Saving for retirement - is a pension the best bet now?
Discussion
I am looking for opinions about how best to save for retirement, or more specifically whether the a pension being tax free makes it the best choice if inflation exceeds the growth of the pension.
I'm 34, and in recent times have been overpaying the mortgage with a view to having it cleared at the end of our fixed term in 4.5years time.
I have also recently realised that my (currently very meagre) pension has averaged 6.2% growth over the last 5 years. My immediate reaction to this was stop overpaying the mortgage and put that money into my pension instead, it will earn more than the interest on the mortgage costs me, and it's tax free.
The rhetoric in the media is that we are probably in for decades of higher inflation to de-value the massive national debt. So is it reasonable to assume that over the next 25years that growth will exceed inflation? Or, if not, for those in the know what would you expect worst case in terms of inflation exceeding growth, and over how long? The fact it's tax free is on the face of it a 40% bonus compared to say putting the money in property instead, but is that sound logic?
I'm 34, and in recent times have been overpaying the mortgage with a view to having it cleared at the end of our fixed term in 4.5years time.
I have also recently realised that my (currently very meagre) pension has averaged 6.2% growth over the last 5 years. My immediate reaction to this was stop overpaying the mortgage and put that money into my pension instead, it will earn more than the interest on the mortgage costs me, and it's tax free.
The rhetoric in the media is that we are probably in for decades of higher inflation to de-value the massive national debt. So is it reasonable to assume that over the next 25years that growth will exceed inflation? Or, if not, for those in the know what would you expect worst case in terms of inflation exceeding growth, and over how long? The fact it's tax free is on the face of it a 40% bonus compared to say putting the money in property instead, but is that sound logic?
alistair1234 said:
Even without any growth, 40% tax saving is a lot better than 1.5% mortgage interest.
Agreed, and I am happy with that decision alistair1234 said:
Consider a LISA as well, 25% bonus. You can take your 25% tax free lump sum at 57, LISA matures at 60, then start drawing pension whenever.
Thanks, I wasn't aware of the LISA, I will try and get one sorted this financial year.The instant 40% uplift is very hard to beat. Of course the resulting npension is taxed, but there is a 25% tax free lump sum, and it's likely you will pay less tax on the remaining money than you paid going in.
If your only getting 6% per year consider managing it yourself in a SIPP. My pension has been at least double that, and some of my funds have been 20% +
If your only getting 6% per year consider managing it yourself in a SIPP. My pension has been at least double that, and some of my funds have been 20% +
For some retirees, the retirement date isn't always on a voluntary basis (know of a few who was effectively forced into retirement due to the Covid pandemic), so it's prudent to have funds available to bridge the gap to your pension age (currently under consultation to extend to 57). It's maybe worth considering placing a portion of your retirement funds into a Stock & Share ISA for added flexibility.
I am 56 is it worth putting in to a pension fund now? I was looking at all the charges and blurb and thinking its to late , I do have a large collection of cash ISAs, and was thinking it would be better to cash these in when I retire in a few years or just buy a property outright and rent it out , but this also worries me with tenants rights can take a year to get non payers out (watching to many rouge tenants programs 
) and gov attack on landlords not a great problem to have but looking for ideas
) and gov attack on landlords not a great problem to have but looking for ideas In your situation, I would put more in my pension. It if is a work pension then even better because you should get employer contribution. You are looking over 20 years' investment so that is why I would invest in pension and equity at that.
You get 40% tax relief, any company contribution plus you have seen over 6% annual growth (alhtough past is no predictor of the future with these investments). That probably double your contribution in the first year alone.
As mentioned by others, that advantage is much higher than the 25% LISA benefit but keep an eye on future government tax policies. If they reduce the tax relief or the tax free portion when you take your pension (i.e. currently 25% tax free portion) then LISA may work out better.
Also as mentioned by others, for 20 years' savings, plus growth, you may find you could exceed the lifetime allowance. This then becomes tax punitive so you want to work out how much to invest on an ongoing basis to account for this maximum threshold.
So if you have quite a lot available to invest then you may want to start a LISA at the same time.
You get 40% tax relief, any company contribution plus you have seen over 6% annual growth (alhtough past is no predictor of the future with these investments). That probably double your contribution in the first year alone.
As mentioned by others, that advantage is much higher than the 25% LISA benefit but keep an eye on future government tax policies. If they reduce the tax relief or the tax free portion when you take your pension (i.e. currently 25% tax free portion) then LISA may work out better.
Also as mentioned by others, for 20 years' savings, plus growth, you may find you could exceed the lifetime allowance. This then becomes tax punitive so you want to work out how much to invest on an ongoing basis to account for this maximum threshold.
So if you have quite a lot available to invest then you may want to start a LISA at the same time.
fishseller said:
I am 56 is it worth putting in to a pension fund now? I was looking at all the charges and blurb and thinking its to late , I do have a large collection of cash ISAs, and was thinking it would be better to cash these in when I retire in a few years or just buy a property outright and rent it out , but this also worries me with tenants rights can take a year to get non payers out (watching to many rouge tenants programs ) and gov attack on landlords not a great problem to have but looking for ideas
My pals parents rent university flats. Put high speed broadband in and its easier to get full. Its safer money than dodgy tennents imo. Although it will need a good clean during the 2 months you don't have anyone.. we've all been students. Most the time the rent for the terms gets paid in full by the parents straight away. ) and gov attack on landlords not a great problem to have but looking for ideas Although the flats will probably be at a premium, they only got into it due to buying a flat for each son to live in while at uni as they wouldn't live together haha. I had many good nights in those flats..
