Is it worth paying into a pension when you're aiming for early retirement?

FIREwork86

Hello there,

I'm an MSE Forum newbie and hoping MSE wisdom can help me. I'm sorry if my questions are incredibly naive.

We (me and husband) are planning early retirement. We're looking at retiring at 48. We have workplace pensions that are projecting £30K total (so £15K each) income if we take them at pension age.

While I understand the tax benefits of investing in pensions, that money gets locked away which means your early retirement years are poorer.

In my situation [looking at a long early retirement, having an okay-ish workplace pension], is it wise(r) to invest somewhere other than pensions? Perhaps a mixed approach is the best option - some into pension and some elsewhere.

I really appreciate any thoughts that anyone has.

eskbanker

How would you fund the years from 48 to pension access age?

lisyloo

So you're both looking to fill a gap of 19 years?
That's quite significant.

I'd say a pension is a good choice for the years between 57 and 67.
I'd start with that.

Is 15K each enough for you both to live on? (with addition of state pensions presumably).

How much do you want to live on between 48 and 67?

rnj

Hard to say without knowing your intentions or circumstance. I'd opt for a mixed approach. If your income is significantly higher than outgoings I would certainly keep paying into a pension and save the rest in a S&S isa for easier access.

Also think about what you will do in retirement. I realised I get bored easy so found a job that I enjoy and is also a hobby that it doesn't actually feel like a job.

NoMore

Your 48, currently earliest pension access age for you is 57. that's only 9 years you won't be able to access pension. As Pensions are generally the most tax efficient account available, and as most of your retirement will be after pension access age, ignoring pensions is not really the most tax efficient, when in reality most of your investments should be in pensions.

Its about getting the balance right between your pension and other investments, ignoring pensions because you are going to retire early is a mistake.

TheSpectator

FIREwork86 said:

Hello there,

I'm an MSE Forum newbie and hoping MSE wisdom can help me. I'm sorry if my questions are incredibly naive.

We (me and husband) are planning early retirement. We're looking at retiring at 48. We have workplace pensions that are projecting £30K total (so £15K each) income if we take them at pension age.

While I understand the tax benefits of investing in pensions, that money gets locked away which means your early retirement years are poorer.

In my situation [looking at a long early retirement, having an okay-ish workplace pension], is it wise(r) to invest somewhere other than pensions? Perhaps a mixed approach is the best option - some into pension and some elsewhere.

I really appreciate any thoughts that anyone has.

What do you mean by 'pension age'? State pension age? Date you can access workplace pension?

Nebulous2

How old are you at the moment? 

How much money do you need in retirement? 

You'll get £15k each at pension age, what age is that? Is there an opportunity to take it sooner for less? 

You need to consider it as several distinct time periods, not just as retirement. 

48-57 - except in very rare circumstances, you wont be able to access pensions, so you will need savings or investments to draw on to fund this period. 

57-67 - you can draw on pensions to fund you here. Pensions are likely to be the most tax-efficient way of saving for this period. 

67+ State pension should kick in and reduce the amount you have to draw from your other resources, pensions / savings etc. Your workplace pensions will be in payment as well, if you don't draw them early. 

As a bit of a sense check - retiring that early brings risks, as things can change dramatically in the time you will be retired. The further out something is the more misty the crystal ball becomes. If you need £40k a year to live on and you have 20 years until you can access state / company pensions, then you'll need to draw down £800k to fill that gap. 

Marcon

FIREwork86 said:

Hello there,

I'm an MSE Forum newbie and hoping MSE wisdom can help me. I'm sorry if my questions are incredibly naive.

We (me and husband) are planning early retirement. We're looking at retiring at 48. We have workplace pensions that are projecting £30K total (so £15K each) income if we take them at pension age.

While I understand the tax benefits of investing in pensions, that money gets locked away which means your early retirement years are poorer.

In my situation [looking at a long early retirement, having an okay-ish workplace pension], is it wise(r) to invest somewhere other than pensions? Perhaps a mixed approach is the best option - some into pension and some elsewhere.

I really appreciate any thoughts that anyone has.

Is that based on contributions to date, or does it assume you go on contributing until 'pension age' (whatever you mean by that - state pension age? Something else?).

If you are rich enough to retire at 48, then taking some proper (paid for) financial advice is likely to be a very good investment.

AlanP_2

What type of workplace pensions, Defined Benefit or Defined Contribution as the projections for each type will have very different assumptions underpinning them?

Also worth noting that a projection is about as much use as a chocolate teapot if they are DC pensions.

What counts there is the pot value, investment returns, inflation and most important of all how much you need / want to withdraw from it over what length of time 

FIREwork86

Hi

Thank you for all of your comments.

Sorry to not be clear - when I said "pension age", I meant the age at which I can access my full workplace pension which is currently 66. This is the age at which we'd be getting £30K based on contributions so far and continuing until 48. 

I know I can access my workplace pension earlier, but that wouldn't be the full amount.

We'd be funding the years from 48 to 66 through interest on investments and draw down.

We're after around £45K per year income which interest and draw down should give.

@Nebulous2 That's great to think about retirement as three distinct periods. Thank you, I'll give that more thought. I've been thinking of it as 48-66 and then 66+ when pensions kick-in.

I really appreciate all your thoughts on this.

eskbanker

FIREwork86 said:

We'd be funding the years from 48 to 66 through interest on investments and draw down.

We're after around £45K per year income which interest and draw down should give.

You clearly have very substantial non-pension investment portfolios so would need to give more information about your overall finances in order to guide the specific question about the extent to which pensions should be used, as they'd obviously just be a part of your retirement planning and the bigger picture is therefore very relevant....