When to reduce pension contributions?

ORC

My DC pension is currently at about £700k and I am contributing £60k per year. I am 42 and I'm conscious that if I keep contributing at this rate then I'm going to suffer tax at 40% when withdrawing much of what is being contributed at the moment. On one hand that isn't necessarily a problem as that is less than my marginal rate of tax on the contributions, but on the other I wonder whether I should reduce my contributions down to the minimum required to get full company matching and take the tax hit on the rest now (and put into an ISA). I can't see anything on the horizon that means I need the flexibility of having more accessible funds now, but I guess you never can until the thing you didn't see coming happens!

What would others do in my shoes?

gm0

It is hard to make any firm plan decades ahead.  

What is certain is that the rules will be different when you get there.  And while you can speculate on what "could" happen.  It is impossible to say

In my own example.  When I was at your stage - I carried on saving the pension and did not divert.  They (the treasury) introduced and reformed LTA with various mad loops on protection and indexation promises and what the limits were. Promises then broken (fiscal drag), then they reformed it, then cancelled it altogether over a couple of years.  And replaced it with the current system - which I would happily bet (small token amounts only) but with confidence will not be the same when you are 60.  This farrago of incompetence was inconvenient.  As at several steps it created a clear incentive to take a particular action - protection certs and stop contributing.  Or managing how to take the pension based on its value while considering the extant age 75 penalties. And so on.  All of mere historical interest now. But a pain in the backside nonetheless. 

For a current example - at the moment TFC allows 25% of DC fund below the new LSA cap to be extracted and this is then free to be used as desired (transfer between spouses, gifting to children under PET - whatever consumption is desired.  

But this limit is regularly targeted for kite flying on it being "too generous".  A lot of which is media speculation for outraged readers of thus filled columns.  And it may stay at current levels and be gently fiscally dragged down.  Which is the default behaviour of government to avoid pain with deeply unpopular changes.  

So it is possible to see a future where DC pension benefits are materially less accessible than today.  And thus less flexible for you than some S&S ISA held alongside

A "balance" of tax wrappers used is more flexible and better hedging against getting backed into a corner over what you want to do later.  And it eases balancing across married couples.

The opportunity cost (extra tax relief held for a long time as investments) is fairly easy to see.  The question on how much this affects your long term plans - less so.

DRS1

Yes max out your ISA - put it in VWRP or the like.  Use it if you want to retire at say 55 and need something to tide you over from then until you can draw on the SIPP.

Do you have an emergency stash of cash in case something happens.  3 months spending money would probably be the minimum for that.

I know this is the pensions board but it is not always good to stick absolutely everything in a pension.

chile_paul2

I’m a couple of years older than you at 45 and have in recent years diverted all of my pension savings above the level required to max out the company contribution into S&S ISA’s to fund the bridge from retiring early at circa 50 through to being able to access my DC pension at 57.

In reality I’m still going to have more money in pensions than I think I will ever need in retirement - I wish I’d switched my strategy a few years earlier.

Mark_d

ORC said:

My DC pension is currently at about £700k and I am contributing £60k per year. I am 42 and I'm conscious that if I keep contributing at this rate then I'm going to suffer tax at 40% when withdrawing much of what is being contributed at the moment. On one hand that isn't necessarily a problem as that is less than my marginal rate of tax on the contributions, but on the other I wonder whether I should reduce my contributions down to the minimum required to get full company matching and take the tax hit on the rest now (and put into an ISA). I can't see anything on the horizon that means I need the flexibility of having more accessible funds now, but I guess you never can until the thing you didn't see coming happens!

What would others do in my shoes?

In terms of efficiency, putting £60k in to your pension means you're likely avoiding NI even though you're not really saving on tax.

If I was putting £60k into a pension and had a very comfortable level of savings/investments then I'd continue with the same level of pension contribution.  If I had extra cash in my pocket now it wouldn't change my life - I wouldn't start flying first class, I wouldn't start buying designer clothes, I wouldn't start dining at the Ritz.

