Paying too much into pension or ISA?
Discussion
Hi All,
Apologies for the mish-mash of information, but I'll try to keep it clear:
With extra money is it a mistake to increase pension amounts (as it's effectively locked away and not available), or into the ISA next year - which is designed for long term savings (10+ years) rather than putting it into premium bonds or something else?
I definitely want to retire early, ideally just before 60. I also have a high mortgage (about £320,000 remaining) but thankfully it is still on a low interest rate for the next 2-3 years.
So although I could now pay more into ISA next year, or overpay even more into a pension, maybe I should look at different methods of savings or investments?
Just wondering what everyone else does if you're in a similar position?
Thanks
Apologies for the mish-mash of information, but I'll try to keep it clear:
- For the past year I have been paying about 12% of my income into a pension, 6% is paid in by my employee. The total per month therefore is £1650 and that includes tax relief too. My current pot is £13,000... HOWEVER: I have a Police Pension from 16 years of service, which will give around £11k per year from aged 65.
- I also pay into an ISA (Vanguard All Cap Index Fund). This is only first full year but I plan to try to max it out at £20,000 for the year.
- I also have emergency savings in Premium Bonds, enough for 9-12 months roughly.
- I am 39 years old, not married and no kids. Possible plans to have kids at some point but not clear at present (ask my GF!).
- Lucky enough to be a home owner, with £330,000 of mortgage outstanding. Value of house is £510,000 so I will be aiming soon for lower than 60% LTV. I'm also lucky that I have 2.5 years left of mortgage deal where the interest rate is 1.7%.
With extra money is it a mistake to increase pension amounts (as it's effectively locked away and not available), or into the ISA next year - which is designed for long term savings (10+ years) rather than putting it into premium bonds or something else?
I definitely want to retire early, ideally just before 60. I also have a high mortgage (about £320,000 remaining) but thankfully it is still on a low interest rate for the next 2-3 years.
So although I could now pay more into ISA next year, or overpay even more into a pension, maybe I should look at different methods of savings or investments?
Just wondering what everyone else does if you're in a similar position?
Thanks
Edited by redrabbit29 on Monday 13th November 16:46
One key part is your current age?
Ive stopped working this year 53 after selling a business. my aim even as a kid was to stop working by 55 and then worked out backwards how to do that + luck.
During working life - Our priorities were to pay down and clear mortgages we have a couple of BTL's and main home then gentle into pensions and balance into ISA Its great you have a employer paying in as well for you ! is that a direct ratio? if so utilise that more if they will pay in more.
In hindsight Its worked out well for us. We were earning well which helped us to clear off mortgages first and then we put the excess into paying down the other mortgages and then upped the pension contributions last.
You can get pension projections but if you are long term away then 100% equities were and are my bet. (although we are pretty much all in equities at present)
What annoyed me with my private pension was that I had set it up to mature at 50 but the govt messed around and changed it to 55 plus some time in the very early 20's my pension projection was decreasing despite putting more in hence the shift into BTL and paying pension money pretty much 100% into into the mortgage to reduce those asap. Our industry was in the BTL side of things anyway as letting agents so we were confident in the value of BTL's in our area. (in hindsight I think paying a bit more into the pension would have been as good or slightly better is morgages 75% pension 25% for me would have been a better ratio then 99% mortgages.
moving forward we used the sale of the business to buy up equities portfolio in April this year vie Intelligent money and have done very well so far plus my pension and isa was with them for a few years prior in any event and it did great.
So based upon my experiences I would say pay down/off the mortgage asap and keep paying into pension perhaps a 50/50 split. Global trackers are pretty good overall. IM do offer some great other portfolio mixes one of which is PH Tech which im up by about 20% since April. Get that pension growing - some great youtube vids on compound growth for pensions would say to watch. Have a look at IM website ask them some questions on pistonheads as they sponsor finance section.
Ive stopped working this year 53 after selling a business. my aim even as a kid was to stop working by 55 and then worked out backwards how to do that + luck.
During working life - Our priorities were to pay down and clear mortgages we have a couple of BTL's and main home then gentle into pensions and balance into ISA Its great you have a employer paying in as well for you ! is that a direct ratio? if so utilise that more if they will pay in more.
