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

Silvertabby

In my LGPS days I would often be asked similar questions, usually re making additional pension payments.  My reply would be that I could probably work it out to the pound for them - but if only they could supply me with one vital piece of information.  Their date of death.

Without that, you can only do what feels best for you.  But would suggest putting some money away in other savings, so if you want/need/are able to retire before 57 (and counting) you will have access to these funds.

hugheskevi

Cobbler_tone said:

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.

I think a lot comes down to what 'sacrifice' means exactly.

When chatting to younger folk I sometimes pose the question of how much does a cup of coffee cost them, and how much it costs me (me being a lot older than them)? Then I go through a counter-factual of instead of buying coffee putting the money into a pension, gettting 40% relief and the total compounding over many years of investment, and the impact on finances of buying that coffee is a lot more for them than it is for me. In many cases it shows the opportunity cost of that coffee is far more than the £3 - £4 they initially answered.

So in my younger days I was much more inclined not to spend money on more minor things and focus expenditure on things that added value or were major experiences. Part of that was a challenge I set myself each year to put all of our higher rate income into pensions each year. As I have become older my propensity to 'sacrifice' has become lower and so I spend more, but that is all a rational response to the incentives given to me by our tax system.

As a general principle, I think there are strong incentives to put higher/additional rate income into a pension, but the incentive for high contributions from income taxed at basic rate is much less clear. Although salary sacrifice and being close to retirement (when outcomes are more certain) makes the decision easier.

Cobbler_tone

hugheskevi said:

Cobbler_tone said:

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.

I think a lot comes down to what 'sacrifice' means exactly.

When chatting to younger folk I sometimes pose the question of how much does a cup of coffee cost them, and how much it costs me (me being a lot older than them)? Then I go through a counter-factual of instead of buying coffee putting the money into a pension, gettting 40% relief and the total compounding over many years of investment, and the impact on finances of buying that coffee is a lot more for them than it is for me. In many cases it shows the opportunity cost of that coffee is far more than the £3 - £4 they initially answered.

So in my younger days I was much more inclined not to spend money on more minor things and focus expenditure on things that added value or were major experiences. Part of that was a challenge I set myself each year to put all of our higher rate income into pensions each year. As I have become older my propensity to 'sacrifice' has become lower and so I spend more, but that is all a rational response to the incentives given to me by our tax system.

As a general principle, I think there are strong incentives to put higher/additional rate income into a pension, but the incentive for high contributions from income taxed at basic rate is much less clear. Although salary sacrifice and being close to retirement (when outcomes are more certain) makes the decision easier.

The time of life you mention is the key factor.
Imagine that conversation with the average 20 something. “Instead of buying that £4.50 skinny mocha frappe-chino, you could be getting tax relief on your pension” the reply might contain the words ‘granddad’ and ‘off’. 

P.S. I prefer to grind my own beans, which I’ve paid tax on.

vacheron

disgruntled1234 said:

....
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!!

I completely agree that this could be the trickiest part. As you say, for many a saving mindset is a way of life and for decades they have accumulated ever increasing wealth with the objective of being able to live "a better life for longer".

In previous generations (recent ones at least), your reward would be a paid an income for life, either by your employer, the state, or both.....  for however long that may be, so a potentially "infinte horizon" awaited them. 

This generation however will be one of the first to have to work towards the "die with zero" mindset (or at least "die with enough to not burden your beneficiaries with huge inheritance tax oblications and having the state take a huge chunk of your savings).

So after years of steady accelleration, you now have to lift off and begin to apply the brakes, knowing that if you plan has worked perfectly, when you approach zero (or your target figure to leave for your beneficiaries) death should be imminent. In order to do this, you have to objectively and realistically decide how long you expect to live in order for your careful calculations to work optimally.  

I'm not sure that many people are prepared for the psychological pressure which being required to constantly remind yourself and re-evaluate this will entail. 

Pipthecat

wondering if I'm missing something and it's not a good idea?

