Is it too late to start a pension?

sometime_soon

Hello.  Both self employed and have arrived rather late in the day to finally being in a financial position to save etc as previously any money was put back into moving forward in life to get to a position of owning our property etc. So we are now wondering if it is too late to look at a private pension! No pension at all currently and 50 and 55 in age. Tax wise it would clearly be beneficial I understand but if we ending up drawing it in 5 years for example , is it better to have left money in our savings pots as it simply won’t add up in such a short term? 

DodgyDave88

Tricky one! You are getting the tax relief so that's the big advantage. If you are wanting to start drawdown in 5 years though, that's not a long time and the market may not be in your favour in such a short amount of time. I think you need 10+ (ideally 15+) timeframe in order to ride out the ups and downs. 

QrizB

I think DodgyDave is, er, dodgy, at least in this cse.

sometime_soon said:

Tax wise it would clearly be beneficial I understand but if we ending up drawing it in 5 years for example , is it better to have left money in our savings pots as it simply won’t add up in such a short term? 

Pension beats ISA by at least 6.25% for a basic-rate taxpayer. It beats taxable savings/investments by more than that.

And you're not necessarily investing for 5 years; you're investing for the rest of your life, 30 years or more.

sometime_soon

Thanks yes this is our dilemma! Not ideal at all , it feels it has all come rather too late despite a lot of work to get this far. Currently just sitting in standard savings (£200k) which could go into the pension pot and we have isa’s additionally. Keep holding off work to not go into higher tax so it feels very inefficient tax wise . It will in reality (unfortunately) be most likely longer than 5 years but equally we cannot say just as the markets probably won’t go in our favour but do we look at it and hope that we at least gained the tax back! 

GN_TDCI

You're going to need more time than 5 years to build anything up. But you also haven't included your potential savings either.

You get the 20% tax relief which makes saving into a pension better than anywhere else, but you do need to factor in more time.

Let's make some small assumptions then.

You start with £0, and you are able to contribute £100 a month. Based on your ages, lets assume that State Pension age is 67 and therefore that's the age you will retire. For the purposes of these calculations, I am assuming you will open up a DODL pension or similar, but choose yourself after research.

I am assuming your birthday is 01/01/1975, and therefore retirement age is 01/01/2043.

First Deposit of £100 to be made in December, followed by £100 contributions each month. The expected return on investment is 5% (could be more, could be less, but I would expect more in the right investment portfolio).

When you consider the tax relief, the costs of managing the account, and the 5% return, then a £100 monthly investment could see you with around £92,000 on 01/01/2043.

In 2030 that would be around £18,800
In 2035 that would be around £37,500
in 2040 that would be around £69,000

As you can see, the length of time you can save for, the better.

Lets assume then that you manage to get to £92,000. That could be a £23,000 tax free lump, followed by an annuity of £250 per month (£3000 per year), or you could consider a draw-down which would potentially leave you able to take £500 per month and there being £19k in the pot when you are 85.

These figures are for guidance only.

Obviously, the amount you put in makes a massive difference. But if you compared that to an ISA giving 8% returns then you would be looking at the following figures:

£100 deposit into an ISA, with a £100 monthly contribution based on an 8% return

2030 - £7500
2035 - £18,500
2040 - £35,000
2043 - £48,400

In order for an investment/savings to beat a pension on returns, you would need a return of over 11% if the pension only gave 5%. Some pensions are returning double digits, so it is well worth considering.

GN_TDCI

sometime_soon said:

Currently just sitting in standard savings (£200k) which could go into the pension pot and we have isa’s additionally.  

There is an annual limit you can put into pensions. You can backdate, but I am unsure on the exacts on that. Bear in mind that money in a pension is not accessible in the same was an ISA is, so think about fluidity too.


Also, you mentioned holding off income to avoid higher tax brackets, but you can contribute to pensions to offset this. If you are reducing your income through pension contributions, can't you keep yourself in the lower tax brackets?

sometime_soon

Thanks- Yes my thoughts were to simply max out the contributions in the first few years using the saving pots as to my simple mind, it makes more sense but my mind is a very limited financial experience! For many reasons it has only come together in the last 5 years financially so we have worked our backsides off to save everything, have no debts or mortgage etc but realise we are now completely tax inefficient and still not financially where we should be in regards to retirement income. 

Jerben

It really isn’t a ‘dilemma’. Just do it.
It’s a great saving vehicle. 
Depends on lots of other things like what do you expect to live on?
Will your self employed earnings carry on?
Have you other income and / or savings?
+ many others

Many people save heavily into pensions in their 50’s.
I did from age 55 and finished work at 60.
I’m now withdrawing it (tax free) before state pension comes online next year.

If you research it you will see the benefits.
It’s worth checking your exact state pension situation too. 

Dazed_and_C0nfused

GN_TDCI said:

sometime_soon said:

Currently just sitting in standard savings (£200k) which could go into the pension pot and we have isa’s additionally.  

There is an annual limit you can put into pensions. You can backdate, but I am unsure on the exacts on that. Bear in mind that money in a pension is not accessible in the same was an ISA is, so think about fluidity too.


Also, you mentioned holding off income to avoid higher tax brackets, but you can contribute to pensions to offset this. If you are reducing your income through pension contributions, can't you keep yourself in the lower tax brackets?

You can never backdate pension contributions.

Then op may be able to utilise carry forward of unused annual allowance from previous tax years but that only allows additional contributions in the current tax year.

And it isn't clear yet if the op is genuinely self employed or not (a very common source of condition here) and if they are whether either have profit levels which means carry forward is even a relevant factor.

sometime_soon

The 5 years is “a goal” but probably not a reality but is driven in part by the fact I have a joint condition which is eventually going to prevent me from working despite my best efforts and I would really like time to use them for me ! 

ColdIron

sometime_soon said:

Keep holding off work to not go into higher tax so it feels very inefficient tax wise .

Pension contributions will help there, your basic rate band will be increased by your gross contributions so you pay more at 20% and less, or none, at 40%

Giving up potential income and tax rebates is not very optimal. You need to look at things in the round