In hindsight Its worked out well for us. We were earning well which helped us to clear off mortgages first and then we put the excess into paying down the other mortgages and then upped the pension contributions last.
You can get pension projections but if you are long term away then 100% equities were and are my bet. (although we are pretty much all in equities at present)
What annoyed me with my private pension was that I had set it up to mature at 50 but the govt messed around and changed it to 55 plus some time in the very early 20's my pension projection was decreasing despite putting more in hence the shift into BTL and paying pension money pretty much 100% into into the mortgage to reduce those asap. Our industry was in the BTL side of things anyway as letting agents so we were confident in the value of BTL's in our area. (in hindsight I think paying a bit more into the pension would have been as good or slightly better is morgages 75% pension 25% for me would have been a better ratio then 99% mortgages.
moving forward we used the sale of the business to buy up equities portfolio in April this year vie Intelligent money and have done very well so far plus my pension and isa was with them for a few years prior in any event and it did great.
So based upon my experiences I would say pay down/off the mortgage asap and keep paying into pension perhaps a 50/50 split. Global trackers are pretty good overall. IM do offer some great other portfolio mixes one of which is PH Tech which im up by about 20% since April. Get that pension growing - some great youtube vids on compound growth for pensions would say to watch. Have a look at IM website ask them some questions on pistonheads as they sponsor finance section.
Edited by superlightr on Monday 13th November 11:23
Edited by superlightr on Monday 13th November 11:26
to my mind it depends on whether your a 20% or 40% taxpayer?
if 20% the percentage you save on input to the pension will likely be the same you pay on the way out. So probably best to put in the iSA as it will be 20% of a greater number on the way out if you use a pension.
if your a 40% tax payer you'll save 40% on the way in but likely only pay 20% on the way out. So better off in a pension.
its not quite that simple but its how I treat it
if 20% the percentage you save on input to the pension will likely be the same you pay on the way out. So probably best to put in the iSA as it will be 20% of a greater number on the way out if you use a pension.
if your a 40% tax payer you'll save 40% on the way in but likely only pay 20% on the way out. So better off in a pension.
its not quite that simple but its how I treat it
Edited by markiii on Monday 13th November 12:51
This is my insight based on my specific circumstances and some is subjective:
I didn't look at my pensions in any meaningful way till my early 30's so that coupled with at least 5 years of no contributions during periods of contracting meant I was very behind in terms of overall pot. I then moved into perm roles and was fortunate to have reasonably generous DC schemes so aimed to contribute enough to bring my adjusted net income out of the 40% tax bracket as well as ensuring I contributed the minimum needed to receive the maximum 'employer match'.
As of today due to being on a single salary and also thinking more about job security (or lack of it!) I contribute enough to receive the max employer match however still paying a chunk of 40%....it is what is but I would rather have more peace of mind if I can build up my S&SISA to have a balance between accessible cash/investments and those in the pension which are locked away till 55/57. If you can go aggressive on the pension contributions (to the extent that is optimum for tax and employer contributions) whilst still maintaining enough take-home to support required standard of living then that's probably the ultimate goal....could mean something different for different folks.
As an aside make sure you know what you are invested in...you may have this covered but fund selection can obviously have a big impact on longer term returns based both on the funds performance and fees. Plus avoiding the 'lifestyling' element of typical DC work pensions.
I didn't look at my pensions in any meaningful way till my early 30's so that coupled with at least 5 years of no contributions during periods of contracting meant I was very behind in terms of overall pot. I then moved into perm roles and was fortunate to have reasonably generous DC schemes so aimed to contribute enough to bring my adjusted net income out of the 40% tax bracket as well as ensuring I contributed the minimum needed to receive the maximum 'employer match'.
As of today due to being on a single salary and also thinking more about job security (or lack of it!) I contribute enough to receive the max employer match however still paying a chunk of 40%....it is what is but I would rather have more peace of mind if I can build up my S&SISA to have a balance between accessible cash/investments and those in the pension which are locked away till 55/57. If you can go aggressive on the pension contributions (to the extent that is optimum for tax and employer contributions) whilst still maintaining enough take-home to support required standard of living then that's probably the ultimate goal....could mean something different for different folks.
