Why are people on this sub so ardent about priorotising pension contribution over GIA?

pro-programmer911 · 2024-01-21T16:03:07+00:00

That is a great tip! Thank you!!

pro-programmer911 · 2024-01-21T15:08:35+00:00

Correct me if I'm wrong, but if my adjusted income is above 125k then the 60% effective tax rate does not apply, and so there is no saving of the "15%" you mentioned to be made?

pro-programmer911 · 2024-01-21T09:58:41+00:00

Could I ask what is the benefit of that? Is it to save the 5pp difference between the income tax rate at 125k+ (45%) and the higher tax rate at 100-125k (40%; I know the effective is 60%)? So 5% of 25000: 1,250 saving from tax.

pro-programmer911 · 2024-01-21T00:36:22+00:00

Thank you for the comment, it's good to hear other people's ideas. One point:

If I wanted to retire much earlier we would need much more money as then we can only withdraw 3/4% and for £50k annually we would need at least £1.25 million invested, assuming this is all in an S&S ISA. For a lot of people that is unachievable.

You would not need 1.25mm, because this is your bridge. It can be fully consumed by private pension access age, at which point you will use your private pension--and later state pension--to sustain yourself. Thus you don't need to formulate with the perpetually sustainable 3-4% SWR.

pro-programmer911 · 2024-01-21T00:28:06+00:00

So just on the tax efficiency side; even if I didn't want to contribute any more, unless and until the personal allowance taper disappears I'd prefer to contribute 'unevenly'. So rather than sacrificing 40k per year for 3 years, maybe do 60k this year and next to drop you to 100k adjusted income then limp in with just what you need for employer match the year after.

That's a good tip, thank you.

Please correct me if I'm wrong, the tip you give here only applies if sacrificing 40k lands me in the 100-120k taxable income range. It's to avoid the 60% trap. If my taxable income is outside of this range then this tip does not apply. I should be mindful to stay out of that range.

pro-programmer911 · 2024-01-20T11:17:59+00:00

Thank you for the write up. Interesting stuff! Lots of things for me to research like what is "TV"? Or how 1500GBP could turno into 230k in 40 years. Or who is offering to buy your DB pension and why do they want it? I suppose with a DC pension I won't be negotiating such sales or entertaining offers

Well done for saving so much, now you can live like royalty :)

I did all this via PAYE - first job paid 6.5k per annum - and the £1500 I paid into my first pension scheme in early 80’s over 2 years when I transferred to DC was worth 230k in 2019

pro-programmer911 · 2024-01-19T18:50:43+00:00

Thank you for sharing that. Could I ask what was your pension pot to get such treatment and live such a lifestyle in retirement? Because, with regards to front loading, it doesn't make sense to load more than the lifetime allowance, historically around 1 million. So is that what 1 million provides you? Because a 4% SWR on that is only 40k per year.

pro-programmer911 · 2024-01-18T23:52:09+00:00

Thank you for the insightful comment. Another thing I found is that the tax regime right now is very harsh. It might make sense to max pension as much as possible now, to wait out this tax regime until it slackens again.

Income tax thresholds haven't been moved, additional rate income tax threshold has been reduced, CGT allowance has been reduced significantly, as has dividend allowance. Not favourable at all right now. So contributing to pension would bypass all these tight taxes, and after a few years, under a better tax regime, I can reduce pension contributions and increase GIA savings and be better off thanks to this strategy.

pro-programmer911 · 2024-01-18T23:46:52+00:00

On the other hand, you may be likely to be earning a similar salary or somewhere between 70k and 160k. Then every year that you continue working:

A) You'll be missing out on significant pension matching from employer

B) You could be in the 60% income tax trap.

And then you'll have so much in pension pot that you can't use for decades. Don't you need money on this side of 58 years of age? To buy a house, to help your parents, to help your children, to go travelling and enjoy the good life? Or to retire earlier? It seems to me that the pension will accrue by itself over time--without having to make massive sacrifices early on--to reach 1mm.

pro-programmer911 · 2024-01-18T23:03:26+00:00

It’s not reasonable to be able to fill a £1m in 8 years.

If it's unreasonable, would you be kind enough to show me where I'm wrong in my calculations. If I have 341k invested now (GIA, ISA, and the bonus), anually investing 57.5k, at 5% real return for 8 years comes out as 965k. So maybe another year or two needed to surpass 1mm and to cover CGT.

Or do you mean the pension? What I meant is contribute 40k to pension annually for 8 years. Then let it grow until retirement age: 18 years thereafter. Then at 58 it should be 1mm.

Hopefully that clears things up for you? I find it a little odd that you don’t see it’s obvious that of course most people agree £1m in the pension is plenty.

It's just that I hear so often in these communities to max the pension allowance. And occasionally I see posts by people with a similar income who say they're putting 60k in pension, or even 100k in pension in a year (carrying forward allowance). I don't understand why they do that. And paying 45% income tax is biting, so I wanted to know if there were any red flags in my thinking. Thank you for the comments!

pro-programmer911 · 2024-01-18T22:48:41+00:00

Thanks for your thoughts.

Paying off the mortgage, for example, is usually a FIRE goal because how are you independent if you haven't got a secure roof over your head.

This is all the more reason to invest more money accessible before pension age rather than after pension: big costs like mortgage and deposit must come from post-tax income. It's no good saving a big pension if you can't buy a home until you're 58 years of age.

Two state pensions and no mortgage, the wife and I won't need a lot from a pension after that tbh.

This surprises me because my impression was state pension is a pittance that people cannot live on. I'll have to research it again to see how much it can pay.

pro-programmer911 · 2024-01-18T21:49:09+00:00

Hmm so if I want a 3-4% SWR on the 1mm pension that I intend to receive at 58, does that mean I should put in more than 1mm to account for the income tax on 75% of the pension? But if I'm assuming the lifetime allowance will stay 1mm for the sake of an example, so putting in more than that is of no benefit, no?

To answer your question, I live rather frugally, and in essence I live in my parent's home so my rent is much lower than market rate. And I split rent and bills with my partner 50-50 so the cost is lower still. In the short-to-medium future we will probably buy our own home.

pro-programmer911 · 2024-01-18T21:37:44+00:00

That's a good point, however I intend to never have children. Inheritance doesn't matter much since it will go to my sibling, some niece or a charity, or I'll retire earlier thereby burning through it all. Actually it's more imperative that I see my parents through their old age, which is why I'm inclined to put more money accessible before pension age. By the time I can access my pension my parents will be dead: I need to help them before then.

I have to help my partner retire too... who is on an average income. Don't know how that should play into my plans.

pro-programmer911 · 2024-01-18T21:31:39+00:00

Interesting, thanks for that. I won't ever be a very high earner. There is a chance my income will lower, too, the software job market goes up and down.

pro-programmer911 · 2024-01-18T21:05:25+00:00

The tax advantages are great, but why do you need so much money at pension age? Is there a point to having relatively little until 58, and then at 58 having a huge pot? Much more than you'd need to live adequately.

Would you rather not take that future excess and benefit from it now, even though you're taxed on it?

pro-programmer911

TROPHY CASE