Maximizing Pension Strategy Mid 30s, one salary for the household

Tashitalksmoney

Hi, long post ahead so please bear with me.

As my wife and I are both in the mid 30s, we have recently started to be a little more savvy about our family personal finances and more particularly our pensions, and are after some advice from the MSE community on the best strategy / route to a comfortable retirement. Appreciate each person might have different sets of circumstances and views on the best way to save and invest, but wanted to get an understanding whether we are doing everything we can to maximize the outcome given our family setup.

Current situation:

We are a family of 4 (one became recently a high rate earner, one SAHP and two preschool children) no family help available, living in London with high part time nursery costs for one child.

We have a flat with a low-ish mortgage fixed rate until 2027 (under 3%) so currently not looking to overpay it (The house might benefit from renovations in the future though)

No other unsecured debt

We have also just made the child benefit claim, mainly to get the National Insurance Contributions for the non-working parent (my wife has never worked in the UK before so have 0 years NI contribution so not sure if she is ever going to reach 35 years to get the full SP) and we might need to repay the excess in benefits received via SA if I am paid a bonus bringing my annual salary over 50k.

We have 10k in accessible savings (premium bonds) saved for future renovations or emergencies, and a couple of small pots in regular saving accounts but no other investments (ISAs or SIPPs)

We have combined all our finances together as a household and are happy to look at it as a whole.

Current strategy:

I would like to retire early (around 58 or earlier if possible)

From this tax year (2023-2024) we have decided to massively increase my salary sacrifice to put all my salary above 50k into a DC pension hence getting a 40% relief at source.

50k gross annual salary for all of us would allow us to have a comfortable life (but without any excess or luxury, and we would need to budget for everything) for the next 5 years until our fix rate ends in 2027 when we will re-assess. 

My wife does not have any pension

We area also starting to think about how to help children in the future with the house deposit or university fees but no idea where to start

Question:

Is it better to continue sacrifice all taxable income above 50k (at 40%) from one salary into one DC work pension and have one sizeable (hopefully) pot in 20 years or so OR

Is it preferable from the tax/income maximisation point of vie to have two medium sized pots (i.e. opening a SIPP for the non working parent), getting a relief of 20% only but also having 2 x 25% non taxable withdrawals in the future and two annual income personal allowances instead of one?

Putting aside all the possible risks and questions in regards to separation, family money management etc, are we missing something in our strategy or is there a general consensus that maximizing DC for the high earner with the highest compound interest is still the best approach when it comes to retirement?

Thank you for reading until the end and appreciate all the feedback.

Tas

Pat38493

From looking at many other threads, I would say that getting the 40% tax relief is definitely going to be the way to go as it will outweigh the other options.  Just make sure you have completed your pension nomination forms properly as pensions are not part of your estate but are in trust.

Once you've exhausted 40% tax relief, you could split any further pension contributions between you but if your wife is not working, she would be limited to £3600 paid into a pension per year gross (£2880 net).

As a generalization, paying into the pension is almost always going to be better due to the tax advantages, unless you are trying to retire before reaching the relevant age where you can access the money. 

MallyGirl

Whilst you get 40% relief on pension contributions you will be paying 20% on at least some of it on the way back out. Your wife (like any low earner) can withdraw about £16,666 pa from a pension in retirement and pay no tax so it would be worth getting some in a pot for her. As a non earner I would definitely start doing the £3,600 per year gross contributions that she is allowed to do.

xylophone

See

https://adviser.royallondon.com/technical-central/pensions/state-benefits-pension-manuals/child-benefit-avoiding-the-tax-charge/

Dazed_and_C0nfused

From this tax year (2023-2024) we have decided to massively increase my salary sacrifice to put all my salary above 50k into a DC pension hence getting a 40% relief at source.

The standard higher rate threshold is now £50,270 so you won't be avoiding 40% tax on everything sacrificed but it will also help minimise any HICBC payable.

Note HICBC is based on adjusted net income, not taxable income so interest from any of your regular savings accounts (ones in your name or joint names) will still be counted as part of your ANI even if it is then taxed at 0%.