During retirement all your time will be your own.  Having a huge pension income means you can travel the world.  You can experience the Orient Express.  You'd have the time to benefit from Netflix, Spotify...courses to learn different skills/languages...

leosayer

You don't say what you have outside the pension but with £700k in your DC at age 42 and the ability to make £60k contributions you should be at least filling your ISA entitlement each year. And that of your spouse if you have one. 

Life can throw up all sorts of unexpected things that can be eased by having a large pot of readily available assets to call upon.

Like gm0 I found the constant changing of thresholds and other rules frustrating over recent years. If you have all your eggs in one (pension) basket then the risk of a materially damaging rule change is heightened.

ali_bear

It does depend on your family circumstances and your attitude to work and retirement. I have a friend who is very well paid and still working in his early '70s (loves what he does) while some can't wait to retire as early as possible. 

In current money if you retired at 60 with a DC pot of 1.25M you'd be likely be over the 40% tax band for pension income for the rest of your life. Any more money paid into that DC fund would end up getting taxed at 40% so there is very little to be gained from locking that money away until retirement. 

Find the balance between pension savings, other forms of investing over the medium-to-long term, and living for today. 

vacheron

If if looks like your (very significant) income you are currently earning (plus and the large surplus you seem to have left over after living costs) will continue for a few more years to come... and if tax incentives are a one of your primary driving factors and you don't mind taking some higher risks, you may be approaching the point where you could be considering Venture Capital Trusts, Enterprise Investment Schemes, or other higher tier investments.

You would probably need the services of a good financial advisor to discuss / arrange these. And the risks could far exceed the 40% that you may would be taxed in a relatively safe and diversified pension portfolio.

Also, if you have kids, you could start contributing to a pension for them now. 

artyboy

I think the whole IHT thing has made some people reassess just how much value there is in stuffing their pensions beyond a certain point. Mrs Arty and I both have DC pots well in excess of the old LTA, and whereas in prior years we were putting £60k in, now we are down to the bare minimum. 

In my case it's simply that I'm not working in a job that pays a conventional salary, so I couldn't even if I wanted to. For Mrs Arty, it's been adjusted down to just take advantage of company matching and nothing else - not as though we have any ISA headroom either, but we're already at the 'nice problem to have' stage with pensions, and will take the tax hit for the benefit of more flexibility on what we spend here and now.

Mind you, who knows what further tinkering Reform will do when they win the next election...

Simon11

We are in a similar position to yourself, but +5 years younger with £380k squirrelled away in the pension plus a B2L on top.

I have been busy stuffing my pension as much as possible over the last 5-7 years making hay while the sun shines and was definitely the right decision, as you never know what is around the corner in your career. It has also meant we can take advantage of child benefit.

However we am coming to a similar crossroads where if we keep going at the current pace there could be too much in the pension pot than we really want and with potential changes to taxes/ pensions soon it may support a change in strategy.

Our children are only young and my wife has been working in an unsustainable job where the pay doesn't really make it worthwhile against the hours in the job and personal benefits/ sacrifices (teaching!). So my wife is taking another career path which is more family friendly but much lower pay. It will mean that I will likely make the lowest payments needed into the pension (me 10%, employer 12.5%)- losing child benefit in the process to enable me to draw more money to pay the household bills but also splash out on more lavish/ exotic future holidays to enjoy life 'even more' now. 

If I am lucky to get future pay rises/ promotion and income will exceed £100k threshold then I shall have to throw more at the pension.

MallyGirl

OH is in this sort of ballpark - not quite as high but he will likely exceed LSA before I convince him to retire. I think we will be able to get it all out at 20% (depending on growth). He contributes via Sal sac and also gets the employer NI (at 13.5% as they haven't made the increase to 15% as yet) so is still piling in the contributions since the numbers still work in his favour. He does already have a decent ISA balance and will use this year's allowance to rinse his sharesave which matures soon and avoid CGT on it.