Increased contributions - any down side?

BachSoon

I'm not very savvy with pensions etc and only really have a fairly basic personal finance knowledge.
I qualified into a professional role when I was 30 (2 years ago). I increased my contributions to 10% not long after I qualified and my employer puts in 5% and has done for quite a while. I did it on the basis that I read somewhere about putting in half your age when you start a pension. It's not my only pot as I did work at the company for 2 years in a just over minimum wage type entry level job and also at a different company in the same role, but the amounts I put in would be fairly low (couldn't tell you how much).
Is there any downside to me putting in 15% per month? Other than the obvious of not having it available in my pay packet? I can change my contribution any month if that makes a difference, rather than it being annually.

P.s. I'm not completely daft, however my above post makes me sound they should teach this stuff at school

Zorillo

There's no downside at all beyond not being able to spend it.

tacpot12

They should teach this stuff at school, but fortunately you can learn about pensions at any time.

The only downsize to saving into your pension is that the money is then trapped there. Even in an emergency, you cannot get at that money. Personally, I have always found this to be a positive benefit, because it protected that money for my retirement, but it is a restriction that you need to be aware of. Being able to change your contribution monthly gives you some ability to adjust your pension saving if an immediate need comes up, but then your pension is not being funded as well as it would be if you managed your affairs so that you could cope with the odd financial emergency (e.g. the need for a new washing machine, boiler or car).

Apart from that, there is no downside to saving into a pension, and there is the positive benefit that the more you put in the more tax relief you get from the government - which is why the government introduced the Lifetime Allowance for pensions, to prevent wealthy people from receiving limitless tax relief.

So, make sure you have Permanent Health Insurance, save regularly for expenses that are guaranteed to arise and also save a bit for expenses that you cannot predict, and the rest in your pension. You can stop saving for expenses that you cannot predict when you have six months of living expenses. The downside to this approach is that once you have more than £6000 in savings, the help available from benefits is less, but hopefully you will never need to claim any benefits other than your state pension.

tacpot12

While we are on the subject of pensions, you should check your NI contribution record to see if you can make up any missing years of contributions needed for you to get a full state pension. See here: https://www.gov.uk/check-national-insurance-record

The UK State Retirement Pension is a very valuable and very cost effective scheme, so making sure you can receive the maximum state pension is a sensible thing to do. If you have any missing years, and have spare cash now, you can make voluntary payments that will fill in these missing years which might mean that you can stop work earlier if you wanted to.

Dazed_and_confused

As the op is currently 32 and must therefore have at 35/36 years left to contribute I think paying earlier years NI is unlikely to be of value. But as you say might be worth doing if any years have very very small amounts due.

And irrespective of that checking your forecast is no bad thing.

Johnnyboy11

Surely the down side is that you save tax now, but pay it when you take your pension, albeit 25% is exempt? So you save 20% tax on 25% of your pension pot. So for a measley 6% you tie up your money and carry the risk of more Government pension raids until retirement age.

Marcon

Johnnyboy11 wrote: »

Surely the down side is that you save tax now, but pay it when you take your pension, albeit 25% is exempt? So you save 20% tax on 25% of your pension pot. So for a measley 6% you tie up your money and carry the risk of more Government pension raids until retirement age.

Nothing measly as that 6% compounds over the years and builds up in a tax-favoured environment...

Albermarle

Surely the down side is that you save tax now, but pay it when you take your pension, albeit 25% is exempt? So you save 20% tax on 25% of your pension pot. So for a measley 6% you tie up your money and carry the risk of more Government pension raids until retirement age.

Two points :
1) You often need to contribute yourself to benefit from the employer contributions, which is effectively free money .
2) If you are a higher rate taxpayer then you get double tax relief.

So if you are a basic rate taxpayer and self employed then the argument about 6.25% benefit vs tying your money up a long time is valid . If your employer is also putting money in and/or you are a higher rate taxpayer , the pension is streets ahead of any other form of conventional investments/savings.

hugheskevi

There is a risk that the distribution of contributions is not optimised over time, and a different distribution of contributions tailored to individual circumstances could lead to a better outcome.

To illustrate, assume a person is a basic rate tax-payer now, but in future will comfortably be a higher rate taxpayer, say £70K, and also have a young family.

If the individual simply contributes 15% of their income to a pension throughout, they only benefit from basic rate relief in the period before they become a higher rate taxpayer. When they are earning £70K if they are still simply contributing 15% then they will entitled to almost no Child Benefit.

If instead the individual chose to only contribute enough to a pension when a basic rate taxpayer to benefit from maximum employer contributions and put the rest of the 15% in an ISA instead, they could have higher pension contributions when a higher rate taxpayer (paying more into the pension from salary, and reducing the value of the ISA to replace the income from the higher pension contributions) and gain from higher rate relief instead of basic rate relief on the money they effectively transfer from their ISA into the pension, as well as benefiting from Child Benefit for at least some of the period.

LHW99

OP you say

It's not my only pot as I did work at the company for 2 years in a just over minimum wage type entry level job and also at a different company in the same role, but the amounts I put in would be fairly low (couldn't tell you how much).

I would suggest you find those details now, and keep a record of the name of the pension, your reference number if there is one, the years you contributed to it (with at least some P60 or other paperwork confirming it) and its current value. Keep them safe, because its going to be a lot easier to do now than in maybe 30 years time when the plans have been shuffled off to new owners and you have difficulty tracking things down.
You could consider moving them into the current scheme, although that isn't specifically necessary unless you could get lower charges or a better choice of funds.