15% of pension pre-tax or post-tax?

robaber

Hello

I have been reading about pension contributions. I see that some recommended that people put 15% of their income into a pension. 

One question I don't understand is should this be 15% of your pre-tax or post-tax income?

I have a defined benefit workplace pension. It deducts 8.5% of my pre-tax income. 

If I wanted to increase my pension contributions to 15% would I:

-Aim for 15% pre-tax, therefore an additional 6.5% of my pre-tax income, or 

-Aim for 15% post-tax, deducting what I already contribute to my pension?

af1963

It's a guideline, nor a rule that has a fixed definition - the more you contribute, the higher your pension will end up. 15% of your gross income will deliver more than 15% of your post tax income.

Depending on how much you earn and the rates of tax and NI that you pay, and what you can afford, it can be worthwhile to contribute more than that, sometimes a lot more.

JoeCrystal

It is better to treat pension contribution as gross amount, so 15% of gross since it is paid as gross (or net but tax relief of 25% added back on). However, remember that it is not 15%, but halving your age as a pension contribution is a guide to wake people up to the sheer cost of paying pension contributions. In this case, it is for the DC rather than the DB pension. In principal, it should be as much as possible that is enable you to meet your target, most people can't afford that so it is generally as much as people can afford or spare really. 

You, on the other hand, already got the defined benefit pension, which is like winning a lottery for a pension scheme. Rather than treating 15% as some fixed number, which magically provides you with enough money to live on, work it out properly and treat your already accused or aimed-for DB pension income as a foundation instead and work out what else you need to contribute on top of whatever it is.

NoMore

Does it matter ? If you want to put more in, put in what you want to and can afford.

Its just a recommendation, you will find lots of different recommendations, like half your age as a percentage when you start contributing, or put in all above higher rate tax, don't put any in pensions at all! etc.

The best way is figure out what you want in retirement and add enough to give you that sort of retirement. That could be 15%, it could be 25% or 5%, I have no idea that's personal to you.

tacpot12

It's also worth pointing out that if your employer contributes to your pension then their contribution can be regarded as part of this 15%.

Dazed_and_C0nfused

robaber said:

Hello

I have been reading about pension contributions. I see that some recommended that people put 15% of their income into a pension. 

One question I don't understand is should this be 15% of your pre-tax or post-tax income?

I have a defined benefit workplace pension. It deducts 8.5% of my pre-tax income. 

If I wanted to increase my pension contributions to 15% would I:

-Aim for 15% pre-tax, therefore an additional 6.5% of my pre-tax income, or 

-Aim for 15% post-tax, deducting what I already contribute to my pension?

I'd say that with an existing DB pension the initial focus should be on the choice between buying extra guaranteed DB pension (if that's even possible with your scheme) or starting a separate DC  SIPP or personal pension.

Then look at what level any additional contributions should be at.

Remember DB pension usually has certain guarantees like an inflation linked annual increase.  But a DC pot can add flexibility.

Nebulous2

Pensions are like planning any other project. 

1. Where am I now? 
2. Where do I want to be? 
3. How am I going to get there? 

Starting points for pensions for number 2 would include when do you want to retire, and how much money do you need to live on. What is your number. See the pinned thread at the top of the pension board on the number. 

The earlier you want to retire, and the more money you need for your post-retirement lifestyle, the more you need to save. Stopping at 50 - funding yourself until you can draw a pension at 55, then topping that pension up until state pension age, is a vastly more expensive project than working until state pension age and drawing your db pension as well then. 

Albermarle

I have a defined benefit workplace pension. It deducts 8.5% of my pre-tax income. 

If you are in the private sector, then you are working for a small minority of companies still having an open DB pension ( most have stopped them due to the high costs) . In any case with any DB pension there will be a lot more than 15% of your salary going into the scheme, as the employer % is usually > 20%.

Anyway each DB scheme has different rules. So there may be an opportunity to buy an increased pension by adding more, or it could well not be possible. Or there maybe a linked AVC/DC scheme for extra contributions.

Or you will have to open a separate personal pension ( DC type).

dunstonh

I have been reading about pension contributions. I see that some recommended that people put 15% of their income into a pension. 

