When to stop contributing to pension?

[simon800]

Hope this question is taken as intended - genuinely keen to gauge the insights of the many older/wiser/richer than me folk on the finance sub forum.

I am mid-late 30's, current pension pot £440k. Run my own ltd company (very PH cliche, I know) and pay myself via mix of salary, dividends and pension contributions.

I feel pot size to age is solid enough that I don't really need to add any more to it. However the flip side is paying near enough 50% tax to just take more dividends out doesn't appeal, and with corporation tax at 25% now continuing with the pension makes a lot of tax sense based on loose workings below;

Extra £60k dividend = £30k to me, £30k to the taxman
Extra £60k in pension = £60k to me, nothing to taxman now (though some to the taxman at some point in future), £15k reduced from corporation tax bill

Am I doing anything "wrong" by just cracking on with the pension? Is there a solid argument to say stopping paying into it is "better", or is it simply personal preference at this point?

I tend to debate it with myself at the end of each month when making payments if I am doing the right thing, and would be keen to hear other people's views on it.

Cheers

[Puzzles]

I'd probably start holding back at that level and see how things go, unless you wanted to leave your pension as outside IHT.

[ams007]

I think with the removal of the LTA then putting as much in the pension makes the most sense to me. With LTA you were probably going to breach it and I previously stopped - but started again now.

[LittleBigPlanet]

ams007 said:

I think with the removal of the LTA then putting as much in the pension makes the most sense to me. With LTA you were probably going to breach it and I previously stopped - but started again now.

This.

If you can afford to, continue filling your pension pot, nice problem to have.

[trickywoo]

Have some thought toward the fact the rules can be changed at any time.

Locking in for an unknown timeframe is the biggest downside to pension contributions.

[drmotorsport]

Yes that's a nice sized pot for your age. All depends on your desired lifestyle and pension income when retired and that's still a way off yet. I believe a pot of £1m is the accepted level for a nice income after inflation etc

[alscar]

trickywoo said:

Have some thought toward the fact the rules can be changed at any time.

Locking in for an unknown timeframe is the biggest downside to pension contributions.

Indeed and am quite sure that when / if Labour get in at the next GE they will reverse the reversal of the LTA but they will also need to apply some form of grandfather clause to protect the Doctors and everyone else that has contributed post the reversal by Conservative.

[Ed Moses]

I would keep filling the pension pot while you can - you never know how life is going to change for you over the next 30 years to retirement - health, family, changing rules.

I would also point you at the Enjoying Retirement thread in this forum. You will see that there are a number of us in our Fifties that are in the fortunate/planned position to not have to work in the same way as when we were younger or have stopped completely - by choice. If you have a large pot this is an option to consider.

[Mr Pointy]

Surely it's a no brainer wih those figures. Why give HMRC 45k just to get £30k more income?

[The Leaper]

I'd say you're doing OK but you're only halfway there. Depends, of course, on what you feel is a satisfactory income after tax in retirement. Personally, if I was in your shoes, I'd be taking advantages of the tax reliefs available as much as I could.

R

[OutInTheShed]

simon800 said:

Hope this question is taken as intended - genuinely keen to gauge the insights of the many older/wiser/richer than me folk on the finance sub forum.

I am mid-late 30's, current pension pot £440k. Run my own ltd company (very PH cliche, I know) and pay myself via mix of salary, dividends and pension contributions.

I feel pot size to age is solid enough that I don't really need to add any more to it. However the flip side is paying near enough 50% tax to just take more dividends out doesn't appeal, and with corporation tax at 25% now continuing with the pension makes a lot of tax sense based on loose workings below;

Extra £60k dividend = £30k to me, £30k to the taxman
Extra £60k in pension = £60k to me, nothing to taxman now (though some to the taxman at some point in future), £15k reduced from corporation tax bill

Am I doing anything "wrong" by just cracking on with the pension? Is there a solid argument to say stopping paying into it is "better", or is it simply personal preference at this point?

I tend to debate it with myself at the end of each month when making payments if I am doing the right thing, and would be keen to hear other people's views on it.

Cheers

I would be looking at options which don't tie up your cash until you're nearly 60.
I'd be thinking about where the company might go over the next 5/10/20 years, what my exit strategy is.

We can't guess what your company does, but can you be sure it will be what you want to be doing in 15 years' time?

There are many possibilities including diversifying the company and investing in it.

To know the best option requires a lot of crystal ball work, to guess what's going to happen to your industry, your personal health and circumstances and the tax regime.

Personally I tried to balance paying the least tax against keeping my options open to retire young or at least access my savings to direct them into a different business in my 40s or 50s.

People who say these things are a 'no brainer' need tasering.

[Puzzles]

theres a balance to be struck for sure

[phpe]

Your £440k compounded at an average of 4% for the next 20 years to take you to your late 50s would likely be around £1m in todays terms

Have you considered VCTs as an addition to saving into the pension?

Aside from the higher risk nature, they are not as tax efficient up front (you can reclaim 30% personally, unlike ISAs) , but potential for CGT free gains (like pensions and ISAs) plus any future dividend income is fully tax free all well (like ISAs and unlike pensions)

I guess the downside would be the tax and NI suffered up front to get the money out in the first place.

[simon800]

Thanks all, some v helpful comments.

Puzzles said:

I'd probably start holding back at that level and see how things go,

ams007 said:

I think with the removal of the LTA then putting as much in the pension makes the most sense to me. .

Well that's crystal clear then



That's the exact debate I have with myself each month when making the transfer!

Ed Moses said:

I would keep filling the pension pot while you can - you never know how life is going to change for you over the next 30 years to retirement - health, family, changing rules.

.

