Overzealous in contributing to workplace pension, or the right amount?

j2009

yatesl said:

To give numbers, I'm currently on 117k (current salary ~37k).  Projected annual income, according to Scottish Widdows, is 45.9k including state pension.  This is obviously more than what I'm on now, at an age where I'll likely be needing less.  

Are you sure you plugged the correct pot size into the calculator, the annual income feels optimistic to me but I could be wrong.

Things to keep in mind:
At some point state pension may be means tested, so you need to be ok living on your pot alone if comes to shove
The projection likely assumes you work full time until you're 68, is that your plan? Personally if you have a decent lifestyle currently I'd continue contributing as you are and take early retirement.

Albermarle

QrizB said:

If you're generally comfortable with your current lifestyle, then I wouldn't go changing anything just yet.

When you get into your 50s, you might find that you'll be able to retire earlier than originally thought.

I think this is a key point.
When you get to say 50 or 55 or 60 , you may well start thinking I have had enough of work. You might get a new Boss you do not like, you might get moved to a position you do not like, or maybe be made redundant and not fancy starting all over again.
At this point you will be very glad that you have been building up a nice retirement pot, as it will give you a choice.

hugheskevi

yatesl said:

Thanks everyone.  I do have a S&S ISA and a cash emergency fund.  They can always be higher obviously.  I'll continue contributions as they are as, you're right, if I lose my job or if I change jobs for a lower paying one, I'll regret not doing it now.  Plus it's only a difference of maybe £50 a month I guess?

Pensions work best when one or more of the following are true:

• You get matching from employer
• You are a higher or additional rate taxpayer
• You have access to salary sacrifice

If none of the above are true, you may well do better by redirecting pension contributions into the S+S ISA. When one of the above is true in the future, you can direct more money into the pension and make good any shortfall in income from the S+S ISA. That will lead to more tax relief and more money in the pension pot compared to contributing to a pension and receiving only basic rate relief alone.

LHW99

hugheskevi said:

yatesl said:

Thanks everyone.  I do have a S&S ISA and a cash emergency fund.  They can always be higher obviously.  I'll continue contributions as they are as, you're right, if I lose my job or if I change jobs for a lower paying one, I'll regret not doing it now.  Plus it's only a difference of maybe £50 a month I guess?

Pensions work best when one or more of the following are true:

• You get matching from employer
• You are a higher or additional rate taxpayer
• You have access to salary sacrifice

If none of the above are true, you may well do better by redirecting pension contributions into the S+S ISA. When one of the above is true in the future, you can direct more money into the pension and make good any shortfall in income from the S+S ISA. That will lead to more tax relief and more money in the pension pot compared to contributing to a pension and receiving only basic rate relief alone.

Against that, compounding does the most work on early contributions. So even if "none of the above are true" you are still losing out on the tax refund if you give up pension contributions in favout of an ISA.

hugheskevi

LHW99 said:

hugheskevi said:

yatesl said:

Thanks everyone.  I do have a S&S ISA and a cash emergency fund.  They can always be higher obviously.  I'll continue contributions as they are as, you're right, if I lose my job or if I change jobs for a lower paying one, I'll regret not doing it now.  Plus it's only a difference of maybe £50 a month I guess?

Pensions work best when one or more of the following are true:

• You get matching from employer
• You are a higher or additional rate taxpayer
• You have access to salary sacrifice

If none of the above are true, you may well do better by redirecting pension contributions into the S+S ISA. When one of the above is true in the future, you can direct more money into the pension and make good any shortfall in income from the S+S ISA. That will lead to more tax relief and more money in the pension pot compared to contributing to a pension and receiving only basic rate relief alone.

Against that, compounding does the most work on early contributions. So even if "none of the above are true" you are still losing out on the tax refund if you give up pension contributions in favout of an ISA.

It is all multiplicative, so there is no loss assuming that the investment into the ISA is invested in the same assets at the same charge. They get more tax relief due to the investment growth when funds are moved into a pension.

For example, look at an individual who is a basic rate taxpayer putting £10,000 into an ISA and into a pension (net). They receive 5% p/a growth per year. After 5 years they increase pension contributions to effectively move the ISA funds into a pension.

For the money in the pension:

• The £10,000 is grossed up to £12,500
• The £12,500 receives growth after charges of 5% p/a for 5 years (1.05^5, or 28% growth)
• After 5 years they have £15,954 in their pension

For money into the ISA and later into the pension

• £10,000 is invested
• The £10,000 receives growth after charges of 5% p/a for 5 years (1.05^5, or 28% growth)
• After 5 years they have £12,764 in their ISA.
• They increase pension contributions to effectively move the money in the ISA into a pension
• The £12,764 is grossed up to £15,954

So by using the ISA rather than the pension, they give themselves the option of better tax treatment should one or more of the 3 conditions become true, and also have access to the ISA in case of need. In general, nil-cost liquidity is better than illiquidity, although that may not  be true in the case of need of benefits or bankruptcy - but even then, in bad scenarios many would prefer to have access to financial resources. There is a small risk that the money can't effectively be moved into the pension at the later time if the individual is not working.

There are also LISAs to be considered which give a better outcome than basic rate pension contributions, but lower than higher rate. So that is less certain, with the use-it-or-lose it annual contribution limit. Hence that is less clear to determine what is optimal. 

penners324

I'd even think of increasing your pension contributions a bit. 
The more you have in there the earlier you can retire