Workplace pension - opting out

jamesd

In a normal defined contribution pension an employer will match your contributions up to some level. In defined benefit schemes often used in the public sector 150% is more likely. You can't match 100% or 150% by a change from 20% to 40% income tax rate.

It's unlikely that you'll pay 100% in interest on anything you buy.

I'm assuming that about to buy a house still means more than six months away. Delay what I write next until after completion if it's sooner.

High interest student debts can be repaid more cheaply by getting 0% for purchase credit cards and putting day to day spending on them, using the money spent on the card to repay some of the high interest debt. This can also be used to increase money available for a deposit, though mortgage affordability will probably be reduced.

Paul_Herring

or if I've missed something important!

1) Employer contributions, AKA free money which you won't get if you defer contributions
2) Getting used to the 'deductions' that your future self would slap you for, for not doing it now.

enthusiasticsaver

Nope I think that is a terrible idea. There is an argument to say that paying the minimum into your pension to get the employers contribution and tax relief is ok when you are young if you have costly debts. If you are having to consider cancelling your pension to furnish a house then you are over committing. Furnishing a house does not need to cost an arm and a leg. Borrow things from family, buy second hand and be selective between what you want and what you need.

The main reason it is never a good idea to cancel pension payments (along with the employers contribution and tax relief) is because people are very often over optimistic about when they will get promoted, when they will get out of debt and when money will become easier. If you wait until then you could slip into your 50s with no pension and then you will kick yourself. Treat your pension contribution with as much importance as you do tax, repaying debt, and housing costs.

Paul_Herring

If you wait until then you could slip into your 50s with no pension and then you will kick yourself

.. also, this. But I alluded to it in my last comment

shinytop

OP, at the risk of being controversial on a pensions forum, I think you are right in that your idea could work out financially in your favour. You could stop paying and then catch up. You could end up with a bigger pension at less cost. But, for all the reasons mentioned by others, you could also end up with a big gap in your contributions from which you will never recover. It's a question of which is more likely and from the way you describe it, my money is on the latter.

Sailtheworld

rmc1664 wrote: »

Please let me know if this is a known trick, or if I've missed something important!

It would only be a trick if you were putting pension savings into an ISA or something with a view to diverting them to a pension at a later date when you get higher rate relief. It wouldn't be too difficult to calculate if giving up an employer contribution made this cost effective.

Your trick is different. You're just going to spend the money instead with a vague promise to catch-up at a later date i.e. not a trick at all but a common approach to retirement saving.

IanSt

rmc1664 wrote: »

I'm about to buy a house so could do with the extra income right now to get it furnished etc. and would also use the money to clear high interest student debts more quickly.

And are you 100% sure on the benefits of paying additional money in an attempt to clear off your student loans early. You've not said which student loan system you're paying under, but have you read up the various mse articles that have been written up on this topic.

If you've not, then maybe start with the folowing before proceeding:
https://www.moneysavingexpert.com/students/student-loans-tuition-fees-changes/
https://www.moneysavingexpert.com/news/2019/05/10-000s-a-year-are-volunteering-to-pay-back-their-student-loan--/

kinger101

Others have already pointed out that you'd be missing out of employer's contributions, and the benefits of compounding.

I'd also like to add that if your scheme operates under salary sacrifice (SS), you've overstated the benefits of basic v higher rate relief as you've ignored NI. So the costs of that £1 gross in a pension scheme is actually 68 p v 58 p, not 80 p versus 60 p.

After considering the marginal rate of 15% on pension withdrawals, you're getting a 25% return on investment on day 1. If there's a 1:1 employer match, it's actually a 150% return.

As an interim measure, it's easy to furnish a house fairly cheaply by getting furniture off e-bay or gumtree.

What jamesd said about using a 0% credit card to effectively move the student loan onto a lower rate also sounds great. Just do it AFTER you've completed. Best not to have anything hitting your credit report (particularly debt) when the lender does a final credit check.

cloud_dog

rmc1664 wrote: »

Hi,

Could this be a sensible reason to opt out of the workplace pension?...

You're currently only paying basic rate tax but believe that your career will lead you into the higher rate bracket. When you eventually reach the higher rate, you opt back in with a greater contribution (provided the employer allows it) to "catch up" the amount you missed by opting out, except now you effectively get a 40% tax break instead of 20% on the same contribution?
In my case, I'm about to buy a house so could do with the extra income right now to get it furnished etc. and would also use the money to clear high interest student debts more quickly.

Please let me know if this is a known trick, or if I've missed something important!

Thanks

OP, your question has an element of merit to it but by throwing out the bathwater (contributions) with the baby (employer contributions) you have gone too far (as most everyone above has mentioned).

Firstly, always make the maximum contributions to achieve the maximum employer contributions (as long as you can afford to do so).

Where your train of thought would likely have merit would be where you wish to make additional contributions to a scheme, where the company would not increase their maximum contributions, and you are a BRT payer. In this scenario you would be better off from a financial perspective by placing those extra contributions in to a LISA (assuming you can wait to 60 for access without penalty). You would gain the same government benefit (pension 20% tax relief or 25% increase on net contributions, and the LISA's 25% uplift for contributions). Additionally, this would save 'contribution space' in your pension with regard to the LTA, and as you mention allowing you to make much more beneficial contributions as a HRT payer.

There are a number of assumptions regarding earnings, future earnings, future financial requirements etc but the basic premise, assuming the initial golden rules (to ensure maximum employer contributions) are met has a degree of merit. Another assumption is whether you are paid via Salary Sacrifice (salary exchange), as this can add significant savings to your contributions.

MEM62

Awful idea.

Any spending now at the expense of your pension is taking money from your future self. Money put in in later years does not benefit from the additional years of compound growth - you cannot 'catch up.'

If you are making excuses to neglect your pension now you will be making excuses all your life (car needs replacing, just had a baby, boiler packed up, kids off to Uni) and at some point will face that 'oh-crap' moment in the future when you realise that do not have sufficient money to live on in retirement.

rmc1664 wrote: »

My employer allows me to adjust my contribution, so I could choose to add much more once I'm in the 40% tax bracket. So wouldn't this allow me to end up with the same pot at retirement but having paid less for it?

Errrr.....No. That will not be the outcome.