A very valid point and an ongoing consideration;

a) what if I can't always make big contributions, so let's make hay while the sun shines

Flip side that you touch on though, is rule changes. If the LTA comes back in, I wonder if the option to protect you pension (like you could last time around) will exist again or not...

[simon800]

alscar said:

Indeed and am quite sure that when / if Labour get in at the next GE they will reverse the reversal of the LTA but they will also need to apply some form of grandfather clause to protect the Doctors and everyone else that has contributed post the reversal by Conservative.

Will there be some form of legal obligation that they'd have to offer pension pot protection, or is it simply a hope that they would on the basis that's what happened last time?

[simon800]

phpe said:

Your £440k compounded at an average of 4% for the next 20 years to take you to your late 50s would likely be around £1m in todays terms

Have you considered VCTs as an addition to saving into the pension?

Aside from the higher risk nature, they are not as tax efficient up front (you can reclaim 30% personally, unlike ISAs) , but potential for CGT free gains (like pensions and ISAs) plus any future dividend income is fully tax free all well (like ISAs and unlike pensions)

I guess the downside would be the tax and NI suffered up front to get the money out in the first place.

Thanks for this, I have considered VCTs but would see that as a further extension of the tax tail wagging the dog - VCTs aren't something I have any interest in investing in within my S&S ISAs and SIPP, so it would solely be for tax purposes rather than it being an investment choice I'd want to make. As you say too I'd still have to pay a fair bit of up front tax to extract the £s from my ltd co to get into a VCT (albeit there are of course tax breaks once out).

The other option I've looked into is a family investment company, this would allow me to invest within the wrapped or a limited company so pay no tax to extract money and it kicks the tax can down the road. The downside is circa £7.5K set up costs and £2k a year to administer....

[brickwall]

simon800 said:

alscar said:

Indeed and am quite sure that when / if Labour get in at the next GE they will reverse the reversal of the LTA but they will also need to apply some form of grandfather clause to protect the Doctors and everyone else that has contributed post the reversal by Conservative.

Will there be some form of legal obligation that they'd have to offer pension pot protection, or is it simply a hope that they would on the basis that's what happened last time?

This is the risk if you’re sitting on a decent pension pot at a young age.

A future government may well revive the LTA. You might be below the threshold when they bring it back in, and therefore have no grandfather protections. However with 20+ years to go before retirement you may be in a position where simple compounding on the existing fund (with no new contributions) will mean you blow through the LTA before you’re able to withdraw a penny, and there’s absolutely nothing you can do about it.

[simon800]

OutInTheShed said:

I would be looking at options which don't tie up your cash until you're nearly 60.
I'd be thinking about where the company might go over the next 5/10/20 years, what my exit strategy is.

We can't guess what your company does, but can you be sure it will be what you want to be doing in 15 years' time?

There are many possibilities including diversifying the company and investing in it.

To know the best option requires a lot of crystal ball work, to guess what's going to happen to your industry, your personal health and circumstances and the tax regime.

Personally I tried to balance paying the least tax against keeping my options open to retire young or at least access my savings to direct them into a different business in my 40s or 50s.

People who say these things are a 'no brainer' need tasering.

Many thanks for this.

My company is a 2 man band (or micro SME when being posh) - we are very profitable with just the 2 of us, and enjoy not having the headache of staff, salaries, employment law, politics, etc etc! So reinvesting for growth in the business isn't really a viable option - we are the best part of 10 years in and what we've done has worked well so far to the extent we are too far gone to envisage changing it!

The idea is for work to be a choice in 10 - 12 years time - I will likely still work, I have done since 17, but would be nice for it to be a choice. I have separate provisions in Stocks and Shares ISAs and GIAs that would bridge the gap between "work being a choice" and SIPP being accessible.

However you do make a very valid point around the timescale on pension, not being able to access SIPP for another 20 years feels incredibly far off. I'd hate to reach a point where I theoretically have enough to stop working, but can't as it's X years from being accessed!

[Jawls]

Something that’s not been asked so far is whether you’re enjoying life at the moment. Or perhaps less pointedly, suppose you reduced pension saving and instead took say, £20k of post tax income instead, would that materially improve your life? Or are you basically happy?

This is pistonheads of course, so I imagine that £20k per year could enable some quite nice toys, but for other folks they’re not interested in a different sports car or more expensive hotels or whatever.

Personally I think it’s quite likely that pension tax relief will be reformed in our working lives (I’m mid 30s) so there’s an argument to squirrel as much away now whilst you still can as a higher or additional rate taxpayer. But frankly, policy risk is there with anything. Suppose you whack it all into VCTs or ISAs, or hell just buy some nice watches. Who is to say the tax treatment of those assets won’t change?

[phil-sti]

simon800 said:

Hope this question is taken as intended - genuinely keen to gauge the insights of the many older/wiser/richer than me folk on the finance sub forum.

I am mid-late 30's, current pension pot £440k. Run my own ltd company (very PH cliche, I know) and pay myself via mix of salary, dividends and pension contributions.

I feel pot size to age is solid enough that I don't really need to add any more to it. However the flip side is paying near enough 50% tax to just take more dividends out doesn't appeal, and with corporation tax at 25% now continuing with the pension makes a lot of tax sense based on loose workings below;

Extra £60k dividend = £30k to me, £30k to the taxman
Extra £60k in pension = £60k to me, nothing to taxman now (though some to the taxman at some point in future), £15k reduced from corporation tax bill

Am I doing anything "wrong" by just cracking on with the pension? Is there a solid argument to say stopping paying into it is "better", or is it simply personal preference at this point?

I tend to debate it with myself at the end of each month when making payments if I am doing the right thing, and would be keen to hear other people's views on it.

Cheers

If I was in your position, which I will never be, I'd pump as much in to my pension as possible and look at retirement in my 50's.