Pension / ISA split - too much into pension?

mister_t

Am I putting too much into pension and not enough into ISA?
Am 45 with 650k in DC pension + 175k in S&S ISA.  Spouse has NHS DB pension + 175k ISA.
I work via an umbrella company and earn ~130K so have been maxing out the pension annual allowance (via SS) to save on 40/45% tax, loss of personal allowance, ER NI (13.8%), EE NI (2%) and apprenticeship levy (0.5%), which seemed like a no-brainer.  The ISAs are being fed 9k each per year.

With potentially 10yrs left to retirement, even without any more contributions and 5% avg returns I think that would take it above 1mil.  With continued contribution, much more.  Starting to get concerned that I am building up a pot that will be a liability if the LTA comes back in and that there is not enough in the ISA to bridge until private pension age at ~58.  Retirement at 52-55 would be nice.

However, if I put less into the pension to build up the ISA then I am taking a big hit on the various taxes.  Should I just suck it up and reduce the pension a bit to add 11k x2 to the ISAs or carry on as is.  Any thoughts would be helpful?

Roger175

This obviously all come down to when you actually retire. You will not be able to access your DC Pension until the age of 57, so it's a question of how much you have sitting outside of your pension to plug the gap until you reach age 57. 

With £350k jointly in ISAs to plug a gap of potentially 5 years (age 52 - 57), I would suggest you keep paying into the DC pension which is hugely tax advantageous on your salary. It all depends on what your projected income needs are for this period. 

Qyburn

Do you think you'll be paying 40% tax in retirement? If so that closes the gap a little.

mister_t

Qyburn said:

Do you think you'll be paying 40% tax in retirement? If so that closes the gap a little.

Hadn't considered that, good point.  Don't really have a handle on what income in retirement would need to be.  Must do that.  I would hope with both of us having decent pensions we can both stay under, however with 10 more years of fiscal drag everybody will be paying high rate. 

Kernowshep

If you keep as you are, adding £9k each p.a. into your ISAs, you'll have about £475k (+/-  investment returns) at 52. That would be enough for me with £1.1m in DC pension and your wife's NHS DB pension to follow.

Other points to consider 

Inheritance, is it likely or possible you'll receive any (and approximate timescales).

Will you need any of the ISA or TFLS to pay off a mortgage/buy a house (or something else), thereby reducing the available amount for income.  Or, downsize and free up more cash.

I expect there will be some form of protection re LTA if it comes back in, like before. I'd take the tax benefit now, I think the annual allowance would be more likely to reduce than the LTA. 

Also you effectively get a bit more than twice the amount invested in the pension using the current tax break now (more in the £100k+ bit) vs the ISA, so are likely to have greater investment returns.

Secret2ndAccount

If you think of a shop-worker making 20k, they are paying 20% tax and 12% NI = 32%. Up to 100k you are paying 40% +2% = 42%. So it's not as different as the headline tax rates would imply. I would be tempted to sacrifice down to 99k, and keep the rest outside the pension. You will give yourself more options to retire early or pay for a big purchase. As everyone is stating, it depends how much you want to achieve annually after you stop working.
The alternative is to maximise pension contribs to maximise tax relief. You could even consider using debt to fund the last couple of years before you can access your pension if you have burned through all your savings. Might work out cheaper overall, but more admin and more stress.

cfw1994

mister_t said:

Qyburn said:

Do you think you'll be paying 40% tax in retirement? If so that closes the gap a little.

Hadn't considered that, good point.  Don't really have a handle on what income in retirement would need to be.  Must do that.  I would hope with both of us having decent pensions we can both stay under, however with 10 more years of fiscal drag everybody will be paying high rate. 

I think you probably need to focus a little on your income requirements.
You are clearly on a good wage now….but how much do you spend v save🤷‍♂️

If your spending is on the frugal side, it might be that you could aim towards a retirement closer to 50, if you wanted to…just need those ISA pots to be geared towards filling that window to 57/58…

Is inheritance an issue?  Any offspring to consider?  If so, pension is a pot they might get outside of your estate, as others have mentioned.

Aside from the finances….do you have a handle on how you want to spend your days/weeks/months/years during retirement?
Out of curiosity, I started this thread for ideas for people.  The world is your lobster, as Arthur Daly once said🤣👍

Knowing that might also help give you ideas of what Your Number is.  You are in a great position 😎👍

mister_t

Secret2ndAccount said:

If you think of a shop-worker making 20k, they are paying 20% tax and 12% NI = 32%. Up to 100k you are paying 40% +2% = 42%. So it's not as different as the headline tax rates would imply. I would be tempted to sacrifice down to 99k, and keep the rest outside the pension. 

This is true but it misses the employers NI so it got me thinking about how SS vs ISA stack up.  Assuming the 10k chunk between 90k-100k is either SS into pension or put in ISA and in either case sits in there for 15yrs and grows at 5%.

SS into Pension
10k into pension, no tax/NI/levy to pay on it.  After 15yrs@5% that is ~£20,789.  Assume 25% of it is tax free and other 75% is taxed at 20%.  That leaves ~£17,671 in the pocket.

ISA
Marginal rate is 56.3% (EE NI, ER NI, 40% & levy), so only £4,370 into ISA.  After 15yrs@5% that is ~£9,085 in the pocket.

The pension route is almost double in the end.  Even if you take a worst case scenario of all of the pension money being taxable on the way out and at 40% it is still £12,473 net from the pension vs £9,085 from the ISA.  This assumes no LTA penalty and that I haven't made a glaring error somewhere.  

These numbers ignore the fact that the pension money is locked up for longer, but it was useful to get a handle on the cost of putting it in the ISA.

mister_t

Kernowshep said:

Inheritance, is it likely or possible you'll receive any (and approximate timescales).

Possible, but would never bank on it.  Long term care could wipe out a large pot very quickly.  A nice bonus if it happens.

Kernowshep said:

Will you need any of the ISA or TFLS to pay off a mortgage/buy a house (or something else), thereby reducing the available amount for income.  Or, downsize and free up more cash.

Mtg will be paid off in a couple of years, though then there may be two kids to put through uni, but hoping the lack of mtg will mean not having to dip into ISAs.  Seeing them through uni may dictate retirement age.

MetaPhysical

mister_t said:

Kernowshep said:

Inheritance, is it likely or possible you'll receive any (and approximate timescales).

Possible, but would never bank on it.  Long term care could wipe out a large pot very quickly.  A nice bonus if it happens.

My mother-in-law has burned through £450k in eight years.  Frugal all her life and she planned to leave all of her hard work and that money to me and her two other daughters. So you point is very valid; do not count on inheritance in your long term personal financial planning, it probably will never happen.