Stop paying into pension ("for now")?

BrunoM

Hi all,

Just soliciting opinions please, from people's general 'life experience' :cool:

Currently I pay 6% into a company pension scheme; company match up to 6%, and add a further 3%. This is good, I like it; I've only been doing this for around 6-7 months so far.

In my current situation however, I am only breaking even at best (c.£150 left over per month after regular expenses, which then tends to get absorbed back into occasional costs - clothing, birthdays, etc). I have only around £500 of savings, and no really good fallback options if unforeseen disaster struck.

I am not living quite as tightly and cost-consciously as I could - not awful though, and am slowly improving things there in minor ways, but I can't decide right now whether to:
try to get brutal with my current expenditure (not fun, especially with my non-working, pregnant wife to look after) to enable some savings which will be all the more important after the baby is born this summer,
or to cut the pension out instead/as well, to really make sure I can save something significant quickly.

I'm 33, so pension benefits will obviously not be realised for quite a while; I'll continue to get the 3% contribution from the company even when not paying into it myself.
It's likely that I'll get a solid few k pay rise in a year or so, plus I can expect to get an annual bonus of maybe £1k this year, £3k next year and continuing, which I haven't included in my budgeting.
The £1k I expect to get soon will probably mostly get spent on a last-ditch couple holiday before the OH gets too rotund. Quite possibly saving this money would be better, but... it's our last chance to go somewhere without a kid for 10+ years.

Opinions and criticism welcomed! Thanks

dasherman

I know everyone has things they want and need to spend money on,but purely from a savings point of view,the sooner you start saving the better.Taking savings holidays will ultimately mean you having to save more later and possibly having to work longer.

Retired_I.F.A.

If needs be then take the pension contribution holiday I say. Today is far more important than tomorrow.

dunstonh

Currently I pay 6% into a company pension scheme; company match up to 6%, and add a further 3%. This is good, I like it; I've only been doing this for around 6-7 months so far.

So, for 4.68% of your net money (as its 6% gross), you get 1.2% added for tax relief and 9% added by employer.

In monetary terms, if you pay £100, it is really only £78. On top of that employer adds £150. Are you willing to give up £250 each month that has only cost you £78?

If yes, then you should check you are allowed to rejoin later as some will not allow you to leave and rejoin.

BrunoM

Yes - basically that's the question I'm struggling with. In fact I'm a higher-rate tax payer too, and my actual contribution monthly is around £180 pre-tax. However, I'll get the 3% contributions from employer if I drop to zero contribution, so your example is slightly exaggerated I suppose. I can rejoin any time, in fact I don't need to rejoin as employer keeps on making those payments, I just change the amount I am paying in. However changing that amount I think is limited to once a year.

So ultimately, how far am I willing to go in terms of restricting current lifestyle, in exchange for a much bigger pay-off in 30 years?

And right now I'm not sure of the answer which is why I'm flailing around on here. I do realise that a) pension provisions are important, and b) I am getting a great deal with employer. Would I give up my holidays now in exchange? Or just cut back on them. Would we eat rice and veg 3 times a week? Or once? Are we paying for more cable than we really want?

Etc, etc. I really want an emergency savings fund right now, before the baby is born, is the thing that's driving my little soul-searching exercise just now.

dunstonh

So, the revision is, are you willing to give up £200pm that has cost you £60.

Remember that your 6% contribution, is only costing 3.6% net. So, if your contribution is £180 each month, you net pay will increase by only £108 if you stop.

If you are in receipt of childrens/workings tax credits, the amount you get there will be reduced as well as pension contributions reduce your income and therefore can increase the tax credits potentially (upto an equivalent relief of 73% in best case scenario). I dont think this will apply in your case but worth mentioning for reference in case someone else is reading and is in the same positiion as you.

Also, leaving the pension scheme can also mean you leave the benefits packaged attached to it, such as death in service as well as possibly sickness benefits which may be linked to the pension scheme.

Remember that there is always an excuse not to pay. House, mortgage, furnishings, lifestyle, marriage, children and then whoops you are 55 with just 10 years to save up £500,000 (in todays terms). Then you can look forward to the basic state pension of £4500 a year.

Its not easy but it never will be.

cornerstone13

Bruno - I'd add that once the baby arrives and presumably mummy will be on maternity leave, expenditure can only increase. IMHO, the sooner you start cutting back, the more practice you get and the better at it you will be - with the added bonus of building up a nest egg

Paul_Herring

BrunoM wrote:

In my current situation however, I am only breaking even at best (c.£150 left over per month after regular expenses, which then tends to get absorbed back into occasional costs - clothing, birthdays, etc). I have only around £500 of savings

BrunoM wrote:

In fact I'm a higher-rate tax payer too

I think you need to sort out your budget first. Try the DFW board and post a SOA and see if you can get some suggestions.

If you have no debt I think you should really have more than £150 discretionary income as a higher rate tax payer. If you have debt, then you should really look at reducing that before starting on savings.

Either way I'd keep the pension payments going if only to get the employers contribution and the tax rebate on the money in the 40% band.

Retired_I.F.A.

Of course savings wise not contributing to your pension is a last resort and the planned holiday ought to go out the window first imo Grandma will look after the kids probably later on so the 10 year thing is really a bit of self scaremongering unless there is no grandparents/family.
On the other hand your at the peak in life when it comes to financial liabilty with a pregnant wife, your need for life insurance alone increased by around £100k when that little stick changed colour and thats being very conservative so as I said: if needs be then cease for now the contibution. £78 a month for most is not that difficult to find elsewhere though, this site has some great tips if you take the time to read them.

edit..
Posted the above without seeing your a 40% tax payer.


Revised post:
A 40% tax payer struggling definately has a lifestyle that can easily be cut back even if he has 6 kids ditching the pension contribution would be plain stupid.

BrunoM

OK, thanks all; I'm convinced already, I need to leave the pension payments alone

In moderate defence of my lifestyle, I'm a higher-rate taxpayer with a non-working, non-benefits claiming (US national) wife, and living in Inner London. In the long term my wife's writing may pay off but it won't be quickly. Her quitting her novel and looking for work again is a last resort, and not too likely for a bit anyway, with the pregnancy!
All that said, I agree and admit that I can make savings in our regular expenditure - I've been slowly doing so and will be continuing to do more.

Thanks for all the comments, it all helps me look at things objectively.

weatherwatcher99

I'm thinking of stopping my final salary pension for basically the same reasons as BrunoM, so in the current economic climate would the advice be the same?