What is the correct level of pension contributions? How much is too much?

Bostonerimus1

Mark_d said:

Thanks @Roger175 That gives me some confidence in my current plan for our finances.

My S&S ISA has already surpassed the money needed to pay off our mortgage (for various reasons I don't want to pay off our mortgage early).  However, I plan to remortgage to an interest-only mortgage next year, freeing up more cash which we can put into ISAs.  I do love my job as a consultant so, as long as health permits, I would like to keep working even if only part time.

My partner and I are from working class backgrounds, so we're used to life without the latest iPhones, Playstations or Sky TV etc.  One long haul holiday per year is all we currently do, but that's due to my partner's phobia of flying as much as our finances.

I like that you are putting so much into your pension. You get a large pension pot by starting early, investing sensibly, keeping fees down and making large contributions, just make sure you understand the allowance. It's also good that you are putting money into an ISA as that gives you flexibility of access and its tax free gains and withdrawals are a useful income tax planning tool. Another great financial help is to have paid off your mortgage and I would never remortgage to then risk the money in investments, that goes doubly when the mortgage is interest only. You are borrowing money to invest which is a classic error. You might get lucky and have it pay off, but it's the worst kind of gambling,

Bostonerimus1

Mark_d said:

From my first job, I've been paying in at least 5% contributions.  Typically the employer has double-matched this, paying in 10-12%.

15 years ago I did some calculation that I should be paying-in 20% (plus employed contribution of 12%).

Since then, due to concern about what lies ahead for me, especially in retirement I have been increasing my pension contribution rate.  Now, at the age of 45, I am currently paying in 40% (plus 12% from employer).

Being self-sufficient is important to me.  I want to be in a position that I can afford my healthcare and support costs if I go blind, suffer liver failure, get cancer and diabetes.  Am I paying the optimum amount into my pension?

Pensions advise I generally see talks about having enough money to change your car every x years, or buying a new kitchen every y years.  I'm not interested in these things.  It's the healthcare/support costs which most concern me.

Thanks

Private health insurance will help you for smaller procedures and getting quick appointments, but the NHS is going to be your main provider for serious things like cancer and liver failure and as a US resident and having to pay healthcare premiums I think that UK people are very lucky to have the NHS whatever it's current issues. The issue with nursing home care is more critical IMO. The average stay is 2 to 3 years and they might cost 75k/year, so my pretty conservative budget is around 0.3M to 0.4M. The unfortunate thing in the UK is I believe that you can't buy insurance to cover your long term care...is that right? It would probably be quite expensive though. The "good" thing is that when you are in care other expenses drop so you can put all your pension, SP etc towards your bill and there are care annuities.

Mark_d

Bostonerimus1 said:

You are borrowing money to invest which is a classic error. You might get lucky and have it pay off, but it's the worst kind of gambling,

The idea of switching to an interest-only mortgage is not about borrowing to invest.  It's about freeing up extra cash - some of which would go into savings/investments for goals before retirement.

Andyjflet

I had a discussion with my pension advisor recently, I asked about increasing my contribution from 9% and he said that I should save elsewhere, specifically Cash ISA £20k per annum, however, usually the advice is 15% of your own income regardless of what match you have from your employer. Dont over focus on the pension solution. 
Quickest way to become wealthy is pay off your mortgage, a study of millionaires below makes interesting reading.

 The National Study of Millionaires - Ramsey (ramseysolutions.com)

Simon11

Andyjflet said:

I had a discussion with my pension advisor recently, I asked about increasing my contribution from 9% and he said that I should save elsewhere, specifically Cash ISA £20k per annum, however, usually the advice is 15% of your own income regardless of what match you have from your employer. Dont over focus on the pension solution. 
Quickest way to become wealthy is pay off your mortgage, a study of millionaires below makes interesting reading.

 The National Study of Millionaires - Ramsey (ramseysolutions.com)

I am not sure what planet your pension advisor is on, however the advice across your whole post is extremely poor advice. I hope you didn't pay for their services!

