UK workplace pension - opt in?

[peppermintbee]

Hi! Drop-in and out lurker posting first time here.

I'm starting my first full time job soon and wondering if it would be useful (ERE-wise) for me to contribute to the workplace pension? It matches up to 6% of the salary. I wouldn't be able to access it until the age of 57 (or even later... depending on political decisions..), so assuming I live that long that's 32 years time for me.

I've tried reading some posts by Monevator, although felt unsure how to apply it being younger and aiming for some kind of ERE. I understand that the advantage of a pension over ISAs is that it's a way of using money that otherwise would have gone to income tax.

From a combination of part time jobs over the years and some inheritance I've managed to save about 25k. From my basic calculations assuming 9-10k annual expenses + eventually earning 18-22k/year after tax on average, I'm roughly aiming to retire 13-15 years from now, or possibly semi-retire by working part time in 5-6 years.

Thanks for reading, appreciate any perspective or tips.
(oops, made edits when i was more awake - numbers in the last paragraph)

[Kipling]

Welcome to the board! To be 25 and have accumulated such a significant stash, even with the inherited luck, is impressive and bodes well for your short and medium term future.

Your question, however, is about the long term future. 57 (probably 59 for you given the likely changes in life expectancy) is a long, long way away. But, this is a phenomenally beneficial investment where there is full matching. Let's say you earn 20k gross this tax year. Your effective income tax rate is 7.5% on that so the income tax efficiency on the personal contribution (which then gets locked up for 34 years) is not that great. But, the match supercharges the savings. If you put in 6%, that's 1200 gross, it only costs you about 1100 from your net pay, but you get 2400 in the pension fund.

Always take free money. This is free money.

[guitarplayer]

Yes definitely go for it.

My workplace pension is not that beneficial and I opted out for nearly a year thinking that I better take the money and invest it (perhaps influenced by some early reading of ERE blog or book).

As a basic taxpayer you pay 20% tax on your income above the tax free allowance. On your payslip your pension contribution will appear in the post tax column. To realise how much tax you get back you have to divide (20% tax taken) / (80% net income left) = 0.25. That is why those savings will be topped up with 25% of what you contributed rather than 20% (often found statement online).

When you look at the numbers it looks like this in your case:

You save x
you get x from your employer
you get 0.25x as a tax relief from the gov

When summing it all up:

x+x+0.25x=2.25x

Say you earn the Scottish living wage which is I think £9/hr now and work 37.5h which is a rather common full time these days. You would be then every month contributing £78.0, but in the investment account it would turn into £175.4

If you are frugal and into ERE, you won't feel that much if at all the lack of £78. Over a year it is £935 that you contributed and £2105 that has been invested instead. You don't get such return elsewhere, and there would have to be a severe breakdown of the capitalist system or a political revolution to wipe out this bonus.

I am thinking of it like this: I don't feel the lack of the money now, and it might fund a year or two of my life down the line.

Another account to look at would be SIPP (self investment pension plan) which is a bit like defined contribution plan with 0% contribution from the employer (because it is an individual account). This is something to look at closer to the date money can be withdrawn from it, so maybe in a couple of decades.

[UK-with-kids]

The other posters are correct that you should always take free money if there is a match available. Combined with the savings in tax (and potentially national insurance, depending how it is structured), this is a total no brainer. I made a pretty big mistake here in the past as I worked for a very generous employer but didn't pay the maximum as I thought pensions were for old people. Then one day I realised that I was halfway between that decision and the pension access age and I wished I had more money in my stash. Even with your example of 32 years, you'll find the first 16 years goes very fast and you'll suddenly realise you're on the home stretch. At this point it's nice to have the thought "I've saved enough for retirement, now I just need to get there".

