Author Topic: Pensions or ISAs in 40s  (Read 2289 times)

NorthernMonkey

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Pensions or ISAs in 40s
« on: April 03, 2019, 03:54:12 AM »
Hello all,

I'm trying to optimize what I save, and I'm not sure the best way to do this in a tax efficient way. I'm after some input on how others would split savings on Pensions Vs Isas

My current details

Age 39
Salary £66k + car allowance of £7k (odd scheme that allows me to use my £500 car, but gives me £7k a year to help pay for it)
Pension - company will match up to 10%
Mortgage and other debts - zero
Monthly expenses (including a very very healthy holiday fund) £1500/mo

Currently I save 42% + 10% into a work pension. This works out at £2850 a month, currently just over £200k
I then put £500 into a share-save scheme, and have £1000 left over to put into my S&S ISA (currently £50-55k in the ISA)
The remaining £1500 allows me to live with plenty of cash spare to have just booked my 3rd holiday this year.

At 39, although I've got a savings rate of around 74%, I'm not sure if the amount I'm putting in is too high. Should I continue to put so much into a pension, or should I save more in a mechanism that will allow me to access it in the next 10 years. As it currently stands I cant get access to my pension for 18 years.



« Last Edit: April 03, 2019, 04:38:35 AM by NorthernMonkey »

vand

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Re: Pensions or ISAs in 40s
« Reply #1 on: April 03, 2019, 04:18:55 AM »
As a higher rate tax payer, the advantages of the pension are considerable and I would continue socking as much there as possible, and then use the ISA to bridge the gap between your retirement and when plan on accessing the pension


vand

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Re: Pensions or ISAs in 40s
« Reply #2 on: April 03, 2019, 04:25:11 AM »
Thinking about it some more.. you are already at >25x living expenses, so are in a decent position where you could consider RE, so the questions are:

- how long do you plan to keep working?
- do you foresee your £1500/month expenses as a comfortable level?

the closer you are to pulling the plug on work the more the ISA should be prioritized. this is not the same as simply what is "most tax efficient", though.
« Last Edit: April 03, 2019, 04:33:40 AM by vand »

NorthernMonkey

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Re: Pensions or ISAs in 40s
« Reply #3 on: April 03, 2019, 04:38:01 AM »
Thinking about it some more.. you are already at >25x living expenses, so are in a decent position where you could consider RE, so the questions are:

- how long do you plan to keep working?
- do you foresee your £1500/month expenses as a comfortable level?

the closer you are to pulling the plug on work the more the ISA should be prioritized. this is not the same as simply what is "most tax efficient", though.

Sorry on my error. I'm nearer 12x

vand

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Re: Pensions or ISAs in 40s
« Reply #4 on: April 03, 2019, 04:56:32 AM »
Cool.. I'm in a fairly similar situation, maybe 1-2 years behind, and I'm massively prioritising my pension at this stage. 

I figure that absent other incomes sources, then with roughly a 300k pension pot it should be easy to get everything out tax-free (state pension + annuity). After that the marginal rate is 15% (taking advantage of the tax-free lump sum), so my plan is to run my pension up to this limit first before I think too hard about other savings wrappers. Realistically I reckon I would be able to live fairly comfortably on £20k/year, so even if I ran the pension up to 500k the overall tax rate would only be maybe 6-8%.

ISA will be used as a bridge if and when the happy complication of being in a position to retire well before official retirement age arrives.

PhilB

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Re: Pensions or ISAs in 40s
« Reply #5 on: April 03, 2019, 05:48:22 AM »
It's a no-brainer to keep putting all your HRT income into the pension - that may mean reducing your contribution percentage though with the hike in HRT threshold.  Basic rate is trickier though unless you have salary sacrifice to save the NI.  £80 in to get £85 out is still better than nothing, but not if it creates too many cashflow problems.

NorthernMonkey

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Re: Pensions or ISAs in 40s
« Reply #6 on: April 03, 2019, 05:55:48 AM »
To steal an MMM phrase, I feel like I'm living in a shower of consumer sucker wasteful-ness right now. I have a motorcycle, car, dog, gym memberships for me and Mrs NM, and plenty of cash left for holidays. I certainly don't feel hard up spending £1500 a month.

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Re: Pensions or ISAs in 40s
« Reply #7 on: April 03, 2019, 05:56:08 AM »
I tend to think given that level of expenses and salary, after tax income should cover expenses and allow the ISA allowance to be maxed. Everything above that should go into the pension. Political risk of the pension and a fear of having too much in the pension and subsequently working for too long are my concerns here.

I’ve started to look at this the other way around. I’m getting my ISA to a level where I need it to retire early, and once I hit this I will then focus on the pension. Obviously 40% income tax should be avoided. Whether that approach is right or wrong I’m not sure. There are other threads on the UK board around balancing ISA and pension contributions.

highlandterrier

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Re: Pensions or ISAs in 40s
« Reply #8 on: April 03, 2019, 11:50:12 AM »
I think you need to work out how much money you will need before the pension is payable, how much you would be comfortable with in your pension, and take it from there. When do you plan to retire, how long is that from pension age ? What will your withdrawal strategy be ?

By my back of a fag packet estimates with your current savings and 5% growth you would have enough to cover your expenses from non-pension sources by 47, about £220K to last 11 years (a risky 11 years, as pension age may rise). However your pension would have a £560K pot, and with more than a decade growth left which seems to be more than you require.

So personally I would prioritise more round your individual goals and needs rather than tax efficiency if your goal is to retire as soon as possible. If your goal is just to make as much money as you can for security in old age, with enough to retire a wee bit earlier too, just sail along as what you are doing is fine.

PhilB

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Re: Pensions or ISAs in 40s
« Reply #9 on: April 03, 2019, 04:11:16 PM »
This may also be one of those situations where taking out an offset mortgage would be a huge help.  Take it out now and put the cash into an offset account to avoid paying any interest.  When the ISAs run out live off the cash until pension access age then use the TFLS to pay off the mortgage.  Judged right the tax savings from extra pension contributions easily outweigh the arrangement fees and interest on the mortgage.

NorthernMonkey

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Re: Pensions or ISAs in 40s
« Reply #10 on: April 04, 2019, 11:53:42 AM »
Interesting, I'd not considered a mortgage offset approach. I have started a little consulting work to try and save a little more post tax.

 

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