Paying the most I can into a pension - daft idea?

Mark_d

CaptainWales said:

I am in my 40's and currently pay most of my salary into my pension. My thinking is that it will then have the greatest amount of time to grow. I don't know anybody else who does this though and wondering if I'm missing something and it's not a good idea?

Like you I'm also in my 40's.  I take home a comfortable 3k per month, whilst paying a lot in to my pension.

In retirement I won't have my £380 share of mortgage payment each month but health/care costs will increase very significantly.  Also holiday costs will increase.

My priority has been to ensure that I'll have a comfortable retirement but this has to be balanced with enjoying life now whilst I still have my health.

Hoenir

CaptainWales said:

I am in my 40's and currently pay most of my salary into my pension. My thinking is that it will then have the greatest amount of time to grow. I don't know anybody else who does this though and wondering if I'm missing something and it's not a good idea?

Mortgage free ? Debt free ?  Able to survive if you were to lose your employment tomorrow ? 

Life for many people is far from predictable. Balanced approach covers all eventualities. 

vacheron

CaptainWales said:

Thanks. My living costs are low and I have decent savings, which is why at the moment I put most of my salary into a pension. 

One of the many advantages of regularly paying into a pension is that you learn to live on what you have remaining which avoids the dreaded "lifestyle creep" which cripples so many people (inlcuding most of the people I know who "can't afford to save" yet have £120pm Sky packages and a new £45k car every 3-4 years.

My monthly take home pay / pension saving is split roughtly 40% / 60%, and I am able to live quite comfortably on that. I could always reduce the amount I am saving into the pension at the moment, but for every £100 I would recieve as take home pay, I would be losing £230 of contribtions into my pension.... and an instant 130% return is a hard offer to refuse! 

My first question is what is motvating you to save so much? Do you want to retite early, retire later but with a higher income, or provide for your family?

As others have said though, there is no point being the richest person in the graveyard. Also be careful of finally retiring with all the money to do all the things you have always promised yourself, but now with crippling arthritis, half deaf, and a heart condition! 

You mention you also have non-pension savings, this is good as you may need funds to draw on over the next 10-20 years or so. Also, as pensions are taxed as income, it is worth having non-pension savings to draw on alongside your pension to keep your tax liability as low as possible, especially in the earlier years of retirement.

ali_bear

It is possible to pay too much into a pension, end up being taxed at 40% on your excess pension income. Better to have that money now. 

With 20 years to go your pension should be investing regularly in high growth/volatility funds. 

There is balance to be struck between pensions saving, medium term savings or paying down mortgages, and living for today. 

NoMore

ali_bear said:

It is possible to pay too much into a pension, end up being taxed at 40% on your excess pension income. Better to have that money now. 

Just to make this point clear, if your contributing at 40 % tax rate or above, the worse it can be is tax neutral but if you haven’t exceeded the tax free allowance it’s still a gain. 

Paying in at a lower tax rate and withdrawing at a higher is bad. 

The point is it’s not about a particular tax rate you withdraw at but also the tax rate you contribute at. 

Yes you can pay too much into a pension but it’s not as simple as saying because you might pay a certain tax rate on withdrawal that you shouldn’t. 

Cobbler_tone

Exodi said:

CaptainWales said:

I am in my 40's and currently pay most of my salary into my pension. My thinking is that it will then have the greatest amount of time to grow. I don't know anybody else who does this though and wondering if I'm missing something and it's not a good idea?

Also on a separate note, you must remember life is for living. Don't be one of these people who spends their 'best years' doing nothing but save, and then either is too decrepit to do the things they wished they'd done when they were younger or has trouble pivoting to 'spend' mode in old age (very common problem).

I always struggle with this and that situation must be the exception as opposed to the norm, i.e. people saving for a (financially) better life in retirement than they have now. Who realistically 'sacrifices' a decent lifestyle thinking "Oh, when I am retired I am going to have loads more money to enjoy myself"
In fact, I am sure there are stats out there to show the average decrease in income post work, which makes sense.

That is without the mindset. If you had lived for 40+ years on £30k a year, paying mortgages, potentially raising kids etc, you are really going to struggle spending more than that in retirement. Not sating that you couldn't (easily) but your view of money would probably hold you back. That of course wouldn't be possible anyway without the disposable cash to build it up....or work until you are 85! 

