Relying on growth only to grow pension pot?

ComicGeek

I'm 45, still about 15 years from retirement.

My wife and I are directors of a small ltd company, no other employees. Have been making significant company pension contributions for a number of years, but a significant drop in turnover and rising expenses over the last 14 months has meant we have had to cut costs, including stopping all pension contributions.

I'm working 35 hrs/week, down from around 45-50 hrs previously. Work is starting to pick up, but physically and mentally it's a challenge to increase my hours back up again… Any increase in working hours would purely be for pension contributions, as tax would be too punitive to take as income.

DC pension pots are currently at £1.02M, evenly split between us. Currently living on £60k post tax income between us, with 50% of this currently on mortgage payments and school fees but due to stop before retirement. So 4% withdrawal on this (without state pension included) would be £20k each pre tax, and likely more than we need.

So I'm wondering if I've done enough on pension contributions, and just limit my working hours to cover the other expenses. Working extra hours over the next 15 years to contribute another £180k capital to the pension pots seems unnecessary when the impact of contributions is so outweighed by compound growth at this stage. Plus will probably be making additional pension contributions when closing the company at retirement for tax efficiency.

What are the risks in not making any contributions for 15 years, and just relying on market growth in this situation?

El_Torro

What you need to do is decide how big you want your pension pots to be in 15 years time. This will then dictate whether you need to add more to your pensions now or just let them grow on their own.

It’s good that you are looking at this now. I did the same a few years ago and realised I would be better off adding more to my S&S ISAs and no longer go all in on my pensions. There’s no point having more money than you need in retirement if it also means that you are retiring a few years later than you wanted to.

Tax efficiency is jmportant, though actually being able to access your money is important too.

julicorn

Sounds like with the 4% withdrawal rate you're looking at, you're already at your goal income? So all your pension pot needs to do now is keep up with inflation.
I wouldn't add any more to the pension, and instead see if you want to build up some other savings that would allow you to retire earlier than 55 you're able to access your pension (if that's something you'd like to do and you happen to have spare income).

Marcon

https://forums.moneysavingexpert.com/discussion/comment/82084612#Comment_82084612

Unless OP has a protected pension age, or qualifies for ill health retirement, it'll be minimum age of at least 57 (increases from 55 in 2028) before they can access their pension.

julicorn

https://forums.moneysavingexpert.com/discussion/comment/82084618#Comment_82084618

Absolutely correct, I meant to say 'earlier than you're able to access your pension' and then accidentally put in an (incorrect) age instead! Thanks for flagging that.

Marcon

Any increase in working hours would purely be for pension contributions, as tax would be too punitive to take as income.

Have you considered other tax-efficient savings such as VCTs or EIS?

Exodi

I forecast 3% inflation and 7% investment growth in my long term planning, so I guess the 4% delta could be considered as forecasted growth in real terms.

On £1.02m, that's £1.84m in real terms at your suggested retirement date [1020000*(1.04)^15]. A 3% delta between inflation and returns would be £1.59m, 2% would be £1.37m.

If you intend to only draw £40k per year pre-tax excluding state pensions, you are likely already covered without further contributions (in fact, you have the opposite problem where you are likely to end up increasing your portfolio value in retirement, rather than decreasing it - which everyone initially thinks isn't the worse problem to have, however it means you would have worked longer than you ever needed to. If you brush this off with 'well then my beneficiaries will enjoy the fruits of my labour' I'd remind that HMRC will enjoy the fruits of your labour first.

Of course no-one knows what the future holds.

ComicGeek

https://forums.moneysavingexpert.com/discussion/comment/82084628#Comment_82084628

I have looked into those, but I don't currently have significant personal savings outside of the pensions. I have about £60k in S&S ISAs, but I don't want to lock anything away for a few years with VCTs or EIS to get the income tax relief.

I do need to increase savings outside of the pensions, although I'm definitely not looking to retire before being able to access our pensions. Perhaps once I've strengthened the company bank balance I'll take some additional dividends and just accept paying more tax…

Albermarle

What are the risks in not making any contributions for 15 years, and just relying on market growth in this situation?

The obvious risk, is that if there is no growth, or only growth that keeps up with inflation. Of course it depends on what you are invested in.

When the dot.com crash happened, it took 13 years for the S&P 500 to get back to the same level.

A 40% equity multi asset fund has hardly increased in the last 5 years, whilst inflation has been nearly 25%.

So hopefully nothing like this will happen, but you never know…….

dunstonh

So 4% withdrawal on this (without state pension included) would be £20k each pre tax, and likely more than we need.

4% is not the UK safe withdrawal rate. For someone finishing at state pension age, 3.5% is the UK state withdrawal rate. In your late 50s, it's closer to 3%.

What are the risks in not making any contributions for 15 years, and just relying on market growth in this situation?

What if there is no market growth for those 15 years? You would expect growth over a 15-year period. However, there have been periods when it hasn't happened in real terms.

You don't know if you're going to get a good period or a bad period.

Typically, you plan using pessimistic figures. So you need to be modelling on a pessimistic basis to be on the safe side. However, if you do get a bad period, then another option may be just extending your working life.

mrklaw

arguably pessimistic would be 0% real growth. and with that OP should still be ok for 40k gross drawdown - likely more with state pensions coming along. if the 1m is split evenly then plenty of space for tax free growth, both can take 16760 tax free so 33.5k 0% tax and the remaining 6.5k would be at 15% tax so about 7500 gross or £1k in tax (2.5% effective tax rate)