Increase pension contributions and live off salary and savings.

Ozzig

Reading a comment on another thread just got me thinking.

I am a 40% taxpayer this year and, all being well, will be a 40% taxpayer until I retire in 3-5 (hopefully not more) years.

For 2026-27 and 2028-29, it looks like I can contribute 24% of my salary via salary sacrifice to remain in the 20% tax bracket, when factoring in savings interest as well as salary.

So the "pros" -

Pension contributions, "free" money from the gov.

Lower tax rate on savings interest

Keep 100% of the child allowance

Lower tax rate on capital gains (though not expecting to make much over the Annual Exempt Amount)

And the "cons" -

I would be making up the shortfall in take-home pay from my savings.

When I retire, if I need to, I can take the tax-free lump sum to top up any savings if there is an actual need to do so.

For example, if I wanted to go on a £20k holiday, take the lump sum, pay the deposit, and put the balance in a decent savings account, 6 months later, pay the balance of the holiday.

Now, I've not considered a tax-free lump sum on retirement before, as I have the savings. So I've not researched the lump sum option, yet.

Am I missing anything obvious ?

Are there any massive pros/cons I've completely missed?

DRS1

At what age do you plan to retire? Some people want to retire at an age which is before they can access their pension (which may currently be 55 but is going up to 57 and maybe higher).

If you want to quit at 50 you'll need some money outside a pension to cover that period from 50 until you can access a pension.

Why wouldn't you want a tax free lump sum? It is a big selling point for a pension. The thinking on here about NOT taking it is mainly for DB schemes where the commutation rate is perceived as poor (eg £12 of lump sum for £1 of pension given up). Is that the sort of pension you have?

dunstonh

And the "cons" -

I would be making up the shortfall in take-home pay from my savings.

Think of the savings, investments and pensions as one big pot of money. The cash savings segment of that pot will reduce but the pension segment of that pot will increase. In effect, the pot value will stay the same.

Remember that when you draw on the pension, assuming you are a basic rate taxpayer in retirement, you will suffer a net effective rate of 15%. Which is better than NI and tax on salary. So, for the last few years until retirement (or as long as your savings can hold out) it can make sense.

Ozzig

https://forums.moneysavingexpert.com/discussion/comment/81934406#Comment_81934406

I'm aware of the age thing, so I was factoring in retiring at 57 / 58 - might all go to poop and I work longer than I would like to.

I'm DC, so until the train of thought in this thread, I figured not taking a lump sum would mean a bigger pot to keep me going.

If I took £20k out with no plan to use it, would it be better left in or put in a 4.5% 1yr fixed savings account ?

DRS1

https://forums.moneysavingexpert.com/discussion/comment/81934427#Comment_81934427

Yes with DC pensions you don't have to take the tax free lump sum all in one go when you start your pension. You can use UFPLS where 25% of any payment you take from the pension is tax free. That can make the tax free amount last longer (and grow more) than taking it all upfront (assuming you are not up against the Lump Sum Allowance).

If you take £20k tax free lump sum without having a use for it then what many people would do with that is put it in an S&S ISA and invest it the same way they have invested it in the pension. But obviously if you think you may need it in the relatively short term then a cash ISA may be sensible.

Ozzig

Signing off for today, thanks for the replies so far, something to help me sleep / keep me awake tonight :)

QQQQQQQQ_Y

https://forums.moneysavingexpert.com/discussion/6660973/increase-pension-contributions-and-live-off-salary-and-savings

If you're planning on living off of savings already sheltered in an ISA you lose this benefit, and it may take you several years to replace it from any lump sum. You should therefore prioritise this source of savings last.

Yorkie1

"If you take £20k tax free lump sum without having a use for it then what many people would do with that is put it in an S&S ISA and invest it the same way they have invested it in the pension. But obviously if you think you may need it in the relatively short term then a cash ISA may be sensible."

Just be aware that from April 2027, and until you reach 65, the plan is that you can only put £12K in a cash ISA. And any money held in cash-like funds within a S&S ISA will have something like interest charged on it.

Ozzig

https://forums.moneysavingexpert.com/discussion/comment/81934496#Comment_81934496

ISAs all full and safe, it would be normal savings, part of the incentive for doing it.

Ozzig

I've thought of an ironic "con" to the plan.

Over the previous 3-4 years, I'd done next to no overtime; over the last 12 months, I did 120-130 hours.

It wasn't mandatory, but if I'd said no, I'd probably be asking very different questions today.

There are no projects in the pipeline that would warrant overtime now, but the above came with little notice, so I guess it could again.

I'm comfortable having a crack at working out the estimated 24% salary sacrifice contribution to hover just below the tax threshold, but not so comfortable trying to change it, if 6 months in, I end up with 25% higher monthly pay due to overtime.

Hence the irony, worried I'd be getting paid more.

I'm going to try to get this spreadsheet working to see how beneficial this could be in real terms.

Albermarle

Where it is possible/affordable, filling up a pension and getting 40% tax relief in the last few years of work, is normally a good idea. I did that, as did many other forum contributors.

It can be more debatable, if you already have a large pot and boosting it in this way would take it well over a Million Pounds. That is because there is a limit on how much tax free cash you can take of £268K.

Similarly if you are pretty sure you will be a 40% taxpayer in retirement, it becomes less attractive, but still worth considering.

But if neither of those things apply then normally for many people, who are 40% taxpayers in employment, it is a very attractive option.