Thanks all, I've been playing round with numbers and it's striking how much difference small changes in net growth and inflation make.
I'm looking at total contribution of £~1,310/month. Excluding our mortgage and kids costs we could maintain our standard of living with £2600/month in retirement, which is ~36k/yr gross.
Taking 4% as a sustainable drawdown (ie net growth until and beyond retirement) we'd need £900k in the pension. Taking 6% growth, 2% inflation with my current contributions I'd get to an inflation adjusted £900k at 62. Real value would be ~£1.3M so over lifetime allowance.
If the covid situation reduces sustainable drawdown to 3% (lets say 2.5% inflation, 5.5% growth), I'd be in the same position at 72.
This is obviously a very conservative approach and maintains the pension balance in retirement, so with some favourable growth and allowing the balance to be eroded during retirement I should be able to retire sooner
I'm looking at total contribution of £~1,310/month. Excluding our mortgage and kids costs we could maintain our standard of living with £2600/month in retirement, which is ~36k/yr gross.
Taking 4% as a sustainable drawdown (ie net growth until and beyond retirement) we'd need £900k in the pension. Taking 6% growth, 2% inflation with my current contributions I'd get to an inflation adjusted £900k at 62. Real value would be ~£1.3M so over lifetime allowance.
If the covid situation reduces sustainable drawdown to 3% (lets say 2.5% inflation, 5.5% growth), I'd be in the same position at 72.
This is obviously a very conservative approach and maintains the pension balance in retirement, so with some favourable growth and allowing the balance to be eroded during retirement I should be able to retire sooner
98elise said:
The instant 40% uplift is very hard to beat.
Isn't it a 66.66% uplift? You earn £100, pay 40% and end up with £60. Pay that £60 into a pension, and you'll end up getting your £40 back, hence £100, and 60 to 100 is 66.66%.In the same way that as a 20% taxpayer, they add on 25% to make you whole.
HughG said:
Thanks all, I've been playing round with numbers and it's striking how much difference small changes in net growth and inflation make.
I'm looking at total contribution of £~1,310/month. Excluding our mortgage and kids costs we could maintain our standard of living with £2600/month in retirement, which is ~36k/yr gross.
Taking 4% as a sustainable drawdown (ie net growth until and beyond retirement) we'd need £900k in the pension. Taking 6% growth, 2% inflation with my current contributions I'd get to an inflation adjusted £900k at 62. Real value would be ~£1.3M so over lifetime allowance.
If the covid situation reduces sustainable drawdown to 3% (lets say 2.5% inflation, 5.5% growth), I'd be in the same position at 72.
This is obviously a very conservative approach and maintains the pension balance in retirement, so with some favourable growth and allowing the balance to be eroded during retirement I should be able to retire sooner
You say "we" quite a bit in the spending part but not in the pension pot part, remember that you both have a lifetime allowance so you may not need to worry about exceeding the LTA - if you hit the threshold top up your other half's pension pot instead. If their pot is also at the LTA limit your only worry will be what to spend all the money on.I'm looking at total contribution of £~1,310/month. Excluding our mortgage and kids costs we could maintain our standard of living with £2600/month in retirement, which is ~36k/yr gross.
Taking 4% as a sustainable drawdown (ie net growth until and beyond retirement) we'd need £900k in the pension. Taking 6% growth, 2% inflation with my current contributions I'd get to an inflation adjusted £900k at 62. Real value would be ~£1.3M so over lifetime allowance.
If the covid situation reduces sustainable drawdown to 3% (lets say 2.5% inflation, 5.5% growth), I'd be in the same position at 72.
This is obviously a very conservative approach and maintains the pension balance in retirement, so with some favourable growth and allowing the balance to be eroded during retirement I should be able to retire sooner
Provided you can live with the age conditions for withdrawal, in my opinion pension is the best vehicle for retirement savings for ordinary people before you hit the lifetime allowance. For higher rate payers, or basic rate payers on salary sacrifice, the tax benefits beat LISAs (and the limit on annual LISA contributions is lower anyway).
DC pensions also exempt from IHT and universal credit calculations. LISAs are not. For the latter in particular, that’s a big deal (and bad design of the LISA IMO).
Of course, pensions and LISAs are just wrappers. You could have good or bad investments within the wrapper.
(I exclude here things like owning rental properties, which I think are more often best treated as second jobs rather than pure investments, so it’s not really fair to compare them with passive investments)
DC pensions also exempt from IHT and universal credit calculations. LISAs are not. For the latter in particular, that’s a big deal (and bad design of the LISA IMO).
Of course, pensions and LISAs are just wrappers. You could have good or bad investments within the wrapper.
(I exclude here things like owning rental properties, which I think are more often best treated as second jobs rather than pure investments, so it’s not really fair to compare them with passive investments)
Edited by Jawls on Sunday 14th March 20:22
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