Saving too much into pension for retirement?

ali_bear

thegentleway said:

We are both higher rate tax payers and have been salary sacrificing income over higher rate of income tax. However, I'm wondering if we are saving too much into our pensions. ... 

There's a balance to be struck between saving for the long term, medium term/rainy day savings and living for now. 

It's great to pay into a pension when you're relatively young, the only problem is that money is tied up until retirement. 

Sounds like you're going to end up paying some higher rate tax whatever you do. 

I would say that having cash always gives you flexibility. So build up ISAs and other investments as well as your pensions. And don't be afraid to live a bit while you're at it! 

hugheskevi

thegentleway said:

Albermarle said:

Do you think either of you will be higher rate taxpayers in retirement, remembering that the state pension is taxable income?

Nope, comfortable retirement for couple is £59k net so £67.6k gross, i.e. quite a bit below higher rate for a couple.

You are both currently higher-rate taxpayers with salary sacrifice and expect to be basic-rate taxpayers in retirement.

Assuming you have Lump Sum Allowance available, every £58 that will go in and come out of an ISA could be £100 going into a pension (assuming no employer NICs saving is passed on) with £85 coming out after lump sum and basic rate tax.

That is an uplift of 47%. 

That is a huge incentive to do things like borrow against your house - 47% would cover around 10 years of mortgage interest, and the returns on the pension should be better than the cost of mortgage interest anyway.

Personally, I have an offset mortgage which will initially be fully offset, but as I approach 55 I will withdraw from the offset account as non-pension funds dwindle, and then at 55 either repay or fully offset the mortgage from tax free pension lump sum.

Even though I expect to pay higher rate tax in all years from age 55 and don't have access to salary sacrifice, it is still a reasonable strategy as I will have Lump Sum Allowance available. The uplift is therefore 70%/60%= 17%. A much lower incentive, but still enough to prefer pension saving over ISA from higher rate tax income, combined with a period of paying mortgage interest to effectively access pension savings prior to minimum pension age.

Pipthecat

ali_bear said:

 and living for now. 

Not to be underestimated.  The future can bring both good and bad.  If you have adequate Pension provision and there are things you want to do whilst you are fit and healthy, now might be the time

Hoenir

thegentleway said:

Hoenir said:

thegentleway said:

Cus said:

thegentleway said:

We are both higher rate tax payers and have been salary sacrificing income over higher rate of income tax. However, I'm wondering if we are saving too much into our pensions. We both have defined benefit pensions that are projected to give us comfortable retirement with state pension at 68 (according to PLSA). Obviously we can save more into our pension so we have the option of retiring earlier. But at our current salary sacrifice rates we have more than enough to bridge the gap from 55 to 68. So it would be better to reduce salary sacrifice and put money into ISA for retiring before 55? 

If you know your required retirement number/withdrawal then it's a basic calculation to see which scenario, SIPP or ISA, gives the earliest date of that scenario.

I have no idea what our required retirement number/withdrawal; it's rather difficult to project that far ahead. I'm just going by PLSA numbers. I suspect as we approach retirement the numbers will become clearer and easier to estimate.

Until you get there. You won't know what your investments will actually be worth. 

Indeed but I know what my defined benefit pension will be. Investments are for early retirement which is obviously flexible and would be delayed if investments perform poorly. 

Hence pension is the best route for an early retirement. Most tax efficient route. Though do enjoy yourselves along the way. Years that pass are gone forever. Life can change so very rapidly. As you'll appreciate in time. 

Grumpy_chap

thegentleway said:

Albermarle said:

Do you think either of you will be higher rate taxpayers in retirement, remembering that the state pension is taxable income?

Nope, comfortable retirement for couple is £59k net so £67.6k gross, i.e. quite a bit below higher rate for a couple.

Remember, there is no "higher rate for a couple" whether in retirement or before.
Income tax allowances and rates / bands remain an individual criteria.  The only element of "for a couple" is the Marriage Allowance.

If that £67k is £55k for one plus £12k for the other, some higher rate tax will be suffered.  It does sound like you will both have a good pension individually, so more like a £30k - £37k split which is good if that has been managed.  Many people don't realise the impact of one having far higher pension income than the other in the couple until it is too late - my wife and I are in exactly that boat.

dont_use_vistaprint

thegentleway said:

We are both higher rate tax payers and have been salary sacrificing income over higher rate of income tax. However, I'm wondering if we are saving too much into our pensions. We both have defined benefit pensions that are projected to give us comfortable retirement with state pension at 68 (according to PLSA). Obviously we can save more into our pension so we have the option of retiring earlier. But at our current salary sacrifice rates we have more than enough to bridge the gap from 55 to 68. So it would be better to reduce salary sacrifice and put money into ISA for retiring before 55? 

I think a lot of people save too much and for too long for retirement,  and sacrifice fun and adventures while they are young and healthy.

But if you can’t think of anything else to spend it on and don’t enjoy giving it away and want to carry on working past 50/55 , then hording it away  probably isn’t  the worst option , future generations will surely benefit from the taxes that will be taken from it

kinger101

Cobbler_tone said:

Alexland said:

Cobbler_tone said:

I think you can only work in today’s money. You should have a rough idea of what you won’t be spending…mortgage, childcare, NI, lower tax bill etc. You may want to add on things like private health care, adding pets to the family, extra holidays/hobbies etc.
With DB pensions even easier as the income should be able to be modelled and guaranteed.
As for the price of milk, you need to assume it is relative your income/cost today. I think that’s how most of us would work things out.