As an aside make sure you know what you are invested in...you may have this covered but fund selection can obviously have a big impact on longer term returns based both on the funds performance and fees. Plus avoiding the 'lifestyling' element of typical DC work pensions.
How old are you and how much is in your pension currently? How much money do you actually need now vs retirement? Are you married? Lots of questions need to be answered to know what's right for you.
It appears you are keeping yourself below the £100K threshold, which is key. If able, you want to map it out with a simple spreadsheet.
It appears you are keeping yourself below the £100K threshold, which is key. If able, you want to map it out with a simple spreadsheet.
superlightr said:
One key part is your current age?
<snip>
I am 39, no children but my partner does want them so that plays a part obviously. She works and would most likely stop for at least a few years. <snip>
Thank you for all the useful information and congratulations on stopping work, and the good position you've found yourself in. I did think about BTL but I know nothing about houses from an investment point of view. I
markiii said:
to my mind it depends on whether your a 20% or 40% taxpayer?
if your a 40% tax payer you'll save 40% on the way in but likely only pay 20% on the way out. So better off in a
I'm in the higher bracket, with my gross salary being £110,000.if your a 40% tax payer you'll save 40% on the way in but likely only pay 20% on the way out. So better off in a
VR99 said:
This is my insight based on my specific circumstances and some is subjective:
I didn't look at my pensions in any meaningful way till my early 30's so that coupled with at least 5 years of no contributions during periods of contracting meant I was very behind in terms of overall pot. I then moved into perm roles and was fortunate to have reasonably generous DC schemes so aimed to contribute enough to bring my adjusted net income out of the 40% tax bracket as well as ensuring I contributed the minimum needed to receive the maximum 'employer match'.
<snip>
I didn't look at my pensions in any meaningful way till my early 30's so that coupled with at least 5 years of no contributions during periods of contracting meant I was very behind in terms of overall pot. I then moved into perm roles and was fortunate to have reasonably generous DC schemes so aimed to contribute enough to bring my adjusted net income out of the 40% tax bracket as well as ensuring I contributed the minimum needed to receive the maximum 'employer match'.
<snip>
MaxFromage said:
How old are you and how much is in your pension currently? How much money do you actually need now vs retirement? Are you married? Lots of questions need to be answered to know what's right for you.
It appears you are keeping yourself below the £100K threshold, which is key. If able, you want to map it out with a simple spreadsheet.
Thanks both for your comments...It appears you are keeping yourself below the £100K threshold, which is key. If able, you want to map it out with a simple spreadsheet.
I am 39
Not married
No kids but partner does want them
My salary is £110,000 and the basic pension is 3% from me and 6% max from employeer... as stated I voluntarily pay in 12% which is £880. I could definitely pay more and that's where a lot of reasons for this post comes in.
My pension pot is £13,000. HOWEVER...
I have a Police pension built up over 16 years of service. This is a DB Pension and I believe it is accessible at 65, with a lifetime amount of £11,000.
Therefore, early retirement for me, say 58 or 60 would be using this new pension pot and then at 65 the Police Pension of £11k would start too. (assuming I make it this far!)
okgo said:
How much do you actually need to live right now?
Could you do more into both?
To live, probably about £2.5 to £3k. Could you do more into both?
I could definitely pay more into both. I think that's kind of what I am asking. Whether to do so or whether to keep some in other places, like higher interest accounts (I'm aware you can face taxes depending on interest rates), or more into premium bonds, different investments etc.
I'm just fearful about locking a disproportionate amount of money into a pension which I can't get access to for nearly 20 years. The ISA is a good option as I can still access if there was a major issue.
I suppose it depends on your goal, if you want long term growth in a tax free environment then ISA and pension allow that with different access points.
If you want short term holdings for the unforeseen and have enough money to have to start paying tax on savings, premium bonds can work. I think at your salary level you’d still get a tax free amount of £500 is it? Makes sense to use that before lumping more into bonds given there’s rates that beat PB out there.
The other thing to consider is that at the end of your fix, you may go from easily beating your mortgage rate with savings to easily losing across the board. At 3.5 years out, building up more cash to have the option to pay some debt down doesn’t seem terrible either. Suspect the right answer is a bit of all 3 camps.
