How much to put into a UK pension as a foreigner?

[shimrod]

I'm a foreign national who just started working in the UK, and I need to decide how much to put into my workplace defined contribution pension.

The consensus seems to be that even though there's no access to a UK private pension before 55 or likely later, it's simply too good of a deal to pass up maximizing the employer's match.

However, my employer lets me take the unused portion of their contribution as cash. Effectively, my salary is higher, but there's no employer match, all contributions are from my side ( + tax relief).

Being a higher rate (40%) tax payer, tax relief still makes it seem attractive, but as a foreign national unsure whether I'll be living in the UK in 20 years (when I'll be 55), I wonder whether I should account for additional risks in tying up money in a pension.

What are your thoughts?

[Playing with Fire UK]

Hey Shimrod,

I don't know about the tax implications with you being a foreign national; I'll assume that you do.

I'm going to assume you have no brutal high-interest debt that you should be paying down.

However, my employer lets me take the unused portion of their contribution as cash. Effectively, my salary is higher, but there's no employer match, all contributions are from my side ( + tax relief).

If I understand this right you get the employer match either way, but you can take it as cash now (after tax and NI?) if you don't want to put it in the pension?

Do you have a FIRE date? If you need the cash for FIRE before 55 I'd limit what goes into a pension; you can probably calculate how to split the difference between non-pension and pension funds. Unless you are FIREing imminently I'd try to put all 40% pay into a pension.

If you aren't getting a benefit from the employers' NI savings I'd look into getting a SIPP rather than a company pension.

One thing I would think about, if you are thinking that you may not retire in the UK, is investing and hedging so that you aren't at the mercy of the FTSE 100 and GBP. This is the only thing (apart from tax issues making it more difficult to get the money out tax-free/favourably) that would make me pause.

[shimrod]

If I understand this right you get the employer match either way, but you can take it as cash now (after tax and NI?) if you don't want to put it in the pension?

That's exactly right.

Do you have a FIRE date?

No, too many variables right now, just trying to save as much as I can without denying myself too much.

If you aren't getting a benefit from the employers' NI savings I'd look into getting a SIPP rather than a company pension.

I'm not exactly sure what you mean here, but I think the answer is yes? Whatever I take as cash of my salary + employer's contribution, I pay NI on it, whatever I put into the workplace pension, I pay neither tax nor NI on it.

Even if it were otherwise, what's the benefit of a SIPP over a company pension? More control and flexibility?

[Playing with Fire UK]

It varies depending on your company pension.

I can't take my company pension and continue to work. I can draw from my SIPP and continue to work. The choice of funds in my pension are much more limited and the fees higher. There is one global tracker option and it has no developing world. I couldn't hedge currency in my company pension but I can in my SIPP.

For the NI, you will be paying 2% on NI for most of your 40% tax pay. There will also be employers NI (of I think ~13%); if they pay you salary they will pay the employers NI, but into a salary they won't. Employers sometimes share part of the 13%.

I rate the flexibility of my SIPP above the 2% NI, but not with the employers NI. Your choices may be different.

I also don't have an exact FIRE date, but I know that I plan to spend some time in FIRE before the age of 55 (or whatever), so I can't put all of my cash into my pension. I'm planning on balancing the pension and non-pension so that I can spend down my non-pension stuff as my pension grows.

[shimrod]

I can't take my company pension and continue to work.

Even for another employer?

For the NI, you will be paying 2% on NI for most of your 40% tax pay. There will also be employers NI (of I think ~13%); if they pay you salary they will pay the employers NI, but into a salary they won't. Employers sometimes share part of the 13%.

Ah, right. I don't get that.

I also don't have an exact FIRE date, but I know that I plan to spend some time in FIRE before the age of 55 (or whatever), so I can't put all of my cash into my pension. I'm planning on balancing the pension and non-pension so that I can spend down my non-pension stuff as my pension grows.

One thing I don't like about my company pension is that it doesn't allow drawdown, and that seems to be the superior option to an annuity unless you expect to live to 95. (Or am I underselling annuities?)

But that shouldn't matter too much, because you ought to be able to transfer to another pension provider before taking your pension, one that allowed drawdown if that's what you wanted, is that right? Would transferring also get around your problem with not being able work and draw on your pension?

[MMMaybe]

I would put it in the pension to reduce tax. But you'll need to accept that you will not get your hands on it until 55. Its pretty hard to transfer it overseas. I have a small pension locked up here, dating back to when I worked in the UK years ago.

