Embarrassed 40 year old - no pension.

sho_me_da_money

Hi Guys,

I kinda feel embarrassed putting this up here as I am on of the many that never thought about a putting into a pension. I am 40 years old and have zilch in a pension.

My company offer a pension with Legal and General where they match contributions up to 5%. I have two options to select. I don't recall the official name of one of them but the other is 'Salary Sacrifice'.

My annual gross salary is £62,000.

If I wanted to go aggressive and try and aim for a retirement at 55 years old, how much would I need to put into the pot on a monthly basis to get some sort of decent return please?

I have a very limited understanding about 'tax relief' and I am not sure what the magic number is to get maximum returns for the pension. I think the 40% tax rate starts at any amount over £50,000, meaning, I am paying 40% on £12,000 - is that correct?

Do I simply commit to paying £12,000 per year into the pension via salary sacrifice, which then takes me back to becoming a basic tax rate payer? Should I pay more or less?

I would be very grateful if you could offer your advice on how much I should start pumping into the pot for maximum gains.

JoeCrystal

Well, you are still young enough that you can catch up. It could be a lot worse if you was in your 60s for example but you got over twenty years to catch up! Don't forget about the State Pension as well. The fact you are earning a very high salary actually will help you a lot. However, I would urge you to focus on building up an Emergency Fund of at least six months expense as well. While it is difficult to ensure the best return, the best way to get returns would be to contribute enough and early!

While you got a goal of 55, please bear in mind that the age of accessing your pension will go up to 58 by 2028 as announced by the government but that give you three more years to figure something out. Another important number is what is your number, the ideal retirement income you want and need by 58. Once you got that, it would be pretty straightforward to work backward on the amount of contribution you need to make assuming a pessimist return.

You should however be auto enrolled into workplace pension scheme already or did you opt out then?

Good luck!

QrizB

sho_me_da_money said:

My company offer a pension with Legal and General where they match contributions up to 5%. I have two options to select. I don't recall the official name of one of them but the other is 'Salary Sacrifice'.

My annual gross salary is £62,000.

If I wanted to go aggressive and try and aim for a retirement at 55 years old, how much would I need to put into the pot on a monthly basis to get some sort of decent return please?

How much do you actually need to live on now, and what sort of retirement are you looking for? A lifestyle that needs £20k pa allows more saving now (and needs a smaller pot to fund in retirement) than one that needs £50k pa.

Retireinten

Hi

I agree with Joe.  Definitely sort out an emergency fund as a priority but I would also pay into a pension to get you out of the 40% tax bracket and to get hold of that employer contribution. Salary sacrifice means you save NI as well as income tax so usually the best way to go.

But this is also a question of 'how much can you afford?'.

On a salary of £62k with no savings or investments where is your money going? This could mean a significant lifestyle change for you...is this something you can do and are prepared to do?


In respect of retiring at 55, we would need more information. For a start you need to know how much retirement income you want each year. This is personal to you and your circumstances. Have a look at The Number thread on this board... this thread may help you work this out.


We have no information about your living situation - do you rent, have a mortgage etx or whether you have a significant other half with pension savings etc. The more detail you share the more useful the responses will be.

Sea_Shell

Retireinten said:

Hi

I agree with Joe.  Definitely sort out an emergency fund as a priority but I would also pay into a pension to get you out of the 40% tax bracket and to get hold of that employer contribution. Salary sacrifice means you save NI as well as income tax so usually the best way to go.

But this is also a question of 'how much can you afford?'.

On a salary of £62k with no savings or investments where is your money going? This could mean a significant lifestyle change for you...is this something you can do and are prepared to do?


In respect of retiring at 55, we would need more information. For a start you need to know how much retirement income you want each year. This is personal to you and your circumstances. Have a look at The Number thread on this board... this thread may help you work this out.


We have no information about your living situation - do you rent, have a mortgage etx or whether you have a significant other half with pension savings etc. The more detail you share the more useful the responses will be.

I was just going to ask that...

If you don't currently have any savings you must be spending it all, so what are you going to cut back on to "release" the £12,000 to put into your pension now?

Sea_Shell

As an very rough, back of an envelope, example. 

If you had a total pot of £500k (savings/investments/pensions), using a "safe" drawdown rate of 3% pa, would allow a £15,000 pa pension.    Which sounds like not much if you're used to bringing in over 4x that amount.

You have 15 years to save up in, if you want to retire at 55.    So even a basic calculation (excluding growth) would mean that you'd need to be saving over £33,000 a year to get to a pot of that size.

sho_me_da_money

Thank you for the comments all, here is more transparency;

Salary
£3360 after tax, which includes deducting contributions towards benefits that my company offer - private medical, dental, life insurance, critical illness cover, another illness cover (forgot the name).
Current Outgoings

• I have a 0% credit card on which I owe £12,000 and currently pay off £500 per month.
• Mortgage payment is £350 per month.
• My bills (inc. council tax) are around £500 per month
• My food costs are around £300 per month

Savings

• I have £15,000 saved in company shares
• My mortgage has with 24 years on it that I owe a total of £85K. The current value of the property is around £200-230K
  

Reducing Crap for Pension

• I do spend money on a lot of crap that I need to stop with - takeaways etc. Perhaps I can force myself to spend no more than £500 per month? This would mean my total outgoings would equate to around £2000.00, which means I could put £1360 away per month towards a pension?