If you want short term holdings for the unforeseen and have enough money to have to start paying tax on savings, premium bonds can work. I think at your salary level you’d still get a tax free amount of £500 is it? Makes sense to use that before lumping more into bonds given there’s rates that beat PB out there.
The other thing to consider is that at the end of your fix, you may go from easily beating your mortgage rate with savings to easily losing across the board. At 3.5 years out, building up more cash to have the option to pay some debt down doesn’t seem terrible either. Suspect the right answer is a bit of all 3 camps.
Edited by okgo on Monday 13th November 15:13
It sounds like you're in a good place, especially with the police pension in the background. If you carry on with current pension contributions for 20 years, that's £600K with modest investment growth (and ignoring wage inflation). Add in the police pension and it'll be substantial and definitely wants modelling.
Given children may be on the horizon, personally I'd look at keeping the status quo with the pension and build up cash for a few years. You can be tax efficient using gilts alongside the ISAs.
Given children may be on the horizon, personally I'd look at keeping the status quo with the pension and build up cash for a few years. You can be tax efficient using gilts alongside the ISAs.
I'm in a very similar situation 38 similar salary.
I pay 16% into my pension (6% from employer) this is mainly to stay below the 100k threshold as I'll pay 60% tax and lose the 30 hours free childcare my 3 year old has at the moment.
The rest we put into an S&S ISA's for my wife and I (aim for 40k) because I prefer the flexibility and worry long term what changes to legislation may effect my pension. You ca't really go wrong whatever you do. Any thing above 40k I'd start to filter into my pension but I also like to live.
I don't have your police pension but if I did this would make me even more bullish about the ISA over pension personally.
I pay 16% into my pension (6% from employer) this is mainly to stay below the 100k threshold as I'll pay 60% tax and lose the 30 hours free childcare my 3 year old has at the moment.
The rest we put into an S&S ISA's for my wife and I (aim for 40k) because I prefer the flexibility and worry long term what changes to legislation may effect my pension. You ca't really go wrong whatever you do. Any thing above 40k I'd start to filter into my pension but I also like to live.
I don't have your police pension but if I did this would make me even more bullish about the ISA over pension personally.
Stu-nph26 said:
I don't have your police pension but if I did this would make me even more bullish about the ISA over pension personally.
Thank you for the helpful information. My only issue with the Police Pension was it not being payable until 65 and I wanted flexibility to stop work early. I know I could therefore plan for 58-65 on one pension, then wait for the Police one to become elible too. It's just calculating how much I'd need is difficult. The ISA appeals a lot - for the reasons you outlined in your response.
NowWatchThisDrive said:
It's a valid concern (albeit one of many) and partly why I always heavily prioritised investing through taxable accounts and ISAs over making excessive pension contributions. I'm generally quite bearish about the future state of pension freedoms/accessibility, and placed the most value on being able to stop working and access my money when I needed/wanted to rather than at the government's whim.
Putting more into low/zero-risk options like savings accounts or premium bonds is a different proposition entirely though, and more about whether you feel you have enough of a buffer against life's vagaries here and now than whatever your future plans are.
Thank you - I'm happy with the premium bonds for the emergency savings but I also quite like the excitement of winning (I have won around £1500 this year). I had put some money in a 7% Nationwide saver and also a 5% Cahoot Bond too. I know what you mean about having the control over your money. I resent saving solely for the future as I saw my Dad die early in retirement after years of Military and Police service. Although I don't feel I am missing out on anything in life at the moment, I don't want to get to 60s and feel I have saved up a lot of money for no real reason. Definitely a balance there! Putting more into low/zero-risk options like savings accounts or premium bonds is a different proposition entirely though, and more about whether you feel you have enough of a buffer against life's vagaries here and now than whatever your future plans are.
MaxFromage said:
Given children may be on the horizon, personally I'd look at keeping the status quo with the pension and build up cash for a few years. You can be tax efficient using gilts alongside the ISAs.