It's got to be a balance and I hope that I have never deprived myself of anything during my working life (maybe sacrificing holidays at peak financial commitment stages), which I could have during retirement. The balance of pension contribution and net income has been a battle for me but probably only since I turned 50 and the 40% tax bracket was draining me. It's still the vehicle I chose to save in over anywhere else. It certainly feels different when you know that you could access it anytime.

disgruntled1234

I always follow these types of threads with interest as I'm currently salary sacrificing as much as I can into my pension until I plan to retire towards the end of the year at 56.  I'm doing this partly because of rumours around potential changes to salary sacrifice in the Autumn statement, but also to reduce my tax and NI as much as possible until that point.

If nothing changes with salary sacrifice in the budget, then it's still been a win/win because I'll have put more into my pension and saved on tax and NI.

I have a large S&S ISA and also quite a lot of available cash as well as quite a large SIPP so I'm not depriving myself of the things I want each month by taking a reduced salary.

I'm hoping that retiring at 56 will give myself enough years to enjoy the rest of my life with my partner (who is older than me), with relative good health.

I think I will struggle with "de-accumulating" though as I, like I'm sure a lot of other people, have spent their working lives accumulating money to save and invest for retirement.

I actually have a fear that I won't be able to spend the money I have currently accumulated as my outgoings are not huge and that includes several holidays a year! 

I have no children but do have a sister and a Niece so if I do croak before I've spent it all, then they will be well cared for!!

CaptainWales

Exodi said:

CaptainWales said:

I am in my 40's and currently pay most of my salary into my pension. My thinking is that it will then have the greatest amount of time to grow. I don't know anybody else who does this though and wondering if I'm missing something and it's not a good idea?

This comes across as a bit tone deaf to be honest.

Reminds me of that video of the young girl confused why homeless people don't just buy houses to live in.

I expect most people realise the longer money is saved/invested, the more it is likely to grow, however a lot of people in their 30's/40's will be simultaneously grappling with things like mortgages, children, etc.

Of course we could all probably contribute a little more to our pensions, but wildly unrealistic to expect the average younger household to be able to 'pay most of [their] salary into [their] pension'.

Also on a separate note, you must remember life is for living. Don't be one of these people who spends their 'best years' doing nothing but saving, and then is either too decrepit to do the things they wished they'd done when they were younger or has trouble pivoting to 'spend' mode in old age (a very common problem).

Appreciate that not everybody can do this, I was only talking about my personal circumstances. With doing the things I'd wish I'd done (as you put it), I guess I am fortunate that what I enjoy don't cost much. The best experiences in my life often haven't equated to paying more. 

kempiejon

I started work as a teenager and never really felt it was for me, I could usually think of sometihng else I'd rather be doing. In the decades that followed I stepped away from employment several times to do other things; that meant I needed to fund periods between jobs so got used to low cost of living and salting money away deferring gratification. Now I have my FU money work is optional. If I had piled it all into my pension I never would have had the freedom to take a break in my 40s and 50s.
When I start deaccumulating in earnest I will have more income out of work than I earned while in work. Should I hang on the state pensions will be along which gives me a new source to do something useful with.

kimwp

leosayer said:

Overall, I put something like a third of my salary into my pension from my mid 40s to mid 50s. I'm now 55 and retired. 

I think there's a few questions you need to ask yourself:

- What tax rate am I avoiding by making these pensions contributions and what tax rate do I expect to pay in retirement? Is the tax saving worth it for having the money tied up for over a decade?

- What big expenses could come up between now and when I start drawing from the pension (age 57?) 

- How much annual income do I actually need for retirement?

- What investments should I use to provide the annual income that I need in retirement?

I have been piling as much as I can into my pension and I think these questions are spot on. My mistake was not understanding how to reasonably forecast my pension pot on retirement, which meant that I massively underestimated how much I am likely to have by a certain point and therefore misidentified the point where I could start saving outside my pension for retirement earlier than when my pension becomes available. Which means I can't put everything I'm saving into an ISA, so I'll end up paying more tax because I didn't start saving outside my pension earlier. So worth thinking about that too.

I don't think your question is tone deaf. Some people have much greater income than their outgoings, some don't. Tone deaf would be to say "like most, I have lots of spare money", which you didn't do.