Have I messed up my pension payments?
Discussion
Bit of background:
Finished uni at 21 and took up a coding job with a then start up that grew significantly quite quickly. Result was I was promoted to a “senior” developer role at 23, salary ~£55k.
Wage growth has slowed down since then, currently on £65k but I enjoy the work so haven’t really pushed hard for more.
Since day 1 I’ve been paying into a defined contribution pension. Company will match up to 10% (I have to pay 10% to get the 10% match).
I’ve always been told by my parents that it was pointless paying 40% tax so have paid in everything above the 40% rate into my pension as well as I can live with a salary under this threshold easily enough.
Fast forward to now. I’m 33 and my pension fund is £308k. It is fully invested in Aegon’s “AGN Fundsmith Equity” fund.
I was doing a bit of research into other funds over the weekend as I've been told I should diversify however I’ve noticed that there is now a lifetime pension limit of £1m? Is this how much I can pay in or does it include investment growth?
If it is the later, looking at the returns I’ve had over time and the fact that it appears I won’t be allowed to access my pension until I’m 58 I’m a little concerned I’m going to hit this limit even if I don’t pay any more in?
If so have I’ve been stupid as if I stop paying in now I’m basically taking a 10% pay cut as my employer won’t have to pay their 10%?
Would I have been much better paying less in for longer, paying some 40% tax and getting contributions from my employer for longer?
Feeling a bit stupid and frustrated that I’ve cost myself a load of money by blindly taking my parents advice without looking into it?
Finished uni at 21 and took up a coding job with a then start up that grew significantly quite quickly. Result was I was promoted to a “senior” developer role at 23, salary ~£55k.
Wage growth has slowed down since then, currently on £65k but I enjoy the work so haven’t really pushed hard for more.
Since day 1 I’ve been paying into a defined contribution pension. Company will match up to 10% (I have to pay 10% to get the 10% match).
I’ve always been told by my parents that it was pointless paying 40% tax so have paid in everything above the 40% rate into my pension as well as I can live with a salary under this threshold easily enough.
Fast forward to now. I’m 33 and my pension fund is £308k. It is fully invested in Aegon’s “AGN Fundsmith Equity” fund.
I was doing a bit of research into other funds over the weekend as I've been told I should diversify however I’ve noticed that there is now a lifetime pension limit of £1m? Is this how much I can pay in or does it include investment growth?
If it is the later, looking at the returns I’ve had over time and the fact that it appears I won’t be allowed to access my pension until I’m 58 I’m a little concerned I’m going to hit this limit even if I don’t pay any more in?
If so have I’ve been stupid as if I stop paying in now I’m basically taking a 10% pay cut as my employer won’t have to pay their 10%?
Would I have been much better paying less in for longer, paying some 40% tax and getting contributions from my employer for longer?
Feeling a bit stupid and frustrated that I’ve cost myself a load of money by blindly taking my parents advice without looking into it?
It's a lifetime limit including all investment returns.
You have not been foolish at all. You've essentially "done" your entire tax allowable pension at 40% tax relief before the government takes it away. Result.
Have you been doing ISAs? Currently you can invest up to £20,000 p.a. and then all growth (and income) is tax free. Nice.
As with pensions, there's a risk of ISA's being "capped" in future so IMO it's a good time to "fill yer boots".
In your situation I would probably cease future pension contributions and switch to ISA investment going forwards. The fund you have already accumulated should easily grow to the max' currently allowed. But it's purely a personal thing. And the max could conceivably change to a higher limit or a lower one. Or investment returns could deteriorate.
[Another approach would be to carry on with the pension and switch to lower risk investments so that you have certainty about what you will have at retirement age.]
You have not been foolish at all. You've essentially "done" your entire tax allowable pension at 40% tax relief before the government takes it away. Result.
Have you been doing ISAs? Currently you can invest up to £20,000 p.a. and then all growth (and income) is tax free. Nice.
As with pensions, there's a risk of ISA's being "capped" in future so IMO it's a good time to "fill yer boots".
In your situation I would probably cease future pension contributions and switch to ISA investment going forwards. The fund you have already accumulated should easily grow to the max' currently allowed. But it's purely a personal thing. And the max could conceivably change to a higher limit or a lower one. Or investment returns could deteriorate.
[Another approach would be to carry on with the pension and switch to lower risk investments so that you have certainty about what you will have at retirement age.]
IMO you have been very sensible.
Your pension fund should grow nicely, and the upper limit should increase every year (under current rules).
If you come close to the limit then you may have to transfer some or all of your holdings to cash, or a safer but low yielding investment.
It's a very nice problem to have!
Your pension fund should grow nicely, and the upper limit should increase every year (under current rules).
If you come close to the limit then you may have to transfer some or all of your holdings to cash, or a safer but low yielding investment.
It's a very nice problem to have!
Worst "I bagged my pension by 33" post ever...
I'd diversify if i were you away from equity, you've done the heavy lifting, assuming a lower risk of 3 to 4% pa over 25 years you'll hit near a million. Take 2/3 of what you have and put it something lower risk.
Reduce your pension contributions and put them into an ISA (you're young enough to go fo LISA which is essentially free tax payers money, not that you need it.)
Invest the rest in coke and hookers.