Thank you - that's reassuring to know. I think I will keep things as they are. I am due a bonus (I think) with my job around April time. I'm not sure what it will be - maybe around £10k, so I guess that's probably best in the pension to avoid being taxed heavily on the extra income.okgo said:
I think at your salary level you’d still get a tax free amount of £500 is it? Makes sense to use that before lumping more into bonds given there’s rates that beat PB out there.
The other thing to consider is that at the end of your fix, you may go from easily beating your mortgage rate with savings to easily losing across the board. At 3.5 years out, building up more cash to have the option to pay some debt down doesn’t seem terrible either. Suspect the right answer is a bit of all 3 camps.
I'm not sure on the interest vs tax issue to be honest. Premium Bonds have worked well for me this year, I think I've won around £1500 in the last 9 months which is quite lucky. That is on a holding of around £30k.The other thing to consider is that at the end of your fix, you may go from easily beating your mortgage rate with savings to easily losing across the board. At 3.5 years out, building up more cash to have the option to pay some debt down doesn’t seem terrible either. Suspect the right answer is a bit of all 3 camps.
Edited by okgo on Monday 13th November 15:13
I was playing around with numbers the other day. At the end of my current mortgage deal, if I add in £30k to reduce my mortgage then it will go below the 60% LTV amount which I believe makes quite a big difference. I therefore think you're right about having the cash available, but also covering pension and long term savings.
Thank you
Edited by redrabbit29 on Monday 13th November 17:03
Here is my take.
How much cash do you need in your ISA as an emergency fund?? I would build that up to a comfortable amount and then stop and put everything into your pension.
Also, in your situation I would look at chipping the mortgage away... Not as tax efficient, but no one knows where interest rates will go.
Lastly, don't forget to enjoy your working life too.
On this basis, I took the approach of putting a third of my excess monthly money into mortgage, a third into pension and a third having fun.
I am older (49) but on about half the wage. But I now have nearly zero mortgage, a healthy pension (not overtly though) and some great experiences. Plus two kids to put through university as my next financial hurdle......that is not gonna be cheap.....
How much cash do you need in your ISA as an emergency fund?? I would build that up to a comfortable amount and then stop and put everything into your pension.
Also, in your situation I would look at chipping the mortgage away... Not as tax efficient, but no one knows where interest rates will go.
Lastly, don't forget to enjoy your working life too.
On this basis, I took the approach of putting a third of my excess monthly money into mortgage, a third into pension and a third having fun.
I am older (49) but on about half the wage. But I now have nearly zero mortgage, a healthy pension (not overtly though) and some great experiences. Plus two kids to put through university as my next financial hurdle......that is not gonna be cheap.....
gotoPzero said:
You should be able to access it at 55 - but with actuarial reduction?
You in PPS06?
I've got half in PPS06 and half in the new PPS15. I believe the government refund allows me to move entirely to 06 after the police legal battleYou in PPS06?
However I believe PPS06 age of 55 or 60 is totally deferred until 65 if you leave the scheme which I've done. The only caveat is if I rejoined within 5 years I could go back as I was.
redrabbit29 said:
Thank you - that's reassuring to know. I think I will keep things as they are. I am due a bonus (I think) with my job around April time. I'm not sure what it will be - maybe around £10k, so I guess that's probably best in the pension to avoid being taxed heavily on the extra income.
Yes any bonus that takes you over the £100K should be sacrificed into your pension really, as otherwise the effective tax rate will be 60%.Edited by redrabbit29 on Monday 13th November 17:03
MaxFromage said:
Yes any bonus that takes you over the £100K should be sacrificed into your pension really, as otherwise the effective tax rate will be 60%.
I'm not even sure what my annual earnings will be as I've paid quite a lot into my pension already - 12% most months. I'll also need to try to work out how to sacrifice it. There is an external benefits provider and I usually email the person there to ask for pension adjustments, so I guess around May or June when I know it's being paid, I will just ask for him to increase the contribution from 12% up to 30% or something like that.This is all new to me as I've never had a bonus before or managed my own pension (came from public sector).
caduceus said:
That's a decent interest rate. Is it only open to NW account holders?
Sorry just looked it up - it was First Direct: https://www.moneysavingexpert.com/news/2022/11/fir...It was about a year ago, it was the one where you can only pay in £300 maximum per month, that's probably why it was so high. There is one more payment left for the 12 month period.
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