Advice at 33

30andcounting

I have a Employer Pension scheme where my employer pays in 10% (I'm a director) and I dont have to contribute anything. This equates to £750 per month. I currently have £40K in my pot and I'm 33 years old, my aim is to retire at 60 (ish).

I'm not putting contributing anything at the minute myself as I think £750 a month is reasonable in my early 30s and have a typically high cost life style (nursery fees, decent chunky mortgage) with relatively low savings compared to my earnings. I earrn £90K plus car allowance, I'm using any spare cash to overpay mortgage a bit, and save for a rainy day.  

The question is should I be putting in on top of my employer. 

Thanks  

Dazed_and_C0nfused

Will your adjusted net income exceed £100k?

If so you will have an effective 60% tax rate on some of your income so personal contributions could be worthwhile.

https://www.gov.uk/guidance/adjusted-net-income

MaxiRobriguez

Short answer - yes.

£750 a month over the next 27 years will give you a pot of around £600k maybe after real returns compounded growth, which if you drawdown will give you about £30k a year, with 7 years still until you get additional state pension on top. That's quite the step down from £90k, and perhaps won't leave anything in terms of inheritance - at least from your pension pot.

There's no guarantee the tax breaks for pension contributions will be around forever, and no guarantee you'll always be on £90k, so why not take advantage now? Is it really sensible to overpay your mortgage? You could just run your mortgage for longer, potentially into retirement, using the additional contributions to pay it off.  You're saving a 2% on a mortgage overpayment, but you'd be able to save 40% of tax by additional pension contributions.

FWIW, I'm also 33, also have nursery fees and a mortgage to consider, yet I'm contributing 3x as much as you despite earning 2/3'rds your salary. It can be done.  

30andcounting

MaxiRobriguez said:

Short answer - yes.

£750 a month over the next 27 years will give you a pot of around £600k maybe after real returns compounded growth, which if you drawdown will give you about £30k a year, with 7 years still until you get additional state pension on top. That's quite the step down from £90k, and perhaps won't leave anything in terms of inheritance - at least from your pension pot.

There's no guarantee the tax breaks for pension contributions will be around forever, and no guarantee you'll always be on £90k, so why not take advantage now? Is it really sensible to overpay your mortgage? You could just run your mortgage for longer, potentially into retirement, using the additional contributions to pay it off.  You're saving a 2% on a mortgage overpayment, but you'd be able to save 40% of tax by additional pension contributions.

FWIW, I'm also 33, also have nursery fees and a mortgage to consider, yet I'm contributing 3x as much as you despite earning 2/3'rds your salary. It can be done.  

Yes I understand you're first point but my needs in retirement wont require an income of £90K a year, I don't have a lavish lifestyle now nevermind in my 60s...I don't plan to anyway!

How do you mean when you say use your additional contributions to pay it off (relatng to mortgage), you mean my additional contributions now and then withdraw it from my pension at 55?

3 times as much on £60K, how? I'd like some inspirtaion! My childcare fees are £750 a month and mortgage £1,200 FWIW.

Thanks some good ideas and just what I was after.  

MX5huggy

You do have a lavish life style, you just can’t see it because you’re used to it and it’s just crept up on you. After tax you have £5000 per month so far you have accounted for £1950. 

Your mortgage is probably 2% investing should (could, possibly or might not) return 5% on average, then there is the tax savings from investing in a pension. 

There’s different approaches to balancing mortgage vs pension.

Payoff mortgage then start pension (sub optimal, low risk)
Bit of both say half spare cash in each
Go hard at pension but mortgage is a repayment mortgage that will be paid off by about retirement (that’s me).
Borrow as much as possible on the mortgage on interest only to invest as much as possible in pension, because of its tax and investment advantages. (High risk)

Albermarle

You do have a lavish life style, you just can’t see it because you’re used to it and it’s just crept up on you.

The phrase 'lavish lifestyle' as used by the OP , I guess means he is not flying around the world in First Class, drinking champagne every night etc 

I think probably more accurate  to say that earning £90K pa ( before tax ) he  has probably got used to a comfortable lifestyle, bought a rather nice house, in a nice/expensive area,  maybe runs a couple of nice cars and the kids go to a nice/expensive nursery for many hours a week . So does not have much spare cash and therefore thinks he is not doing that great money wise, when in fact is in the Top few per cent of earners .

dunstonh

I currently have £40K in my pot and I'm 33 years old, my aim is to retire at 60 (ish).

There was an old saying of needing around £35k at age 35 if you want to be on track to retire at state pension age.  it is only a ballpark saying to get people to realise the scale of what they need to be paying.   It fails to take into account later starters paying higher amounts.   So, putting that aside, you are broadly where you need to be if you want to retire at state pension age.

I earrn £90K plus car allowance,

This means your contribution is not bad but it's low for someone on £90k and certainly not sufficient to achieve your objective of retiring at 60 unless you have significant other assets.

I'm using any spare cash to overpay mortgage a bit, and save for a rainy day.  

You absolutely need a rainy day fund.   However, overpaying the mortgage is expensive for you.   You are a higher rate taxpayer.  So, personal contributions to a pension would be better (or salary sacrifice if available).

you are paying the mortgage from money that has been taxed at 40% and had NI on it.   Pension can avoid both of those.  Mortgage is probably only around 2% interest whereas pension is likely to be around 5-7%.long term (estimate).   Effectively you are currently doing the low risk but expensive thing rather than the optimal way. 

MaxiRobriguez

30andcounting said:

MaxiRobriguez said:

Short answer - yes.

£750 a month over the next 27 years will give you a pot of around £600k maybe after real returns compounded growth, which if you drawdown will give you about £30k a year, with 7 years still until you get additional state pension on top. That's quite the step down from £90k, and perhaps won't leave anything in terms of inheritance - at least from your pension pot.