Surely the percentage would be the figure needed to achieve your objectives.  Putting in 15% in your 20s is very different to putting in 15% in your 50s.

One question I don't understand is should this be 15% of your pre-tax or post-tax income?

Neither.  If you are going to use a made up figure then it doesn't matter.

I have a defined benefit workplace pension. It deducts 8.5% of my pre-tax income. 

It doesn't matter what is paid with a DB pension as the end pension income is not based on what you pay in.   With DC pensions, what you pay in is vital.

robaber

Thank you all. 

I work in the public sector. I am a higher rate tax payer. I am 38. 

I understand that I have 4 options? 

1) Make Additional Pension Contributions. These are offered by my employer. These are deducted pre-tax. My employer doesn't contribute to these. 

If I contributed £100 per month. I understand that you'd would only cost my around £60, as I wouldn't pay 40% and National Insurance on this. 

I am still trying to get my head around this. 

If I contributed £100 a month for 30 years, in a 80/20 or 100% equity funds. If I got an average of 5% a year return. A calculator says in 30 years I would have around £74,000. 

2) Buy additional pension. My employer offers this, but don't match my contribution. This is taken pre-tax. If I contributed £100 a month, my employer calculator says I would receive around £1,900 a year extra pension. If I lived 30 years, this would be around £57,000. 

3) Stocks and Shares lifetime ISA. I understand that I receive 25% government bonus. Which would be less than the contributions being taken pre-tax at higher rate tax and national insurance. 

4) SIPP. Where I would receive 20% bonus, but can apply for an additional 20% in a self assessment.

I am thinking that Additional Voluntary Contributions are the best option for me, as they come out pre-tax and national insurance. I can access this money at 58, tax free. 

I am thinking my second best option would be a SIPP. So I could receive the 20% government contribution and the additional 20% in the self assessment.

However, I understand this this income would be taxed. Whereas Additional Voluntary Contributions or Lifetime ISA would be tax free. 

A bit confusing. 

Have I made any mistakes in these options?

Many thanks for any advice.

JoeCrystal

robaber said:

Thank you all. 

I work in the public sector. I am a higher rate tax payer. I am 38. 

I understand that I have 4 options? 

1) Make Additional Pension Contributions. These are offered by my employer. These are deducted pre-tax. My employer doesn't contribute to these. 

If I contributed £100 per month. I understand that you'd would only cost my around £60, as I wouldn't pay 40% and National Insurance on this. 

I am still trying to get my head around this. 

If I contributed £100 a month for 30 years, in a 80/20 or 100% equity funds. If I got an average of 5% a year return. A calculator says in 30 years I would have around £74,000. 

2) Buy additional pension. My employer offers this, but don't match my contribution. This is taken pre-tax. If I contributed £100 a month, my employer calculator says I would receive around £1,900 a year extra pension. If I lived 30 years, this would be around £57,000. 

3) Stocks and Shares lifetime ISA. I understand that I receive 25% government bonus. Which would be less than the contributions being taken pre-tax at higher rate tax and national insurance. 

4) SIPP. Where I would receive 20% bonus, but can apply for an additional 20% in a self assessment.

I am thinking that Additional Voluntary Contributions are the best option for me, as they come out pre-tax and national insurance. I can access this money at 58, tax free. 

I am thinking my second best option would be a SIPP. So I could receive the 20% government contribution and the additional 20% in the self assessment.

However, I understand this this income would be taxed. Whereas Additional Voluntary Contributions or Lifetime ISA would be tax free. 

A bit confusing. 

Have I made any mistakes in these options?

Many thanks for any advice.

It would be more helpful if you said exactly which scheme you are on since that makes paying more varies. AVCs for the LGPS can be taken as a tax-free lump sum (or used to buy more annuity at factors set by LGPS if needed). Based on your mention of 8.5%, I assume you may be on LGPS and have an excellent salary of £53,301 to £74,700. You already accrue £1,087 to £1,524 index-linked pension per year for life. So, it's a terrific deal. Since you are already on a high salary and assuming you have a low cost of living, I don't think you have any issue building a comfortable pension already, provided you plan and stay in the pension scheme. You are already on one of the best pension schemes in the country anyway, at a cost of peanuts for you.