Pie in the sky pension question

How early do you want to retire?

If you want to retire before the SP age then you should at least contribute as much as your employer will match. Say your employer will match a contribution of £3000 (after tax), so that becomes £6000 and with tax relief £10,000. You are not going to do better anywhere else.

Your pension pot will then grow and with interest rates so low that growth is likely to be at a higher rate than your mortgage. So you would make more money than you would dave by paying down your mortgage.

So even though you would only get 20% tax relief on further payments your pension would be the best place to save any money you can afford to tie up.for a long time.

GT1979 wrote: »

One question: when people say the 40% pension relief is a no-brainer, what do they mean?

You need to read-up on tax relief on pension contributions. This may be a good starting point:
https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

Your income is sufficient to pay tax at 40% (this band kicks-in on earnings above £45k in this tax year). This means that you can claim 40% tax relief on ALL of your pension contributions.

Below is a very brief overview. There are lots of rules around pension contributions but much of the complexity is directed toward those with very high earnings and/or large pots.

For every £10 you add to your DC/SIPP pension you contribute £8 and the pension provider claims the extra £2 from the government. You then claim another £2 on your self assessment tax return. So, the £10 added to your pension only costs you - a 40% tax payer - £6, but it would cost a 20% tax payer £8.

This effectively means that you receive a rebate of all the income tax you have paid on the contribution amount (plus more if your contribution is greater than the income on which you have paid 40% tax in any one tax year). There are limits on the amount you can contribute gross each tax year (currently the greater of £40k or your total earned income). There is speculation that the government will change this rule at some point in the not too distant future so it pays to make hay whilst the sun is still shining so brightly.

Many people's taxable income drops on retirement so the tax they pay when the money is taken out of the pension is usually less than the tax relief they have claimed on the money at the time it was contributed.

This is the 'no-brainer' scenario referred to. The downside is that you currently cannot touch those pension savings until you reach 55 (except in very exceptional circumstances). That age is likely to be raised in line with increasing state pension age.

I'm sure that the technical experts here would make a better job of explaining this but I hope you get the gist.

The bottom line is that for many 40% tax payers this pension rule is so generous that stashing as much of your income as you can afford into a pension makes more sense than investing in other savings wrappings, or paying down a mortgage - especially whilst mortgage rates are so low.

AnotherJoe wrote: »

This is because you only get 40% tax relief on the salary eligible for the 40%.

Think you are right about that. Apologies, my mistake.

DairyQueen wrote: »

There are limits on the amount you can contribute gross each tax year (currently the greater of £40k or your total earned income).

I don’t think that is quite correct - it would be the lesser of £40k or your total earned income. In your case, with a £50k salary, you could contribute up to £40k unless you have unused allowance from a previous year (which you probably do).