Tashitalksmoney

Thank you for your replies. Very helpful to get other views on our situation indeed. To be honest we haven't 100% reviewed the cash flows on the way out once we hit the retirement age so it seems there are definitely benefits to have two pensions pots with two Annual allowances rather than one if for example we intend to draw 30-40k from it per year, even it means having "only" 20% relief vs 40%.

The other thing we were looking at to invest is a LISA. Would it be better to open a LISA or a SIPP for my wife in our situation - both offer 20% relief but LISA is only accessible at 60? Thank you

Tashitalksmoney

Dazed_and_C0nfused said:

From this tax year (2023-2024) we have decided to massively increase my salary sacrifice to put all my salary above 50k into a DC pension hence getting a 40% relief at source.

The standard higher rate threshold is now £50,270 so you won't be avoiding 40% tax on everything sacrificed but it will also help minimise any HICBC payable.

My understanding is that we are avoiding 40% on all gross salary above 50,270 salary (ex: if my salary is 60,270 I will only be paying 20% tax is I sacrifice 10k into DC). My savings are not generating 500 interest per annum to be taxed so are not added to my gross salary.

ussdave

Tashitalksmoney said:

Thank you for your replies. Very helpful to get other views on our situation indeed. To be honest we haven't 100% reviewed the cash flows on the way out once we hit the retirement age so it seems there are definitely benefits to have two pensions pots with two Annual allowances rather than one if for example we intend to draw 30-40k from it per year, even it means having "only" 20% relief vs 40%.

The other thing we were looking at to invest is a LISA. Would it be better to open a LISA or a SIPP for my wife in our situation - both offer 20% relief but LISA is only accessible at 60? Thank you

Is your wife expected to continue to be a non-earner?  If so, a SIPP to cover the retirement years up until state pension age, and LISA for beyond that.

Dazed_and_C0nfused

Tashitalksmoney said:

Dazed_and_C0nfused said:

From this tax year (2023-2024) we have decided to massively increase my salary sacrifice to put all my salary above 50k into a DC pension hence getting a 40% relief at source.

The standard higher rate threshold is now £50,270 so you won't be avoiding 40% tax on everything sacrificed but it will also help minimise any HICBC payable.

My understanding is that we are avoiding 40% on all gross salary above 50,270 salary (ex: if my salary is 60,270 I will only be paying 20% tax is I sacrifice 10k into DC). 

That is correct but in your original post you said this, which is slightly different.

From this tax year (2023-2024) we have decided to massively increase my salary sacrifice to put all my salary above 50k into a DC pension hence getting a 40% relief at source.

My savings are not generating 500 interest per annum to be taxed so are not added to my gross salary.

Taxable interest forms part of your adjusted net income even if taxed at 0%.  So if you had taxable pay/salary of £50,270 and say £330 interest with no other pension contributions or Gift Aid donations then your adjusted net income would £50,600.

And with ANI of £50,600 you would be required to complete a Self Assessment return and pay 6% HICBC.

Albermarle

The other thing we were looking at to invest is a LISA. Would it be better to open a LISA or a SIPP for my wife in our situation - both offer 20% relief but LISA is only accessible at 60? Thank you

Lifetime ISA (LISA): how they work & best buys - Money Saving Expert

If you scroll through to the latter part of this link, you will see a Lisa vs pension 'Pros & Cons'

We area also starting to think about how to help children in the future with the house deposit or university fees but no idea where to start

You have various choices about how to live your life and use your money eg

Spend it now YOLO
Paying off mortgage/ buying a bigger house
Funding a hopefully nice and maybe early retirement
Saving up for the children ( house deposit etc ) 
Savings for home improvements, new car etc

For most of us, doing it all is not possible. So you either concentrate on a couple of areas, or spread you money out relatively evenly. That can only be your decision.
Financially getting the 40% tax relief on your pension contributions is the obvious good thing, but you have to balance it against other goals.

Tashitalksmoney

ussdave said:

Is your wife expected to continue to be a non-earner?  If so, a SIPP to cover the retirement years up until state pension age, and LISA for beyond that.

Thanks ussdave, that makes sense. For the moment the plan is for her to remain SAHP for at least another 4-5 years, until both kids are in full education. Our mortgage rate will also end at the same time so we will review then.