition to use against the dreaded 60% tax band and the dreaded annual allowance taper.

AnotherJoe

Mirey wrote: »

I'm in a somewhat fortunate position.
I don't have to pay rent and I'm earning a decent salary (£80k base).

I have £35k in an ISA/LISA
My current pension is at £20k.

My employer gives me 7% pension, and I'm putting in 13% on top of that. I'm in my late twenties so I still owe a student loan under plan 1.

Now, if I make my pension contribution 42% of my salary, the amount of 40% tax I pay is basically 0, and student loan contributions half as well.
My monthly take home would then be £2.6k.

As it stands, paying 13%, my take home is £3.6k.

The thing I can't decide is whether or not it's worth getting so much in a pension I can't access for at least another 25 years (and that's if the gov decide not to change it's mind, which I think it will) at the expense of saving £1k/month now.

I am trying to save up for a deposit to buy a house, but I can't help buy feel it might be worth saving for my pension, if only for a year or two (to kick start that compound interest)

The bit of their mind they are most likely to change is 40% tax relief. So i would take it whilst its going* with the proviso that saving for a house also is needed for which the standard answers are HTB and LISA.




* I can see the new NHS input being part funded by its removal for example

jamesd

When do you think you might want to retire? Ten years from now isn't inconceivable, depending on what income you want and how much you spend on a house.

It's worth looking into VCTs because they deliver 30% initial tax relief plus investment performance with only a five year holding time. You could view it as deferring some of your income for five years to save tax. VCT dividends are tax exempt.

A key part of your situation is how long your free accommodation will last. Pension contributions are good but they might want you to make deposit and moving out a priority.

Bimbly

Pensions are great, but having a home is also great. I bought my first house at age 30 and it's been a good foundation.

How about this for a suggestion:

Look at what home you want to buy, look at how much they are and affordability. Look at how much you want / need to borrow on a mortgage and how much deposit you will need. Add in a chunk for moving costs. Decide a timescale on when you want to move. Now look at your budget and arrange a savings plan to meet that goal.

Whatever is left to go into pension.

---
Still not sure? Another approach could be take the extra that you could put into the pension and split it so half goes into pension and half goes into buy-a-home-fund.

Alexland

Do the maths on a property purchase first then put as much as possible remaining into a pension to reduce tax. Your future self will thank you.

Alex

Mirey

kidmugsy wrote: »

With a promotion or big bonuses you might soon be breaching £100k. From there to £100k + 2 x Personal Allowance there's effectively a tax band of 60%. After £150k you start to lose annual allowance (for pension contributions) and the £150k is calculated in a rather ungenerous way.
https://3652daysblog.wordpress.com/2018/03/05/pension-allowance-taper/

So: there might be case for keeping some of your powder dry so that you can use carry-forward annual allowance in future. (You can carry forward three years worth of unused annual allowance.)

It would be a gamble, of course, but if you feel like not maximising your pension contributions currently you could always tell yourself that you're storing ammunition to use against the dreaded 60% tax band and the dreaded annual allowance taper.

So with bonuses and things I'm likely be just over £100k.
That's really helpful and I didn't think about this.


Thanks everyone, it's been really helpful

Mirey

jamesd wrote: »

When do you think you might want to retire? Ten years from now isn't inconceivable, depending on what income you want and how much you spend on a house.

It's worth looking into VCTs because they deliver 30% initial tax relief plus investment performance with only a five year holding time. You could view it as deferring some of your income for five years to save tax. VCT dividends are tax exempt.

A key part of your situation is how long your free accommodation will last. Pension contributions are good but they might want you to make deposit and moving out a priority.

Free rent will last for a couple more years I suspect.

Ah, I forgot about those! I've bought into a few companies on crowdcube to take advantage of SEIS. I'll have a look into some VCTs