There's no guarantee the tax breaks for pension contributions will be around forever, and no guarantee you'll always be on £90k, so why not take advantage now? Is it really sensible to overpay your mortgage? You could just run your mortgage for longer, potentially into retirement, using the additional contributions to pay it off.  You're saving a 2% on a mortgage overpayment, but you'd be able to save 40% of tax by additional pension contributions.

FWIW, I'm also 33, also have nursery fees and a mortgage to consider, yet I'm contributing 3x as much as you despite earning 2/3'rds your salary. It can be done.  

Yes I understand you're first point but my needs in retirement wont require an income of £90K a year, I don't have a lavish lifestyle now nevermind in my 60s...I don't plan to anyway!

How do you mean when you say use your additional contributions to pay it off (relatng to mortgage), you mean my additional contributions now and then withdraw it from my pension at 55?

3 times as much on £60K, how? I'd like some inspirtaion! My childcare fees are £750 a month and mortgage £1,200 FWIW.

Thanks some good ideas and just what I was after.  

If you're used to £90k earnings you'll probably want more than £25k in retirement... Most topics suggest needing 2/3'rds of money in retirement to continue your lifestyle, but as you earn much more than normal people you could probably get away with half, maybe less.... but that is still significantly more than what you're projected to be on.

Additional contributions to pay it off - yes, essentially pay into your pension now and use TFLS or drawdown to pay off the mortgage you're no longer paying off. £1,200 a month a mortgage means you're funding that from £2,500 odd worth of salary because it's post tax. That £2,500 odd could be sheltered from tax by putting in pension. Then when you do come to accessing the pension a chunk of that will be tax free, and what is not is almost certain to be taxed at a lower rate than you currently have now. 

My pension contribution is £2.1k a month - my employer pays £400, I push in £1.7k. That reduces my post-tax income to about £2.6k a month, of which mortgage is £750, mortgage overpayment of £800, bills are about £500 including council tax and running a car, and nursery is £400.

That leaves a couple of hundred. We have an offset mortgage so the monthly mortgage and overpayments which total £18,600 a year go immediately into a S+S ISA at the start of every new tax year, or if necessary large capital expenditure. F.e we bought a new car this year for £15k (edit2: bought on a 0% credit card will pay it off over next few years) but it's only done 3,000 miles and will actually fit a pushchair AND luggage that our old Yaris, which has done 95k miles does not.

My wife also has part time earnings of about £15k a year - £5k of that goes into a SIPP, and the rest she uses for things like baby classes, lunch out if she's taken him out etc. That stuff racks up faster than anything else usually...

Edit: Pension pot (including ISA) is now at £200k, expecting it to hit about £800-900k by time I'm 50, which will give me drawdown of £30k+. I'm expecting to still have most of the mortgage by then but that will be easily serviceable on £30k which will translate into £2.1k a month in the pocket. Less than what I'm on now, but the £800 overpayment won't be needed anymore, so net + £300 a month.

30andcounting

MX5huggy said:

You do have a lavish life style, you just can’t see it because you’re used to it and it’s just crept up on you. After tax you have £5000 per month so far you have accounted for £1950. 

Your mortgage is probably 2% investing should (could, possibly or might not) return 5% on average, then there is the tax savings from investing in a pension. 

There’s different approaches to balancing mortgage vs pension.

Payoff mortgage then start pension (sub optimal, low risk)
Bit of both say half spare cash in each
Go hard at pension but mortgage is a repayment mortgage that will be paid off by about retirement (that’s me).
Borrow as much as possible on the mortgage on interest only to invest as much as possible in pension, because of its tax and investment advantages. (High risk)

Thanks for the assumptions - I wouldn't say lavish no, I have an Audi A4 2litre diesel not a Porsche 911 - hardly living the dream!

Im a firm believer in balance and I was just trying to get some advice on sticking a bit more away whilst still enjoying life, growing up with my children etc etc. 

I'm probably going to go down the same line as you on the 4 options. 

30andcounting

Albermarle said:

You do have a lavish life style, you just can’t see it because you’re used to it and it’s just crept up on you.

The phrase 'lavish lifestyle' as used by the OP , I guess means he is not flying around the world in First Class, drinking champagne every night etc 

I think probably more accurate  to say that earning £90K pa ( before tax ) he  has probably got used to a comfortable lifestyle, bought a rather nice house, in a nice/expensive area,  maybe runs a couple of nice cars and the kids go to a nice/expensive nursery for many hours a week . So does not have much spare cash and therefore thinks he is not doing that great money wise, when in fact is in the Top few per cent of earners .

I think that is a bit rude and full of assumptions. I was only coming on here for some advice!

dunstonh

Additional contributions to pay it off - yes, essentially pay into your pension now and use TFLS or drawdown to pay off the mortgage you're no longer paying off. £1,200 a month a mortgage means you're funding that from £2,500 odd worth of salary because it's post tax. That £2,500 odd could be sheltered from tax by putting in pension. Then when you do come to accessing the pension a chunk of that will be tax free, and what is not is almost certain to be taxed at a lower rate than you currently have now. 

We dont know what the tax positions or options will be when the OP gets to retirement.   However, I would be planning to use the 25% for income rather than lump sum due to the size of the pension that is likely to be needed for someone who has got used to a £90k a year income (in today's terms).   The 25% TFC paid as income could avoid higher rate tax throughout retirement.

If the OP really does have financial problems that require the pension lump sum to clear the mortgage then I would look at spending habits as the next thing as it suggests they are not living within their means.

Hopefully, they can continue with the repayment mortgage and have it cleared through normal monthly repayments without the need to use the TFC.  (with not much info known about the OPs scenario, we could paint many pictures as to what could be done).