Should i pay extra into my private pension?

Andy566

Hi 

I need some advice on whether or not to pay extra into my private pension. Im 30 years old and my employer contributes 12% to my pension without any contribution from myself. If i make a contribution my employer will match 14% eg if i contribute £100 a month, £114 will be paid into my pension pot. I am in the Basic rate tax bracket so from my understanding i will save £20 a month in tax as the pension contribution is deducted from my earnings before i pay tax, reducing my taxable income. If this is right i'll be getting £114 paid in to my pension for £80 coming out my pocket, is this worth it or does it mainly benefit those in the higher rate tax bracket?

My pension pot is quite small at around £15,000 in medium/high volatility ETFs. My employer contribution is £300 a month + £114 which i will contribute giving me a total monthly contribution of £414 from next month. Is this good enough at 30 years old? though pensions will be a large part of my (hopefully early) retirement income i'm not planning on pensions being my only source of income when i'm old. I am investing in a stocks and shares ISA and i am planning to purchase a buy to let property within the next 5 years. I'm just unsure whether to put the extra £100 towards my pension or is my pension in a decent enough place for me to invest that money instead?

Thank you

Archerychick

Adding money into your pension is investing it, with the difference being that you have tax benefits of using the pension vs other investments. As you also will gain additional free money from your employer pension is where I would put that money. 

northAthenian

id say go for it , if you can afford that, its decent company matching rate. the younger you are able to get cash into a pension, the more it can grow.
one thing worth checking with your employer/payroll if you can easily increase AND decrease the amount if you ran into a need to do so . some may let you do so monthly, some might be set for a year. my reason to flag that as a valuable question to ask, is from personal experience - in a prior company we were able to increase our payments by 1% at any point, but could only decrease if a qualifying "life event" occurred.
 In that company pension death/births qualified ..marriage and moving house were not qualifying events.. gave a bit of a stumbling block when we were moving house and getting a mortgage as the broker had suggested i reduce my pension contributions for a few months, so i showed as having more available income. 

DRS1

Can I perhaps suggest that you steer clear of a buy to let.

Also at what point does your employer stop adding an extra 14% to your contributions?  Can you get there without feeling the pinch?  If so do it.

I have no idea what a medium/high volatility ETF is but you are young enough to go for one of those global equity tracker things people on here so love (VWRP/HMWO or the like).

kimwp

If your pension payments are salary sacrifice, you also save on national insurance. 

Is it definitely that your company matches a percentage of your contribution or is it that they will match up to a percentage of your salary?

ali_bear

It is difficult to say what level of contribution is enough. But most people are paying way too little into their pensions. The statutory minimum is low because the govt that legislated for it didn't want to burden the low-paid or hurt those who employ large numbers of the low-paid. 

Congratulations on taking an interest at your age. Making additional contributions is the most tax-efficient way to save for your retirement. You'll be thanking yourself later. 

Aretnap

kimwp said:

If your pension payments are salary sacrifice, you also save on national insurance. 

Is it definitely that your company matches a percentage of your contribution or is it that they will match up to a percentage of your salary?

14% is employer's national insurance contribution, so presumably this is a salary sacrifice arrangement where the employer pays it's own national insurance savings into the employers pension. 

In which case the OP's sums are wrong. He actually gets £114 in his pension for every £72 off his take home pay, as he also saves his own national insurance. 

So it makes sense to pay in whatever you can afford, while leaving yourself a reasonable standard of living and some savings for the short and medium term of course.

El_Torro

A 30 year old with a £15,000 pension pot with £414 going in every month will have a pot of about £426,000 at 68. Is this enough? This is in today's money.

Being 30 years old you will hopefully have a promotion or two in your future, with opportunity to put more in your pension. A lot can happen in 38 years time, and there will be a lot of expenses for you between now and then. You are doing more with your pension than a lot of people your age, though it's worth bearing it in mind as time passes and your circumstances change. I think your strategy to also pay into a S&S ISA is a good one. 

I agree with others who say that you are most likely better off adding more to your workplace pension rather than paying into a separate private pension. 

Andy566

northAthenian said:

id say go for it , if you can afford that, its decent company matching rate. the younger you are able to get cash into a pension, the more it can grow.
one thing worth checking with your employer/payroll if you can easily increase AND decrease the amount if you ran into a need to do so . some may let you do so monthly, some might be set for a year. my reason to flag that as a valuable question to ask, is from personal experience - in a prior company we were able to increase our payments by 1% at any point, but could only decrease if a qualifying "life event" occurred.
 In that company pension death/births qualified ..marriage and moving house were not qualifying events.. gave a bit of a stumbling block when we were moving house and getting a mortgage as the broker had suggested i reduce my pension contributions for a few months, so i showed as having more available income. 

Yes I can change it month to month. I had set the employer contribution to 11% for the past year (the 1% was paid into my salary to cover extra holidays I bought). I’ve now changed it to 12% and an additional £100 contribution. I would just need to give a 1 month notice without reason to have it changed. 

Andy566

DRS1 said:

Can I perhaps suggest that you steer clear of a buy to let.

Also at what point does your employer stop adding an extra 14% to your contributions?  Can you get there without feeling the pinch?  If so do it.

I have no idea what a medium/high volatility ETF is but you are young enough to go for one of those global equity tracker things people on here so love (VWRP/HMWO or the like).

I do want to diversify a bit and not rely on a single income. Buy to lets can provide a good income whilst also giving me a physical asset that usually appreciates in value. 

The main drawback is interest but the reason I plan on buying one in around 5 years is to save a large deposit (around 30%) so the rent covers not only the monthly mortgage payments but also 10% yearly overpayments on the property. 

I live in the north east where properties are currently cheap (not for long) so my plan is to buy a cheap townhouse for around £90K and put down a £30K deposit. The monthly repayment would be around £350 a month. If I rent to 3 students room by room I could make at least £1000 a month profit, this would cover the mortgage and 10% overpayments from the first year of the mortgage. 

The 14% employer contribution stops at £60,000 which is well above my current salary. 

Medium/High volatility ETFs are trading funds that trade stocks. Medium/High volatility ETFs are better for young people as we have time on our side to ride out the volatility and in the long run they usually give much better returns. They’re not recommended if you don’t plan to keep the investment in place for at least 5-10 years. 

Andy566

kimwp said:

If your pension payments are salary sacrifice, you also save on national insurance. 

Is it definitely that your company matches a percentage of your contribution or is it that they will match up to a percentage of your salary?

The company gives me 12% of my salary without me contributing a penny. If I contribute anything they will match 14% of what I contribute and yes it is salary sacrifice.