The concern about the money being locked up is a legitimate one. IIRC in the USA you can still get the funds back out again if you pay a penalty, but in the UK that isn't the case, it really is out of your hands for a very long time. For this reason I would always divide my funds between pension funds and instant access accounts (such as ISAs). So in your case that means keep adding to your £25k pot from your regular salary, in addition to maxing out the pension option you have. As a result, you'll still have the option of spending down your capital and/or working a part-time job in the run up to retirement at 57/58/59. Monevator recently ran a multi part series on how to figure this "bridge" out, but that's a subject you'll get more interested in later on once you're in your 40s. It's great to reach that point with a massive pension pot waiting in the wings!

When you leave your current employer you can open a low cost SIPP and transfer your pension funds into that to ensure you keep control of the pot of money that you have accrued, and make sure the fees remain competitive. You can keep doing that every time you leave another employer.

[guitarplayer]

When you leave your current employer you can open a low cost SIPP and transfer your pension funds into that to ensure you keep control of the pot of money that you have accrued, and make sure the fees remain competitive. You can keep doing that every time you leave another employer.

I didn't know that, thanks for sharing!

[peppermintbee]

Hi Kipling, guitar player, UK-with-kids, thank you for the replies!

guitar player, I didn’t understand how I’d be getting 0.25x in tax relief. why is the tax I get back “tax taken over net income left” ? (btw i read your journal, wow your situation sounds cool.)

https://monevator.com/sipps-vs-isas-bes ... n-vehicle/
I did look at this post from monevator and I see because of the timings of tax it is likely I would not have to pay as much (and possibly no tax at all, if my expenses do stay below personal allowance as I intend) by putting the money to pension rather than ISA. Of course, the trade-off being the decades in between.

The figures you and Kipling mention helped wrapped my head around the “2x” part. I get more money from the money I put in because of the matching, and that doubled sum being invested over time.

So with a bit more digging and staring at example payslips this is what it looks like to me:

Pluses
* being given free money with the workplace matching
* tax relief (?10% of gross income), and lower tax paid overall
* lower NI payments (12% saving on the amount given to pension)
* Could be helpful to have this if/when I reach that age, who knows what might happen to my assets before age 59, or additional medical costs etc i might have by that point.
* If i build it up I could have an option to go with a scenario of spending down capital in between in the run to 57/59.

Minuses
* the investments of the fund likely do not align with my preferences for ethics (but ah, I guess I could open an SIPP in order to make decisions on this later down the line, as UK-with-kids mentions?)
* the uncertainty of government, pandemics, climate emergency, etc meaning by the time the decades are up there may be not much to draw on.

Ok I think atm I lean towards opting in. And keep an open mind/bearing in mind I can change plans if I see a better route for me.

Uk-with-kids do you have any recommendations for low cost SIPPs?

[guitarplayer]

@peppermintbee, I am not entirely sure about the lower NI payments.The way I remember it is like in this example:

Say you earn £24.000 per annum
Your gross monthly salary is then £2000.
Your net monthly salary after NI contribution and taxes is £1663.33 (from a gross net salary calculator for UK)
You contribute 6% of your net monthly salary which is £99.79
Your employer contributes also £99.79
You get a tax relief on top of the net salary contribution. The £99.79 you have contributed was around £124.75 before taxes. This is because basic tax in the UK is %20 and

£124.75 * (1-%20) = £99.79

So the tax relief is:

£124.75-£99.79=£24.96

And in terms of the percentage of your contribution

£24.96 / £99.79 = 25%

So after contributing £99.79 /month your pension fund is topped up with £99.79+£99.79+£24.96=£224.54 /month which is 225% of your contribution.

EDIT:

One thing I know about SIPPs is that you can top them up with heaps of money every year, I think basically the amount you earn. So one strategy that could be employed would be:

- Save up your post tax income in an ISA or elsewhere
- observe when you are getting closer to the age you can withdraw from a SIPP (now it is 55 yo I think),or when you are in the final years of your salaried work
- when you are at that time, max out SIPP from your savings from past years
-- for example, you are 40 yo and have £250.000 saved and earn £50000 / year. Then you can deposit £50000 to your SIPP in the tax year, and 'retrieve' tax that you paid on it (i.e. £12500). You can do it again and again. Even if you don't work anymore, you can still deposit, I think, £3600 / year to your SIPP and 'retrieve' £900.

