Are my assumptions sound on my retirement plan? Or is disaster on the horizon...

WYSPECIAL

Jonboy1889 said:

Although if it’s a pure additional contribution (ie no extra company contribution), then £100 contribution gets you £139 as a lower rate tax payer- which is taxed at 28% eventually with 25% tax free= £110 (obvs growth on top of this), even less if you pay higher rate tax by then £95

You don't pay NI on pension income so where does the 28% tax figure come from?

Tantalus86

MetaPhysical said:

You are right to be thinking of this at age 37.  Bravo to you.  But my counsel is that a million things can happen between your age and retirement, many of which you have little or sometimes zero control.  I had two more kids, my wife died, I remarried, made redundant twice, all after age 37.
What you can do is save as much as possible into a global tracker.  At your age I'd suggest 80-90% equities.  These have historically averaged over 7% per annum.

I am now 56.  I paid 3% since 18 and then upped that to 8% with employer match since I was 37 and upped this again to 25% from 48..  I have maxed out the personal pension TR allowance every year now since I was 52.  I can't emphasise enough how important it is to your plan to save as much as possible now into your pension to get the compounding going.  if I were 37 again I'd be at 25% contribution from your age and not 48 like I did.

Good luck to you.

think I said it earlier but it's all about the compounding for me. I'm lucky enough that at the moment I can chuck a bunch of my income into my pension. I'd like to keep that up but who knows what's around the corner that could de-rail that plan. So the more I can get in there now, the more compounding will kick in and the more flexibility it gives me later on.

I started later than I would have wanted to as well. I knew fairly well about compounding from maths at school & uni, but was completely ignorant of pensions. They just didn't teach that sort of thing growing up. I just assumed the government gives you a pension when you're older. Didn't realise you contribute yourself, what funds were and how they work, tax benefits of them or anything like that.

A big big shout out for financial education at school!

Tantalus86

My 2 pennies on LISA and why it doesn't work for me personally.

My aim is to retire as early as possible. As I won't be able to touch my pension before 57 I need to save somewhere else. A LISA won't help here as I can't take it out before 60 without taking a penalty. Hence the S&S ISA.

Another factor is that I would expect to be a basic rate taxpayer in retirement, and currently am a higher rate. So if I had a couple grand lying around that I wanted to put for retirement, it makes more sense to chuck it in the pension for the 40% tax relief.

Griffin78

I would say given the focus you have on this, you'll likely reach a comfortable retirement within your plans. That is without any hiccups along the way.
I'm 45, hoping to retire at 60 and find it very difficult to plan with any detail. There are so many variables that will happen in the next 15 years.
I currently have 23% of my salary (just under 6 figures) paid into my workplace pension. I could afford to pay more into my pension, at least another 5-10% however I'm trying to find the right balance between money now, saving for future and tax efficiency.
It does bug me that I could be more tax efficient by paying more into my pension but I acknowledge the fact that life is also worth living now! I've found Guiide the most useful tool to analyse where I'll be by planned retirement age.

Jonboy1889

WYSPECIAL said:

Jonboy1889 said:

Although if it’s a pure additional contribution (ie no extra company contribution), then £100 contribution gets you £139 as a lower rate tax payer- which is taxed at 28% eventually with 25% tax free= £110 (obvs growth on top of this), even less if you pay higher rate tax by then £95

You don't pay NI on pension income so where does the 28% tax figure come from?

I meant if you take any pension at 60 (like you can with a LISA) and are still working, even just part time. But yes if you retire then then will just pay 20%. But for 40% tax payer doesn’t work out as good- LISA is a good option for higher rate tax payer who wants some money early without touching pension 

cloud_dog

Jonboy1889 said:

WYSPECIAL said:

Jonboy1889 said:

Although if it’s a pure additional contribution (ie no extra company contribution), then £100 contribution gets you £139 as a lower rate tax payer- which is taxed at 28% eventually with 25% tax free= £110 (obvs growth on top of this), even less if you pay higher rate tax by then £95

You don't pay NI on pension income so where does the 28% tax figure come from?