* Its important to have a balance of spare cash put away to cover the mortgage, emergency savings, ISA and finally the pension.
* In terms of percentage to put into your pension, they always say half your age when you commence paying into your pension. Around this you then need to consider your life priorities, aims for retirement and tax situation.
*Its very important to not only consider your percentage paid into the pension, but also your employer. Not enough people consider the value of their employer money paid into the pension as part of the overall package.
* The quickest way to become wealthy will never be to pay off the mortgage (in fact, wealthy people buy more real estate and actually increase their debt to become even wealthier long term). For most people however, investing is usually the best choice for most people at the moment, whether that's through a pension or ISA. I focus my energy on building my pension pot where I get a 40% saving in tax immediately and then annual compounded growth. That alone beats the saving I would get by paying off my 1.64% mortgage at the moment!

LHW99

That alone beats the saving I would get by paying off my 1.64% mortgage at the moment!

Presumably a fixed rate, taken out some time ago. You would probably get something nearer 4.3% now, and historically of course, rates have been up to 17% historically: https://www.purepropertyfinance.co.uk/news/a-brief-history-of-average-mortgage-interest-rates/

I believe the long term average has been around 5%, so while equities may produce that on average, the judgement between paying off a mortgage and keeping it will depend, very much, on the relative values of equity growth vs interest rates.

Linton

Mark_d said:

Bostonerimus1 said:

You are borrowing money to invest which is a classic error. You might get lucky and have it pay off, but it's the worst kind of gambling,

The idea of switching to an interest-only mortgage is not about borrowing to invest.  It's about freeing up extra cash - some of which would go into savings/investments for goals before retirement.

Moving to an IO mortgage is increasing your borrowing since you are hanging onto the bank's money for longer.  You are proposing to use the money you have saved to gain returns from savings and investments.  So you are using your increased borrowing to invest.  

It is highly risky because investment returns are not guaranteed and may bear no relationship to mortgage rates.  For example mortgage rates have reached well beyond 10% in my lifetime. As regards investments, for the 5 years starting 1/1/2001 global investment returns were negative. Feeling lucky? What is your plan should you not have sufficient money to pay off your IO mortgage? You should have one.

Bostonerimus1

Andyjflet said:

I had a discussion with my pension advisor recently, I asked about increasing my contribution from 9% and he said that I should save elsewhere, specifically Cash ISA £20k per annum, however, usually the advice is 15% of your own income regardless of what match you have from your employer. Dont over focus on the pension solution. 
Quickest way to become wealthy is pay off your mortgage, a study of millionaires below makes interesting reading.

 The National Study of Millionaires - Ramsey (ramseysolutions.com)

I wouldn't post US based articles from the Ramsey Organization on here. Ramsey has some sensible ideas and also some pretty strange ones. He's a guru to be avoided, especially by any all UK residents.

Bostonerimus1

Linton said:

Mark_d said:

Bostonerimus1 said:

You are borrowing money to invest which is a classic error. You might get lucky and have it pay off, but it's the worst kind of gambling,

The idea of switching to an interest-only mortgage is not about borrowing to invest.  It's about freeing up extra cash - some of which would go into savings/investments for goals before retirement.

Moving to an IO mortgage is increasing your borrowing since you are hanging onto the bank's money for longer.  You are proposing to use the money you have saved to gain returns from savings and investments.  So you are using your increased borrowing to invest.  

It is highly risky because investment returns are not guaranteed and may bear no relationship to mortgage rates.  For example mortgage rates have reached well beyond 10% in my lifetime. As regards investments, for the 5 years starting 1/1/2001 global investment returns were negative. Feeling lucky? What is your plan should you not have sufficient money to pay off your IO mortgage? You should have one.

Linton and I are in 100% agreement on this. Taking out an interest only mortgage for "freeing up extra cash - some of which would go into savings/investments for goals before retirement" is borrowing to invest. You seem to be in a strong financial position and taking out another mortgage seems like a risk you don't need to take.

IvanOpinion

How much is too much?
Too much is if you are saving so much for tomorrow that you leave nothing to enjoy your life today.