If you have cash to save in your 40's three topics keep coming up on these forums: should I pay of my mortgage (debts), max out my pension contributions or ISA?  Which is right for you will come down to your specific circumstances but the answer might be a combination of these.

• Psychologically having no debts if very liberating even if the maths says your money could be working harder elsewhere
• Pensions wins for tax efficiency at the cost of tying away your money for another 10+ years
• ISA allows you to change your mind and access tax free money earlier.

My starting position would be to take advantage of any matching contributions into my company pension and then sit down and work out what my end goal is?  Do you have a target age and or income to retire?

disgruntled1234

vacheron said:

So after years of steady accelleration, you now have to lift off and begin to apply the brakes, knowing that if you plan has worked perfectly, when you approach zero (or your target figure to leave for your beneficiaries) death should be imminent. In order to do this, you have to objectively and realistically decide how long you expect to live in order for your careful calculations to work optimally.  

Yeh, that's the part I'm struggling with (lifting off the gas and starting to apply the brakes!).  I do enjoy my job to a degree and I know I can fill my time with activities with my partner, family and friends, when I do retire.

Part of me does feel like I'd be letting my work colleagues down as I've worked for the same company for over 20 years, but I have to think about myself and family.

Hoenir

disgruntled1234 said:

Part of me does feel like I'd be letting my work colleagues down as I've worked for the same company for over 20 years, but I have to think about myself and family.

Everybody is expendable in the workplace. Think of yourself as a sand castle built on the beach built at low tide. 

Tomorrow somebody else will come and build a new one. 

Triumph13

There is no right answer, but a few thoughts for you:
Higher rate tax relief and employer match are largely use it or lose it. Basic rate can often be postponed ie save in an ISA now and add to your pension later in your final years of work.  That can give a lot more flexibility.
If you want to retire before pension access age then you need funds outside the pension.  If you end up deciding to go later, you can shift some of them to your pensions then.  No such flexibility the other way round.
What we did in our final years of work was try to keep the split such that we could have a level income either side of pension access if we retired tomorrow. Once that level of income was enough we retired.

Cobbler_tone

disgruntled1234 said:

vacheron said:

So after years of steady accelleration, you now have to lift off and begin to apply the brakes, knowing that if you plan has worked perfectly, when you approach zero (or your target figure to leave for your beneficiaries) death should be imminent. In order to do this, you have to objectively and realistically decide how long you expect to live in order for your careful calculations to work optimally.  

Part of me does feel like I'd be letting my work colleagues down as I've worked for the same company for over 20 years, but I have to think about myself and family.

Despite thinking of my large corporate as a local business for over 30 years, that is one thing I WON’T be worrying about!!!!
You’d be gone in a heartbeat if they have to cut their cloth accordingly.
I think we all like to think we are more important than we are, it’s what keeps us going.

Cobbler_tone

Triumph13 said:

There is no right answer, but a few thoughts for you:
Higher rate tax relief and employer match are largely use it or lose it. Basic rate can often be postponed ie save in an ISA now and add to your pension later in your final years of work.  That can give a lot more flexibility.
If you want to retire before pension access age then you need funds outside the pension.  If you end up deciding to go later, you can shift some of them to your pensions then.  No such flexibility the other way round.
What we did in our final years of work was try to keep the split such that we could have a level income either side of pension access if we retired tomorrow. Once that level of income was enough we retired.

Triumph13 said:

There is no right answer, but a few thoughts for you:
Higher rate tax relief and employer match are largely use it or lose it. Basic rate can often be postponed ie save in an ISA now and add to your pension later in your final years of work.  That can give a lot more flexibility.
If you want to retire before pension access age then you need funds outside the pension.  If you end up deciding to go later, you can shift some of them to your pensions then.  No such flexibility the other way round.
What we did in our final years of work was try to keep the split such that we could have a level income either side of pension access if we retired tomorrow. Once that level of income was enough we retired.

Higher rate tax…depends how long you can sustain having no net increases.