Comment Above
"but I would also pay into a pension to get you out of the 40% tax bracket and to get hold of that employer contribution. Salary sacrifice means you save NI as well as income tax so usually the best way to go."
Question:
Is it best to always salary sacrifice an amount that takes me under £50K and out of the 40% tax bracket?

Anonymous101

sho_me_da_money said:

Thank you for the comments all, here is more transparency;

Salary
£3360 after tax, which includes deducting contributions towards benefits that my company offer - private medical, dental, life insurance, critical illness cover, another illness cover (forgot the name).
Current Outgoings

• I have a 0% credit card on which I owe £12,000 and currently pay off £500 per month.
• Mortgage payment is £350 per month.
• My bills (inc. council tax) are around £500 per month
• My food costs are around £300 per month

Savings

• I have £15,000 saved in company shares
• My mortgage has with 24 years on it that I owe a total of £85K. The current value of the property is around £200-230K
  

Reducing Crap for Pension

• I do spend money on a lot of crap that I need to stop with - takeaways etc. Perhaps I can force myself to spend no more than £500 per month? This would mean my total outgoings would equate to around £2000.00, which means I could put £1360 away per month towards a pension?

Comment Above
"but I would also pay into a pension to get you out of the 40% tax bracket and to get hold of that employer contribution. Salary sacrifice means you save NI as well as income tax so usually the best way to go."
Question:
Is it best to always salary sacrifice an amount that takes me under £50K and out of the 40% tax bracket?

The £2k per month includes £500 debt repayment so you're looking at £1500 per month (£18k pa) living costs. So given the possibility of state pension contributing later in life and therefore assuming drawdown of 4% then you're shooting for about £500k as a retirement pot. At a more conservative 3% you'd need £660k.

I wouldn't get too hung up on the 40% bracket. Its important don't get me wrong but if you can Sal. Sac. then you get the national insurance saving too so the real comparison is 42% ( 40% tax + 2% NI) vs 32% (20% + 12% NI) so for someone in your situation I'd suggest not letting the 40% bracket stop you and go hell for leather filling up your pension via Sal Sac. The Tax and NI benefit outweighs access benefits of an ISA. If in 10 years time you've done fantastically well with the pension have another look at it then and assess whether you're on track for enough by 55 and then perhaps think about timing of access etc. The first priority has to be getting your pension in a suitable place by the time you can start drawing it.

QrizB

Using the calculator here https://www.moneysavingexpert.com/tax-calculator/ here's an illustration of what you could reasonably achieve without living entirely like a monk.

Your current salary of £62k pa would, after tax and NI, give a take-home* of £44653, £3721 a month.

If you were to sacrifice 30% of your salary - £18600 pa gross - your remaining salary of £43.4k pa would give a take-home* of £33176, £2765 a month. Your employer would top this up by a further 5% of salary, £3100 pa.

So for a cost to you of £11477 a year - £956 a month - you could contribute £21700 pa towards your pension.

* - before other deductions for your insurance, medical, dental etc.

hugheskevi

Salary

£3360 after tax, which includes deducting contributions towards benefits that my company offer - private medical, dental, life insurance, critical illness cover, another illness cover (forgot the name).
Current Outgoings

• I have a 0% credit card on which I owe £12,000 and currently pay off £500 per month.
• Mortgage payment is £350 per month.
• My bills (inc. council tax) are around £500 per month
• My food costs are around £300 per month

Savings

• I have £15,000 saved in company shares
• My mortgage has with 24 years on it that I owe a total of £85K. The current value of the property is around £200-230K
  

So you appear to be spending about £2,500 per month (net income less mortgage payment less debt repayment), as the company shares roughly equal credit card debt you appear to spend the rest. As you haven't mentioned it. presumably you are single, no children and no plans to have any? Any plans to move house, or expect to stay where you are for years, and into retirement?

Bill amount looks good, food amount okay, so your lifestyle appears to be based around spending most of your income on things without any resale value (ie consumption).

State Pension is £9,350 p/a from age 68. So as things stand you need an income of at least £20,000 for post State Pension age, and £30,000 for years prior to State Pension age. I think you need to be planning for a retirement age of at least 60 unless you make dramatic lifestyle changes. Fortunately, reducing consumption now also lowers the retirement income target, which makes things considerably easier.

Joining your employer's pension scheme and salary sacrificing income down to higher rate threshold (Personal Allowance plus £37,700) is an obvious thing to do immediately as it is such good value. That gives you at least £13,300 per year (as the employer will contribute too, and possibly at more than the statutory minimum) going into a pension at a net cost to you of just under £600 per month.

Beyond that, it is then a simple choice between prioritising consumption now, working longer, or choosing to be poorer in retirement.

Albermarle

I will not add to the figures given above , but will just say 40% tax relief on pension contributions is a very generous dollop of free money from the taxman and you should at least try and make the most of it . One day it will probably be stopped.
In simple terms each £1 going into your pension only costs you 60p.