Time to decrease?

Firefly12345

I don’t know if this is the right forum for this but here goes.

The basic figures that I need to give are

Salary: 130k + 10k bonus  (worked hard, at points got lucky. Very secure job in stable industry)

Age: 45

Dependants: Wife and 2 kids. Wife has a part time job that gives her enough cash to make her financially independent from me but minimal savings and no pension.

No schools fees. Mortgage for another 17 years @1k month.

Current pension pot: 450k, currently all equity

Company contribution: Double my contribution with a ceiling of 10% 

My current contribution: 16%

Other savings: 350k equity in house, 30k cash, 5k stocks and shares ISA

For around the last 4 years I have been putting in close to the £40k max amount into my pension as it is a no brainer. This is why my savings are so heavily weighted to my pension. The contribution is via salary sacrifice so I am saving 40% at source. In addition to this for the amount I contribute that takes my adjusted salary under 125k I am effectively saving 60% in tax as between 100k and 125k the personal allowance is removed. [break out the world’s smallest violin, this is very unfair!] The 60% tax I save doing this is decreasing year on year due to fiscal drag. E.g. inflation pay rises add to my salary but the band never moves. Pretty soon the effect will be minimal.

Anyway my question is this. What is the boards opinion of this plan? 

Starting in April 2022 (so one more year of 40k into the pot) I plan to decrease my contributions down to the minimum that will still see my company pay their max contribution. This is 5%. As the company will still pay their 10% my total contribution will drop from 26% to 15% or ~ 37k to 21k a year. I’m not a FIRE type of person and want to enjoy more of what I earn now. My calculations indicate that I am pretty safe to do this now. Even with the decreased contributions an average 4% return on my pension would see my hit 1M by the age of 57/58. If think if I continue at my current levels I am certain to breach the LTA by 55.

This will net me about £600 a month and I plan to use this to part finance buying a property abroad. Basically I want to have some fun with the money now (more holidays) and hopefully I’m buying an asset rather than something that will depreciate. 

Even with zero growth I should have at least 650k in the pot, retiring on this is hardly a disaster. I’m from working class stock and it is much more than my parents of the wife’s parents have. Most people I know consider what I have already to be a great finishing number.  Along with the equity in my house and possible small inheritance (won’t be millions but both our parents own their own modest properties, maybe £250k, I generally don't factor this in. Hope not to get it for a long time) it feels like it’s not that much of a risk I am taking. I would like to have about 50k / year in retirement but we could easily make do with less.

I see everyone else on this board saving more and diversifying into ISAs etc so I am wondering what people think? Is it OK to take the foot of the gas or should I keep up with the max contributions for another 5 years say?

dunstonh

I see everyone else on this board saving more and diversifying into ISAs etc so I am wondering what people think?

Why do you think ISA would be better than pension when you are earning £130k a year?

Albermarle

The pension is such a good deal for high earners it seems almost criminal ( on  a MSE site ) to turn your back on it .
Otherwise , despite your background ( like mine ) , you will have had many years of high earnings to get used to and cutting back a lot in retirement may not seem such a good idea when you actually do retire .
Of course you are right that a pension pot of £650K is way above average , but also somewhat less than needed for a very comfortable retirement income of £50K pa . Typically £650K could safely generate around £20K pa inflation proofed and before tax  for an early retiree, maybe £25Kpa  if markets are kind and you retire later. Of course you could take a lot more but with the risk of it running out later.
State pension will not kick in until your late 60's.
Other points would be your cash savings are not that high , considering your salary and that your pension is 100% equities.
Also it is useful for your wife to have a pension as otherwise when she retires , her personal tax allowance will be wasted if she has no taxable income. 
To be honest it would seem you could do a lot of this and still have plenty of play money with your very high salary.
Maybe have a good look at your expenditure budget ?

LHW99

Although your wife is only part time, if she is eligible, she should be paying into an autoenrollment pension.

