Should I rely on my company pension?

Thrugelmir

Linton wrote: »

If you want to invest the bonus rather than use or save the cash you have two main choices - pension or S&S ISA. As you would seem to be a basic rate tax payer the tax gain of paying into a pension comes from the 25% tax free yet get when you take your pension. So 25% X 20% = 5% benefit. But you cannot access the money until you are 55.


If you put the money into an S&S ISA, with possibly the same investments as the pension, you dont get this 5% benefit but you can access the money whenever you want. So which is most important to you, 5% extra or flexibility?


One thing to check- do you have a cash emergency fund of say 6 months living expenses? If you lose your job or have a major unexpected expense you dont want to have to sell your investments, possibly when prices are low. So you need a cash buffer before you start serious investing.

All things being equal. The gain computes to 6.25%.

There are also the other tax advantages and implications for benefits to be be considered when weighing up the options. Likewise the use of the funds as a form of life insurance pot.

LW7

Linton wrote: »

If you want to invest the bonus rather than use or save the cash you have two main choices - pension or S&S ISA. As you would seem to be a basic rate tax payer the tax gain of paying into a pension comes from the 25% tax free yet get when you take your pension. So 25% X 20% = 5% benefit. But you cannot access the money until you are 55.


If you put the money into an S&S ISA, with possibly the same investments as the pension, you dont get this 5% benefit but you can access the money whenever you want. So which is most important to you, 5% extra or flexibility?


One thing to check- do you have a cash emergency fund of say 6 months living expenses? If you lose your job or have a major unexpected expense you dont want to have to sell your investments, possibly when prices are low. So you need a cash buffer before you start serious investing.

Really great information, thank you so much. Very easily and simply put.

I do have an emergency fund, although this sits in an ISA at 3 months of my wage.

I feel it's probably more pertinant to reinvest into my pension, as commented above numerous times, it's now absolutely clear to me compounding should be my priority at this stage.

twotonealex

Have you considered that you'll want to stop working long before 70?

kidmugsy

OP, also consider the attractions of using your bonus to fund an S&S ISA now (or even an S&S LISA) with the possibility kept open of withdrawing the capital later in life and contributing to a pension then. This preserves flexibility at, potentially, trivial cost.

It will seem an excellent strategy if the tax relief rate is increased for basic rate taxpayers. On the other hand it will seem a poor strategy if your employer suddenly makes the terms of its scheme less attractive.

JoeEngland

mossmanian wrote: »

Really great information, thank you so much. Very easily and simply put.

I do have an emergency fund, although this sits in an ISA at 3 months of my wage.

I feel it's probably more pertinant to reinvest into my pension, as commented above numerous times, it's now absolutely clear to me compounding should be my priority at this stage.

It might be worth building up a bigger emergency pot than maxing out with the pension by putting your bonus in that too. 3 months wages is not a lot if you had a big emergency.

Zorillo

mossmanian wrote: »

I work for the largest Insurance company in the UK. It's very very safe to claim they will be around by retirement age.

I've been in the same industry the same length of time as you. I've been At Risk of redundancy five times. I admire your confidence.

mossmanian wrote: »

I had aimed to reach the 9% over my next two pay rises (which I get yearly of c2.5/3%.)

Get it to 9% sooner, you're giving up free money. Enjoy your bonuses a little, and consider upping the risk level on your investments while you're young.

FIRSTTIMER

I am in exactly the same situation as you actually but aged 34/5 - I have reviewed my pensions which both happen to be defined benefit schemes, the first from when I graduated and joined private sector and then left and the second now the TPS/USS scheme. I decided like you this month that I am now putting in the absolute maximum in my pension monthly until my NPA which is set at 65 for both schemes. That is now costing me 17.8% of my pre tax salary a month from April - which I think I can live with to be honest.


However I DO NOT want to be working past age 60 as the absolute maximum - so have opened a S&S ISA and LISA and I'm drip feeding around £250 monthly to pay for the gap between 60 and 65 to be honest in addition to me probably cashing in the first pension at this time too.


I would DEFO advice you to top up your pension if you are looking at it as a long term thing and can live without the cash - I have always found if its taken out of my salary - I have never really felt I have lost it.


The risk of redundancy is always an issue in any industry - I think if you're paying into a pension - its going to be ok long term - the issue is if the company pension fund goes bust - but again I think you're protected with this.


Insurance industry is very secure - but having been a finance/accountant guy previously - I know redundancy to save money is USUALLY to get rid of people who are actually long termers that are costing the company double the amount of money compared to new starters due to increased holidays/pension costs/salaries/company ni and ultimately the cost of such a big redundancy package. There is a very fine line that needs to be crossed in order for whether or not its more efficient to get rid of an employee or not due to costs. its not pc but its reality.

Lorian

>Over the next couple of years, I plan to increase my pension to the maximum employers contribution which hits me at 9%

Personally I'd be contributing the 9% to get the companies 14% as soon as possible, I love free money.

Remember the extra 5% will feel less in your take home pay because of the tax relief.

Anonymous101

I agree, increase your contributions up to 9% as a matter of urgency.

I'd also suggest you do some reading and scenario planning to understand the effect of compound interest and increasing your payments. As others have mentioned the growth over 35+ years is likely to be larger than your contributions. Its also important to get your head around the tax implications of any additional payment. I was amazed at the amount of tax I paid once I looked into initially and now contribute way over my employers matched percentages just to prevent the taxman getting his hands on my earnings.

If you're a higher rate tax payer you're getting almost double what it costs out of your net pay into your pension so it really is worth doing. Since I've been reading about it I've now lowered my expected retirement age from 68 to about 50. Although I really think it'll be earlier than that.

This might also be worth reading, https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

FIRSTTIMER

This is a great article, thanks - my question would be, if I have maximised the amount of pension I can save out of my salary.

Sorry to hijack the post....but

Does the additional I can save go into a S&SLISA/S&SISA or a SIPP. This is really to bridge a gap between say age 58-60 and 65. I have done half and half at the min between the two stocks and share options - but should I really be doing the LISA more due to 25% top up? I was a higher rate tax payer but now not.