Saving too much into pension for retirement?

Alexland

Cobbler_tone said:
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.

With a 3% inflation capped DB scheme you only need a few years of high inflation (as occurred recently) at the start of your retirement to be down around 15-20% for the remainder of your retirement before considering the ongoing effect of capping in more modest periods of inflation.
I get that DB is supposed to be the gold standard but people need to be aware that some DB schemes are more bronze standard can and carry risk similar to a DC scheme in their ability to maintain spending power.

Alexland

Albermarle said:

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.

My experience in periods I have been away from the forum is that life happens. It's not always something bad (like the trauma of my divorce) maybe a new interest has taken priority, etc. Maybe he will come back maybe not.

thegentleway

hugheskevi said:

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.

Yes

hugheskevi said:

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.

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%. 

For my wife yes. I save even more as I have also have self-employed income and salary sacrifice from my PAYE so I save more NI.

hugheskevi said:

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.

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.

How did you work this out?!

hugheskevi said:

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.

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.

It's very tempting indeed. Although there is a cap on the tax free lump sum and my mortgage is quite a bit bigger than that I guess I could just do it for £268,275

hugheskevi

hugheskevi said:

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.

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.

How did you work this out?!

Assuming mortgage interest rate of 4.5%, 10 years compounded of 4.5% interest is 55%.

So £58 into an ISA gives £58 plus investment returns net of fees.

£58 borrowed over 10 years at 4.5% increases to £90

If instead of taking the salary and paying income tax and National Insurance leaving £58 it is salary sacrificed into a pension, £100 goes into the pension. When taken out 25% is tax free and the rest taxed at 20%, so an average tax rate of 15%, leaving £85 (plus investment returns net of fees).

thegentleway

Pat38493 said:

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).

I think it's typically 42% (40% income tax and 2% NI). I get more NI relief 

Pat38493 said:

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.

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.

We don't already have too much. However, at our current salary sacrifice rates I think we will have too much. I've used the USS calculator (with 2.5% inflation, 0% salary increase, standard investment returns) which says we can both retire at 57 with £114k pa combined income until 68 (then DB pensions + state pension take over). We only spend £59k pa combined at the moment so this is way too much plus it would put one of us in higher rate.

Pat38493 said:

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.

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

Still accruing. 

Pat38493 said:

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.

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.

Agreed. Neither of us will pay higher rate with DB and state pension. However, one of us will if we use up all the DC part between 57 to 68. We could take less income during that period and use DC to supplement DB + state. But our DC + state already covers our current spend (which is due to reduce as it currently include mortgage and childcare etc...)

Also agree about so far into future but I can only plan according to current tax regime and modify accordingly in future when it changes. 

Pat38493 said:

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.

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.

Projections are from USS which I believe are real numbers (i.e. not inflated).

We don't compromise living standards don't worry!

Cobbler_tone

Alexland said:

Cobbler_tone said:
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.

With a 3% inflation capped DB scheme you only need a few years of high inflation (as occurred recently) at the start of your retirement to be down around 15-20% for the remainder of your retirement before considering the ongoing effect of capping in more modest periods of inflation.
I get that DB is supposed to be the gold standard but people need to be aware that some DB schemes are more bronze standard can and carry risk similar to a DC scheme in their ability to maintain spending power.

I think it is a given that whatever scheme you have it is advisable to understand it! It does concern me the amount of people who work with me in their late 50's/early 60's who don't even have their log on to our DB/DC schemes.
Such a large part of the population are programmed to work until they retire at state pension age.

The benefits of 'most' DB schemes goes far beyond a 2.5%-5% RPI/CPI annual cap. It is guaranteed, totally safe and usually comes with a more generous spousal provision, if that is important to you. I regularly look at what my CETV would buy in the annuity world and it is miles away, which shows how beneficial it is.

In terms of inflation, that is down to luck/poor luck. It had been pretty low since the 90's and then no one would have been able to match 2022/23. Retiring at the start of 2022 wouldn't have been the best timing for anyone. It's why those models show financial success as a percentile over the past 100 years, as you can never guarantee success. It isn't predicted to do anything spectacular up 2030.

I agree that many DB pensions (especially private sector) aren't 'what they used to be' if you are lucky enough to still be in one. 

LHW99

In terms of inflation, that is down to luck/poor luck. It had been pretty low since the 90's and then no one would have been able to match 2022/23. Retiring at the start of 2022 wouldn't have been the best timing for anyone. It's why those models show financial success as a percentile over the past 100 years, as you can never guarantee success. It isn't predicted to do anything spectacular up 2030.

As said in an article I read somewhere - a Monte Carlo simulation is fine in theory, until you can't afford the electric bill

kimwp

If you want money before you can draw it from your pension, you need to save outside your pension.

Cobbler_tone

LHW99 said:

In terms of inflation, that is down to luck/poor luck. It had been pretty low since the 90's and then no one would have been able to match 2022/23. Retiring at the start of 2022 wouldn't have been the best timing for anyone. It's why those models show financial success as a percentile over the past 100 years, as you can never guarantee success. It isn't predicted to do anything spectacular up 2030.

As said in an article I read somewhere - a Monte Carlo simulation is fine in theory, until you can't afford the electric bill

It's only maths.
When we see any years of inflation in double digits, someone, somewhere is going to be screwed.

The alternative is to build in some contingency or just carry on working until you pop your clogs, which I appreciate suits some people.

kempiejon

thegentleway said:

I'm 40. I'm guessing it'll be 57 for me (if not higher by the time I get there!)

How interested would you be in retiring from permanent full time employment before 57? Seems like the plan has been to fill the pensions, perhaps an earlier move to financial independence hasn't been considered much previously. At 30 I knew I wanted financial independence as soon as possible and thought 50 plausible. I delayed a bit of gratification for that. Having excess disposable income at 67 as a trade off between having a smaller budget but more experiences with free time from 50 odd
The pensions brings tax advantages but limits earlier access. ISAs have other tax advantages, and for some the earlier access is more useful than the tax treatment of DC pension.