I'd diversify if i were you away from equity, you've done the heavy lifting, assuming a lower risk of 3 to 4% pa over 25 years you'll hit near a million. Take 2/3 of what you have and put it something lower risk.
Reduce your pension contributions and put them into an ISA (you're young enough to go fo LISA which is essentially free tax payers money, not that you need it.)
Invest the rest in coke and hookers.
It's a great position to be in. I'd stick with the 10% to get the employers match, because I think the £1million limit will rise at least with inflation in the long term, so when you get there it could easily be £1.5m.
It would be a good idea to diversify, but switching to lower return funds to limit long term returns (suggested up there somewhere) looks like a perverse move.
Meanwhile, glory in all the tax you've saved.
It would be a good idea to diversify, but switching to lower return funds to limit long term returns (suggested up there somewhere) looks like a perverse move.
Meanwhile, glory in all the tax you've saved.
It’s not a limit it’s a Life Time Allowance. I have a DB pension (that won’t survive the next decade) and I’m going to exceed my LTA by a fair bit with current projections, there’s a tax implication but you can have a pension pot of more than £1m. A significant number of my colleagues left our scheme last year with a fair few taking over £2m.
There’s also an annual allowance, just be careful if your pay increases significantly you may fall foul of that.
There’s also an annual allowance, just be careful if your pay increases significantly you may fall foul of that.
otherman said:
It's a great position to be in. I'd stick with the 10% to get the employers match, because I think the £1million limit will rise at least with inflation in the long term, so when you get there it could easily be £1.5m.
It would be a good idea to diversify, but switching to lower return funds to limit long term returns (suggested up there somewhere) looks like a perverse move.
Meanwhile, glory in all the tax you've saved.
This is the right answer, imho. It would be a good idea to diversify, but switching to lower return funds to limit long term returns (suggested up there somewhere) looks like a perverse move.
Meanwhile, glory in all the tax you've saved.
The allowance will increase by £30k in April iirc. Then again by inflation every April thereafter under current rules (can always change).
This is a specialist area so just use advice here as indicative.
The Lifetime Allowance is not necessarily something to be afraid of. Look at the consequences of breaching it against the loss of employer contributions. Do the calculation and see if it warrants the extra 25% tax if drawn as income.
This is a specialist area so just use advice here as indicative.
The Lifetime Allowance is not necessarily something to be afraid of. Look at the consequences of breaching it against the loss of employer contributions. Do the calculation and see if it warrants the extra 25% tax if drawn as income.
It’s a nice problem to have. You certainly haven’t been stupid. You should be very pleased with what you’ve achieved and thank your parents for their advice.
However, here’s a few things to consider:
-The investment performance you’ve enjoyed to date may not continue
-The lifetime allowance is index linked
-It is almost inevitable that the pension regime will change in the future on contributions, withdrawals and tax
-Abandoning company matching is almost certainly the wrong approach unless you’ve done the maths to prove otherwise. You could still be quids in even if you go over the lifetime allowance.
-Your job/salary situation may not stay the same due to a number of possible factors eg. family, health and attitude.
-You may find yourself needing funds that you can’t access because they’re locked away eg. deposit on a property, starting a business etc.
In my experience, making tax the primary driver of your financial decisions can lead to the wrong and sometimes costly outcomes. First work out what your future financial needs are, then create a plan which considers tax amongst other factors such as accessibility, risk etc.
I would certainly recommend not putting all your eggs into one pension basket. ISAs offer tax free savings and the future tax regime for these is less likely to change compared to pension. Of course you will have instant access to these funds should you need it, which is a nice counterpoint to the locked down pension.
Lastly, you earn well so don’t forget to enjoy life now. Being able to ‘live with a salary’ is great but why defer enjoying the fruits of your labours for 25 years?
However, here’s a few things to consider:
-The investment performance you’ve enjoyed to date may not continue
-The lifetime allowance is index linked
-It is almost inevitable that the pension regime will change in the future on contributions, withdrawals and tax
-Abandoning company matching is almost certainly the wrong approach unless you’ve done the maths to prove otherwise. You could still be quids in even if you go over the lifetime allowance.
-Your job/salary situation may not stay the same due to a number of possible factors eg. family, health and attitude.
-You may find yourself needing funds that you can’t access because they’re locked away eg. deposit on a property, starting a business etc.
In my experience, making tax the primary driver of your financial decisions can lead to the wrong and sometimes costly outcomes. First work out what your future financial needs are, then create a plan which considers tax amongst other factors such as accessibility, risk etc.
I would certainly recommend not putting all your eggs into one pension basket. ISAs offer tax free savings and the future tax regime for these is less likely to change compared to pension. Of course you will have instant access to these funds should you need it, which is a nice counterpoint to the locked down pension.
Lastly, you earn well so don’t forget to enjoy life now. Being able to ‘live with a salary’ is great but why defer enjoying the fruits of your labours for 25 years?
Pensions Tax Relief on the OOTLAR
LTA up to £1.030M in 18/19, ie by CPI. Which should, assuming they don't mess too soon again, compound nicely over time.
https://www.gov.uk/government/publications/autumn-...
LTA up to £1.030M in 18/19, ie by CPI. Which should, assuming they don't mess too soon again, compound nicely over time.
https://www.gov.uk/government/publications/autumn-...
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