I meant if you take any pension at 60 (like you can with a LISA) and are still working, even just part time. But yes if you retire then then will just pay 20%. But for 40% tax payer doesn’t work out as good- LISA is a good option for higher rate tax payer who wants some money early without touching pension 

Just to be a PIA... If you stop working at 60 and start drawing your pension then you also have your Personal Allowance to use up so you won't be paying 20% on all of the tax liable (75% component).

For example, based on 'Our Number' and depending on how I take my early retirement drawdown*, I could likely be paying c. 8% tax on my money (after accumulating it with 42% tax/NI savings).

* - still deciding; 9 months to ensure I have figured out my answer!

Jonboy1889

cloud_dog said:

Jonboy1889 said:

WYSPECIAL said:

Jonboy1889 said:

Although if it’s a pure additional contribution (ie no extra company contribution), then £100 contribution gets you £139 as a lower rate tax payer- which is taxed at 28% eventually with 25% tax free= £110 (obvs growth on top of this), even less if you pay higher rate tax by then £95

You don't pay NI on pension income so where does the 28% tax figure come from?

I meant if you take any pension at 60 (like you can with a LISA) and are still working, even just part time. But yes if you retire then then will just pay 20%. But for 40% tax payer doesn’t work out as good- LISA is a good option for higher rate tax payer who wants some money early without touching pension 

Just to be a PIA... If you stop working at 60 and start drawing your pension then you also have your Personal Allowance to use up so you won't be paying 20% on all of the tax liable (75% component).

For example, based on 'Our Number' and depending on how I take my early retirement drawdown*, I could likely be paying c. 8% tax on my money (after accumulating it with 42% tax/NI savings).

* - still deciding; 9 months to ensure I have figured out my answer!

True, but even with that considered:

if you saved £100 a month by a pension as a LISA, it would get you £125 a month. If you put it in a pension it would get you £139 (lower rate tax payer)

if you did this for 35 years, putting in £100 a month of your own money with 5% annual return, you would end up with £135,480 with the LISA (no tax), and £150,564 in your pension.

that would be taxed 25% free, the remaining 75% at 20% would be £127,979 remaining.

LISA wins in this case.

if you’re a higher rate tax payer in pension you would have £105k to spend at the end.

obviously ignoring allowances etc- but state pension would wipe that out.


works better for a higher rate tax payer or someone that starts higher rate tax payer down the line.

they would end up with £51k more. But if they were still a higher rate tax payer than (and the whole lot is taxed at 40%) then they would be worse off.

but if the money was all taxed at lower rate by then, they would be £22k better off.

so LISA does have its place!

NoMore

You can't contribute to a LISA for 35 years, 32 is max, starting at age 18 and ending at age 50.

No idea how much this affects your figures.

cloud_dog

Jonboy1889 said:

cloud_dog said:

Jonboy1889 said:

WYSPECIAL said:

Jonboy1889 said:

Although if it’s a pure additional contribution (ie no extra company contribution), then £100 contribution gets you £139 as a lower rate tax payer- which is taxed at 28% eventually with 25% tax free= £110 (obvs growth on top of this), even less if you pay higher rate tax by then £95

You don't pay NI on pension income so where does the 28% tax figure come from?

I meant if you take any pension at 60 (like you can with a LISA) and are still working, even just part time. But yes if you retire then then will just pay 20%. But for 40% tax payer doesn’t work out as good- LISA is a good option for higher rate tax payer who wants some money early without touching pension 

Just to be a PIA... If you stop working at 60 and start drawing your pension then you also have your Personal Allowance to use up so you won't be paying 20% on all of the tax liable (75% component).

For example, based on 'Our Number' and depending on how I take my early retirement drawdown*, I could likely be paying c. 8% tax on my money (after accumulating it with 42% tax/NI savings).

* - still deciding; 9 months to ensure I have figured out my answer!