However even if she doesn't meet the criteria for automatic enrolment, she may still be able to opt-in, or join the scheme (those are not the same!).

https://www.thepensionsregulator.gov.uk/en/business-advisers/automatic-enrolment-guide-for-business-advisers/7-assessing-and-enrolling-staff/opting-in-and-joining

Firefly12345

dunstonh said:

I see everyone else on this board saving more and diversifying into ISAs etc so I am wondering what people think?

Why do you think ISA would be better than pension when you are earning £130k a year?

I don't but if I am nearing the LTA then that it's a better option for non-matched contributions. 

MX5huggy

You’re bringing home about £66000 per year I think, plus your wife is independent. Where is all the money currently going? Should be able to save an additional £600pm from this. 

dunstonh

Firefly12345 said:

dunstonh said:

I see everyone else on this board saving more and diversifying into ISAs etc so I am wondering what people think?

Why do you think ISA would be better than pension when you are earning £130k a year?

I don't but if I am nearing the LTA then that it's a better option for non-matched contributions. 

Possibly the case if you have modelled it going forward.   However, next in the pecking order would be your wife's pension (pension trumps ISA in most cases)

Firefly12345

MX5huggy said:

You’re bringing home about £66000 per year I think, plus your wife is independent. Where is all the money currently going? Should be able to save an additional £600pm from this. 

Good question and I think Albermarle made the same points. First point is that this has only been my salary for less than 3 years. 10 years ago I was on 50k a year, then 65 then 90. At the lower levels not much saving was done. As for why I don't have more cash right now there are 2 reasons:

1. I lost about 25k in the stock market trying to get rich quick - cest la vie. I've had to admit the evidence is overwhelming that I'm not a good stock picker so that is now gone! I don't miss it.
2. I've also spent at least 35k on my house. 

Current situation. Believe it or not I do track my outgoings every month. Over the past 12 months I've averaged saving £1.5k a month. Of that I tend to spend 1/3 on holidays, 1/3 on my house (nearing the end of things to do) and save a 1/3. So saving about 5/6k a year [not including 2.6k a month into pension and paying off the mortgage]. I'll freely admit we could save more but I like going out, eating out, expensive gym membership, Waitrose.... you get the picture. I don't make any apology for this, life is far living. If anything I'd like to go out more and experience more. 

I think part of this is me not wanting to give up my security blanket. I know I could almost certainly afford an extra 600/700 a month and not change my pension contribs but I won't save much. Thinking about it for the first time I realise my main concern is that I might start to feel some stress about money! I like the feeling I have now of having zero money worries. If I simply pay for my pad abroad with lower pension contributions I know it wont impact my lifestyle. I am also buying an asset.

The 650k pension is, I think, a worst case scenario with a low probability. I could work on if required. Very more likely is that I will get the magic million around 57/58. If this bull market goes on much longer it will be before that. I think the balance of risk is OK.

Re. the wife having  pension she runs an online micro business and she does not really pay any tax now so I don't think it's worthwhile. 

Sorry I'm really rambling here. I realise this post is probably extremely crass in many regards, apologies.

MallyGirl

wife can get tax relief on her pension contributions even though she doesn't pay tax. You are missing a trick there

Thrugelmir

Firefly12345 said:

 Even with the decreased contributions an average 4% return on my pension would see my hit 1M by the age of 57/58. If think if I continue at my current levels I am certain to breach the LTA by 55.

The time to worry about such first worlds problems is when the time actually arrives. Has been an exceptional period of market returns that is down to relatively few companies. The next decade or so may be very different. 

Albermarle

Re. the wife having  pension she runs an online micro business and she does not really pay any tax now so I don't think it's worthwhile. 

By a quirk of the system , you do not actually have to pay tax to get tax relief.

If she say earns £10K ( and pays no tax ) she can add £8K to a pension and £2k tax relief will be added.

Regarding LTA - the saying is 'don't let the tax tail wag the investment dog' In other words do not let a fear of paying some extra tax , colour your plans too much and maybe end up losing more in the end.

Also as Thrugelmir says a big slump in the markets may anyway make paying LTA tax a distant dream . Something nice to worry about if you actually get there.