In this strategy, you sort of get the tax back from the gov. The benefit is that you have lots of your savings in ISAs most of your life and they are easily accessible. The downside is that you don't get the tax relief to earn interest for you throughout the years. I personally see myself paying the price!

Yes I have a nice settings in relative terms (cozy here and great savings rate) but not necessarily in absolute terms (i.e. could have been saving more nominally working higher paid job). But all in all can't complain

[UK-with-kids]

Uk-with-kids do you have any recommendations for low cost SIPPs?

I used Monevator's table to compare the cheapest ones: https://monevator.com/compare-uk-cheape ... e-brokers/
I haven't looked at it for a while but Charles Stanley and YouInvest used to be good ones to start with. Hargreaves Lansdown is the biggest and most user friendly but charges a bit more I think.
While you have a low sum you'll do better with one that charges a % fee. If you have a serious sum later on then a fixed fee works out cheaper.

Don't forget that you don't really need a SIPP until you have a pension pot that you want to transfer into it. You will be fine with your company scheme for now, and if you have any spare money left over from your payslip you can perhaps save into an ISA, that way you will be building up sums that aren't age restricted.

[UK-with-kids]

One thing I know about SIPPs is that you can top them up with heaps of money every year, I think basically the amount you earn. So one strategy that could be employed would be:

- Save up your post tax income in an ISA or elsewhere
- observe when you are getting closer to the age you can withdraw from a SIPP (now it is 55 yo I think),or when you are in the final years of your salaried work
- when you are at that time, max out SIPP from your savings from past years
-- for example, you are 40 yo and have £250.000 saved and earn £50000 / year. Then you can deposit £50000 to your SIPP in the tax year, and 'retrieve' tax that you paid on it (i.e. £12500). You can do it again and again. Even if you don't work anymore, you can still deposit, I think, £3600 / year to your SIPP and 'retrieve' £900.

In this strategy, you sort of get the tax back from the gov. The benefit is that you have lots of your savings in ISAs most of your life and they are easily accessible. The downside is that you don't get the tax relief to earn interest for you throughout the years. I personally see myself paying the price!

Yes I have a nice settings in relative terms (cozy here and great savings rate) but not necessarily in absolute terms (i.e. could have been saving more nominally working higher paid job). But all in all can't complain

I would be wary of assuming you can make up the difference later. There are limits on annual contributions - £40k per year at the moment IIRC - and rules might change in the future.

One benefit of locked up pension savings is also the downside - you can't touch them when you want or need to spend that money on something else.

[UK-with-kids]

I used Monevator's table to compare the cheapest ones: https://monevator.com/compare-uk-cheape ... e-brokers/
I haven't looked at it for a while but Charles Stanley and YouInvest used to be good ones to start with. Hargreaves Lansdown is the biggest and most user friendly but charges a bit more I think.
While you have a low sum you'll do better with one that charges a % fee. If you have a serious sum later on then a fixed fee works out cheaper.

I forgot that Vanguard recently launched a SIPP in the UK, so that might work out cheapest for you. Think about the size of your pot and do the sums.

[Bankai]

Definitely contribute up to employer's match - if your company is operating on a 'salary sacrifice' basis, you're basically immediatelly trippling your money as a base rate taxpayer (this gets even better if you're on higher rate):

No pension: £1,000 gross becomes £680 net (£670 in Scotland) after 20% tax & 12% NI

Pension: £1,000 gross becomes £2,000 in pension - you don't pay tax or NI and get full employer's match.

£2,000 is ~3x £680. This is just too good to leave on the table regardless of how many years you have until retirement. And the closer you are to retirement, the more it makes sense to save even above employer's match - I'm currently stashing away substantially more than what my employer matches simply to save on tax & NI (immediate 50% boost to savings) even though I'm 20 years away from accessing it.

Monevator has great series on pension vs ISA including how to calculate how much you should save in each vehicle to maximise tax benefits of pension.