True, but even with that considered:

if you saved £100 a month by a pension as a LISA, it would get you £125 a month. If you put it in a pension it would get you £139 (lower rate tax payer)

if you did this for 35 years, putting in £100 a month of your own money with 5% annual return, you would end up with £135,480 with the LISA (no tax), and £150,564 in your pension.

that would be taxed 25% free, the remaining 75% at 20% would be £127,979 remaining.

LISA wins in this case.

if you’re a higher rate tax payer in pension you would have £105k to spend at the end.

obviously ignoring allowances etc- but state pension would wipe that out.


works better for a higher rate tax payer or someone that starts higher rate tax payer down the line.

they would end up with £51k more. But if they were still a higher rate tax payer than (and the whole lot is taxed at 40%) then they would be worse off.

but if the money was all taxed at lower rate by then, they would be £22k better off.

so LISA does have its place!

I have no issue with the value of a LISA and its place as an option for retirement.  It does bug me somewhat that people ignore the fact that even when drawing down a pension not all of the 75% tax liable component will be taxed, possible but not absolute.  Even with SP in payment there is a an amount of unused PA (historically, less so now). 

In your example you are ignoring the fact that the LISA £125 in total (payment £100 and bonus £25), actually cost the BRT payer £135 to accumulate; e.g. £125 gross earnings tax reduction of 20% to £100, plus the NI on £125 (£10)).

Jonboy1889

cloud_dog said:

Jonboy1889 said:

cloud_dog said:

Jonboy1889 said:

WYSPECIAL said:

Jonboy1889 said:

Although if it’s a pure additional contribution (ie no extra company contribution), then £100 contribution gets you £139 as a lower rate tax payer- which is taxed at 28% eventually with 25% tax free= £110 (obvs growth on top of this), even less if you pay higher rate tax by then £95

You don't pay NI on pension income so where does the 28% tax figure come from?

I meant if you take any pension at 60 (like you can with a LISA) and are still working, even just part time. But yes if you retire then then will just pay 20%. But for 40% tax payer doesn’t work out as good- LISA is a good option for higher rate tax payer who wants some money early without touching pension 

Just to be a PIA... If you stop working at 60 and start drawing your pension then you also have your Personal Allowance to use up so you won't be paying 20% on all of the tax liable (75% component).

For example, based on 'Our Number' and depending on how I take my early retirement drawdown*, I could likely be paying c. 8% tax on my money (after accumulating it with 42% tax/NI savings).

* - still deciding; 9 months to ensure I have figured out my answer!

True, but even with that considered:

if you saved £100 a month by a pension as a LISA, it would get you £125 a month. If you put it in a pension it would get you £139 (lower rate tax payer)

if you did this for 35 years, putting in £100 a month of your own money with 5% annual return, you would end up with £135,480 with the LISA (no tax), and £150,564 in your pension.

that would be taxed 25% free, the remaining 75% at 20% would be £127,979 remaining.

LISA wins in this case.

if you’re a higher rate tax payer in pension you would have £105k to spend at the end.

obviously ignoring allowances etc- but state pension would wipe that out.


works better for a higher rate tax payer or someone that starts higher rate tax payer down the line.

they would end up with £51k more. But if they were still a higher rate tax payer than (and the whole lot is taxed at 40%) then they would be worse off.

but if the money was all taxed at lower rate by then, they would be £22k better off.

so LISA does have its place!

I have no issue with the value of a LISA and its place as an option for retirement.  It does bug me somewhat that people ignore the fact that even when drawing down a pension not all of the 75% tax liable component will be taxed, possible but not absolute.  Even with SP in payment there is a an amount of unused PA (historically, less so now). 

In your example you are ignoring the fact that the LISA £125 in total (payment £100 and bonus £25), actually cost the BRT payer £135 to accumulate; e.g. £125 gross earnings tax reduction of 20% to £100, plus the NI on £125 (£10)).

Yes it would have cost £139 in fact (£100/0.72), but you still technically end up with more if you pay tax on all of the pension at the end.

but you’re right does depend on tax set up in retirement.

LISA was sold to me as an ideal nest egg for kids, if you’re around 40 when the kids arrive.

one limitation is you can’t pay into LISA after 50