Depends on how much inflation protection the DB scheme will really provide. My dad's was capped at 3% pa so over time the spending power of his DB scheme diminished as even a low average rate of inflation is lumpy not linear.

But that protection is known. Ultimately it is designed to protect somewhat against inflation, i.e. mine is 5% cap RPI.
It is incredibly difficult to protect against outlier years and over time you shouldn’t be too far off. You can add a contingency but ultimately you need a figure or else we’ll all work until we drop.
Ultimately my state pension will far outweigh any ‘damage’ that 5%+ RPI can do to my DB in the 10 years I’m waiting to get it.

The outlier years might happen early on and have a lasting impact for the duration of pensioner's and spouses retirement.

Unless the scheme chooses a discretionary increase above the amounts stipulated, there's no mechanism to reverse the loss of spending power caused by years in which the schemes are capped.

Cobbler_tone

kinger101 said:

Cobbler_tone said:

Alexland said:

Cobbler_tone said:

I think you can only work in today’s money. You should have a rough idea of what you won’t be spending…mortgage, childcare, NI, lower tax bill etc. You may want to add on things like private health care, adding pets to the family, extra holidays/hobbies etc.
With DB pensions even easier as the income should be able to be modelled and guaranteed.
As for the price of milk, you need to assume it is relative your income/cost today. I think that’s how most of us would work things out.

Depends on how much inflation protection the DB scheme will really provide. My dad's was capped at 3% pa so over time the spending power of his DB scheme diminished as even a low average rate of inflation is lumpy not linear.

But that protection is known. Ultimately it is designed to protect somewhat against inflation, i.e. mine is 5% cap RPI.
It is incredibly difficult to protect against outlier years and over time you shouldn’t be too far off. You can add a contingency but ultimately you need a figure or else we’ll all work until we drop.
Ultimately my state pension will far outweigh any ‘damage’ that 5%+ RPI can do to my DB in the 10 years I’m waiting to get it.

The outlier years might happen early on and have a lasting impact for the duration of pensioner's and spouses retirement.

Unless the scheme chooses a discretionary increase above the amounts stipulated, there's no mechanism to reverse the loss of spending power caused by years in which the schemes are capped.

True but you can only factor in so much. It is not feasible (for most) to factor in prolonged periods of high inflation. For those who have made decent pension provisions you tend to hear about them having more money than they need, as opposed to running out or struggling. Especially when the norm is to need less money as you get older.
That said, if you are aiming for a silver service retirement home then you'll never have enough, or probably die trying!

A decent DB is still the gold standard and if you factor in a decent standard of living in todays money using that, you'll be laughing when the state pension kicks in and more worried about your tax bill. 

Pat38493

thegentleway said:

Albermarle said:

Do you think either of you will be higher rate taxpayers in retirement, remembering that the state pension is taxable income?

Nope, comfortable retirement for couple is £59k net so £67.6k gross, i.e. quite a bit below higher rate for a couple.

Based on what's been posted, I suspect that unless you are planning to retire before you can access your pensions, continuing to put that money into your pension is still likely to be a good, maybe the best, approach.

Fundamentally, if you are getting 40% tax relief on all pension contributions while working, and you will be a basic rate tax payer in retirement, you cannot beat making pension contributions (especially if there is employer matching).

If you believe you already have too much in pensions, so that you could retire at 57 and still have enough to last the rest of your life, that's when the question comes into play whether you should be saving outside pensions.

Without seeing detailed figures and projections, it's hard to be more specific.

I might have missed it but, is are your DB pensions still accruing in your current employments or are they deferred?

Side note:
Regarding the above question about higher rate tax, whether your retirement spend will be less than the current HRT threshold multiply by 2, is not so much the relevant point.  The relevant point is more whether either one of you, will end up paying higher rate tax in retirement based on your guaranteed income sources (DB and later state pension).  If either of you will be, or will be close to that point, that makes the advantage of paying into the pension slightly less, but it's still arguably the best option at this stage.  However we are talking so far in to the future that it's hard to say as future governments might change tax rates or bandds.

Also - when you are looking at DB pension projections, make sure that you understand whether they are giving you real terms numbers, or inflated future estimates - some DB pension administrators will give you an estimate of what your DB pension will be at some future date, after adding an estimated inflation amount to that date - this means you might be overestimating what you will get in today's money and you would have to add the same inflation to the PCLS numbers if that's what you want to use (as others have posted it's better to have your own estimates anyway).  If you are looking nearly 30 years away, that will be a big adjustment.

Finally putting aside the purely rational arguments, don't compromise your living standards too much today in order to save for retirement - there is always a small chance you won't make it that far.

Albermarle

Alexland said:

QrizB said:

There was a regular poster on the forum - @jamesd - who used to suggest Venture Capital Trusts (VCTs) for folk with your problem of having too much income to make use of other tax wrappers.

My VCT experience was that the 30% upfront tax relief looks great but then once you factor in the high 2% pa+ fees, the opportunity cost of the money tied up in poor performing underlying investments and then selling at a 10% discount to NAV then it wasn't worth the bother let alone the investment risk. Still it was an experience I guess.

I once looked into the SEIS ( Seed Enterprise Investment Scheme). More out of idle curiosity really.
Not that dissimilar to VCT's, and  also look attractive on the surface from a tax point of view, but felt they were a bit beyond my pay grade/risk tolerance.

I wonder what happened with jamesd?
He was very active until a couple of years ago, and then I think had some dispute with the mods/MSE.
Then he reappeared in January this year and was very active for a short time, and then nothing, although he is not banned.