How much do you save into pension (UK)?

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Bankai
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How much do you save into pension (UK)?

Post by Bankai » Fri Nov 29, 2019 5:23 pm

The question specifically aimed at forumites from the UK and other countries, where unlike in the US, you can't access your pension pot prior to reaching eligible age (unless terminally ill).

Saving up to employer's match seems a no-brainer. Bypassing 33%* (or more if you're a higher rate taxpayer) of tax & NI and getting a full match on top of that offers 200% instant return - as close to free money as one can get.

But what about saving above this figure?

As long as you're above tax and NI threshold, all money put into pension pot gets 50% bonus from being tax/NI free (£100 into pension vs £67 net). Not as good as instant-trebling, but very good nonetheless. However, there are other factors to consider:

- pension pot is inaccessible until 55 (or 58 in my case as the eligibility age is linked to state pension age, which in turn is going up)

- the main alternative, ISA, is a very tempting option as well - with an annual allowance of £20k and free from tax/capital gains, with a bit of luck and time on one's side, one can build a very sizeable stash, all tax-free

- you have full control over ISA, while with pension there's usually a very limited choice of higher (stocks) or lower (cash) risk options. This changes after quitting as you can usually move your pension pot into SIPP (self-invested pension plan) and take full control over it

- age is an obvious consideration as well, as someone just a few years from being able to access pension will benefit much more from the instant 50% boost, while on the other hand investing in ISA gives flexibility and is generally the better option for younger people

So, where do you personally strike the balance between the two - or are you using another vehicle? Personally, I'm only saving up to the employer's match, but I'm tempted to increase this to reduce my tax bill, inspired by a co-worker who saves 70% of gross salary into his pension (he's only a few years away from being able to start the drawdown though).

* tax is higher in Scotland

chenda
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Re: How much do you save into pension (UK)?

Post by chenda » Fri Nov 29, 2019 5:49 pm

6.5%. I'm in a public sector pension which I consider safer, although I use this alongside ISA and property investments.

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Alice_AU
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Re: How much do you save into pension (UK)?

Post by Alice_AU » Fri Nov 29, 2019 7:19 pm

I had private pension in UK for 13 years and saved around 5% (employer match was 4%) - not because of the considerations you have listed above but just because it was all I could afford. I think now UK people can access private pensions at 55, but soon it will increase to 57 and by the time I get to this age might increase again... to 60? more? I don't know...

Now in Australia I max the contributions to the full annual cap of $25K pa, to get maximum tax benefit. I know I won't be able to take it till 60 - or again, there are talks about increasing it further... but tax benefit is too attractive to miss.

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Bankai
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Re: How much do you save into pension (UK)?

Post by Bankai » Fri Nov 29, 2019 7:46 pm

Yeah, the age going up is a bit concerning, but on the other hand, it won't go up much more since it's already very high. Two more years won't make that much of a difference and I don't see it going up beyond 70, since, well, very few people so old are able to work anymore.

As for tax benefits, that's my main attraction now as I realised I was focusing only on two out of the three possible levers (lowering expenses and increasing income). I'm trying to look at this tax benefit from different angles but it looks very tempting from each side. One way to frame it would be giving myself a 50% boost to my savings by not giving away 1/3 of my income above tax-free allowance in taxes. On the other hand, having post-tax savings outperforming pension pot by 2% pa over the next two decades would end up with a similar-sized pot while preserving flexibility over the whole time. However, outperforming an index by 2% each year requires some serious time commitment.

On a related note, why would anyone ever overpay a mortgage to save 2% in interest if one can instead save more tax-free into the pension and get a 50% boost to savings? Seems like overpaying the mortgage is absolutely the worst compared with other ways of saving (unless maybe some very specific circumstances). Option 1) Of £10k, I pay £3.3k in taxes and overpay the mortgage with remaining £6.7k thus saving the interest of £134 per year. Option 2) I save all £10k into the pension, thus saving £3,3k on taxes; these extra funds should generate 3-4% returns going forward. Option 2) nets >25x higher increase in NW and the gap in relative terms will only grow over time due to compounding. Plus, you keep inflation as your friend if you have a debt.

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Alice_AU
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Re: How much do you save into pension (UK)?

Post by Alice_AU » Fri Nov 29, 2019 11:33 pm

Hmm... I don't think the age you can access your private pension is the same as the age you can get State Pension, is it?

https://www.pensionbee.com/pensions-exp ... nsions-age

or a more official source, but this one doesn't mention increase to 57:

https://www.gov.uk/personal-pensions-yo ... ke-pension

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Bankai
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Re: How much do you save into pension (UK)?

Post by Bankai » Sun Dec 01, 2019 4:22 pm

Yeah, I'm assuming private pension age will soon be linked to state pension age (-10 years) and that state pension age won't go above 70. So, instead of at 55, private pension won't be available until 60.

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Alice_AU
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Re: How much do you save into pension (UK)?

Post by Alice_AU » Sun Dec 01, 2019 8:10 pm

Ah, minus 10 I could live with :-). Making it exactly equal to state pension age would be unreasonable though. After all, it is private savings.

Nomad
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Re: How much do you save into pension (UK)?

Post by Nomad » Mon Dec 02, 2019 7:08 am

At present, my employer puts in 8.7%, I put in 50%. I can get my hands on it in 3 years, 2 months...

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Bankai
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Re: How much do you save into pension (UK)?

Post by Bankai » Mon Dec 02, 2019 3:07 pm

This is something similar to what one of my co-workers is doing; he's also only a few years away and has some side income to supplement, so he only takes a minimum wage from his main office job. Meaning no income tax & very little NI - saves probably £8-9k in taxes per year. Now, being over 2 decades away from qualifying age, it's not an obviously best path for me; many things can happen in 2 decades and government messing around with pensions is one of them. I'm thinking of increasing contributions to maybe 15-20% as every %age point would reduce my tax bill by over £100 a year. But I already have a quarter of my NW in pensions, unsure if having much more than that locked away for so long is a good idea.

Zeran
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Re: How much do you save into pension (UK)?

Post by Zeran » Fri Dec 06, 2019 9:03 am

I think if you are young 0% is a good number, since every £ in the pension puts your retirement date further away. If you can retire at 37, it makes any money in your pot that you can only touch at 55 redundant. (Although I would use it as an additional savings method after reaching FI).
An acquaintance puts 100% of his salary into pension as he is very close to 55, so he will gain the benefit of the tax efficiency in his retirement portfolio - also lives in a van in true ERE fashion. 100% salary into pension is also a baller move for ensuring good treatment in workplace.

There is an equation to work out what proportion to put into a pension, which I don't have at the moment, but if your ERE retirement age is below 55 then 0% gives you the earliest retirement date.

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