[Playing with Fire UK]

I think the terms are that I mayn't work for someone else, but once they start paying the pension they probably can't do a lot about it. I could transfer it out, but the penalties are pretty steep while I'm working for this employer. I'd also like to have the option of dropping right down to one or two days a week while taking a pension and working here. It probably isn't an option I need. Food for thought, thanks.

I don't like annuities, but they are right for some people. If your costs are £Xk a year and increase with inflation, and you have no room to reduce your costs and are a nervous type; an annuity for £Xk could be a great option. If you have the ability to take more risk then you get to keep the upside. If you have strong feelings about leaving an inheritance or providing an annuity for a spouse that could also impact your choice.

Depending on how much will go into your pension while you are in the UK, it could be a real pain to be getting a monthly payment of £10/mo and paying forex costs or needing to hold a GBP bank account overseas for the payments to go into.  If you will qualify for a UK state pension, you might be doing this anyway (did it go to 10 years NI contributions?).

[shimrod]

I would put it in the pension to reduce tax. But you'll need to accept that you will not get your hands on it until 55.

I'm OK with that, I expect to live and spend past 55, so £166 + growth then vs. £100 now seems tempting, I'm just curious how worried I should be about the governments and the insurance providers changing the rules on me in the meantime.

Its pretty hard to transfer it overseas. I have a small pension locked up here, dating back to when I worked in the UK years ago.

Sorry, can you elaborate, what do you mean by "locked up"? Are you saying you're unable to receive your pension from overseas, or that you're unable to take your UK pot and consolidate it with your other ones?

[shimrod]

I don't like annuities, but they are right for some people. If your costs are £Xk a year and increase with inflation, and you have no room to reduce your costs and are a nervous type; an annuity for £Xk could be a great option. If you have the ability to take more risk then you get to keep the upside. If you have strong feelings about leaving an inheritance or providing an annuity for a spouse that could also impact your choice.

I agree in principle, but it seems to me that the prices are extortionate.

http://www.sharingpensions.co.uk/annuity_rates.htm

At £100,000 for £4,025 per year, you'll need 25 years to break even, discounting any growth whatsoever.

I'm new to planning for my pension, so I might be misunderstanding this, but it seems to me that you could well be better off with money under the mattress than with an annuity, if given the choice.

So I wonder whether I can indeed expect a choice in 20 years, and if I can't, whether £100 now might not be better after all than £166 with which to purchase an annuity.

Depending on how much will go into your pension while you are in the UK, it could be a real pain to be getting a monthly payment of £10/mo and paying forex costs or needing to hold a GBP bank account overseas for the payments to go into.  If you will qualify for a UK state pension, you might be doing this anyway (did it go to 10 years NI contributions?).

It's 10 years as far as I know. I have no idea whether I'll qualify, depends on whether the social security agreements with the EU countries are kept.

[MMMaybe]

Sorry, can you elaborate, what do you mean by "locked up"? Are you saying you're unable to receive your pension from overseas, or that you're unable to take your UK pot and consolidate it with your other ones?

Its locked up, in that you can't withdraw it until 55. Depending on your home country, it can also be very hard to transfer the funds from the UK into a local pension fund. So, mine is going nowhere!

[Playing with Fire UK]

http://www.sharingpensions.co.uk/annuity_rates.htm

At £100,000 for £4,025 per year, you'll need 25 years to break even, discounting any growth whatsoever.

And that is for a level pension with no growth, so the £4025 you get in 25 years time will buy you less than today.

The issue with annuity pricing is now that it is very optional to buy an annuity, there is more self selection with who buys them. So people retiring in poor health (with lower life expectancies) are far less likely to be going down that road.

It could well change by the time we get there.

[Moonwaves]

Sorry, can you elaborate, what do you mean by "locked up"? Are you saying you're unable to receive your pension from overseas, or that you're unable to take your UK pot and consolidate it with your other ones?

Its locked up, in that you can't withdraw it until 55. Depending on your home country, it can also be very hard to transfer the funds from the UK into a local pension fund. So, mine is going nowhere!

Yep, where your home country is can make a difference to your planning as well. I'm not sure how they're going to deal with it post-Brexit but currently, if you were to move to another EU country, you would be able to transfer the time you made pension payments in the UK over to count towards requirements for minimum time paid in in another EU country. There may also be similar agreements in place with some other countries. So don't just look at things from a UK point of view, check things out from your home country (or country you expect to settle in) point of view as well.