How much do you put in your pension?

[Fred Bloggs]

And this epitomizes why I don't have faith in a traditional (i.e. 'safe' pension)... you put away £500k and then hope that you can get 4% output from it when you're retired. £20k a year, which will just about pay for your gas bill and food from Aldi. Any less than 4% and you're really stuffed.

You've got to be more creative, especially when the government is doing everything in its power to stop you from having a comfortable retirement.

Drawing down 4% is thought to be sustainable indefinitely. And taking the 25% tax free lump sum into account, the pension income is taxed effectively at 15%. And you can leave the pension pot to your spouse and they can leave it to the kids. All free of IHT as it is outside your estate. If you only draw ~4% a year income, the capital (should) remains untouched and may even grow in value. Not too bad considering you paid into it with money that otherwise could have been taxed at more than 40%. As ever, you pays your money and etc......

[Andy Hallett]

Drawing down 4% is thought to be sustainable indefinitely. And taking the 25% tax free lump sum into account, the pension income is taxed effectively at 15%. And you can leave the pension pot to your spouse and they can leave it to the kids. All free of IHT as it is outside your estate. If you only draw ~4% a year income, the capital (should) remains untouched and may even grow in value. Not too bad considering you paid into it with money that otherwise could have been taxed at more than 40%. As ever, you pays your money and etc......

I thought that the drawdown pension got taxed when it passed to kids? Will check, It still beats the hell out of an annuity which dies with you.

The general rule when starting a pension is to take the age you start it, divide by 2 and that is the percentage of your salary to put in.

There are some smart ways to use pension savings, especially if you are just over higher rate, 100k (where the effective rate is 60% after personal allowance tapers off) or top rate.

Given I use my real name probably not right to disclose my pot just in case my wife ever googles me.

[Fred Bloggs]

I thought that the draw down pension got taxed when it passed to kids? Will check, It still beats the hell out of an annuity which dies with you.

The rules are different now. Annuities make no sense now IMO.

[Pegasus]

Pension approach:
1. Pay all £10K into your pension. There's no tax.
2. Invest it in pretty much anything you want except BTL.
3. At retirement, take 25% of the original £10K AND 25% of any investment proceeds over the years, tax free.
4. With the rest, buy an annuity or use drawdown. It will be taxed at your tax rate in retirement, which is much less likely to be higher rate band than now. If you put your non-pension investments now into ISAs, much of your annuity / drawdown will also be tax free due to the personal allowance.

Thanks WiB. That is a very good explanation. Can you please also clarify what are the rules around drawdown and inheritance? (Mid-30s, no pension contributions yet, but plan to start this year)

Many thanks.

[Fred Bloggs]

Thanks WiB. That is a very good explanation. Can you please also clarify what are the rules around drawdown and inheritance? (Mid-30s, no pension contributions yet, but plan to start this year)

Many thanks.

Check out the excellent free guides available at Hargreaves Lansdown.

[mudskipper]

Thanks WiB. That is a very good explanation. Can you please also clarify what are the rules around drawdown and inheritance? (Mid-30s, no pension contributions yet, but plan to start this year)

Many thanks.

If you're mid 30s, you can't count on things still being the same when you get to retirement age. All you can do is base it on what makes sense today (and tax free pension contributions do make sense) and wild guesses on what might happen in the next 30 years.

[Lance]

a)What would be a reasonable amount to put in each so that the pension actually amounts to something (I'm 34), roughly equatable to what a permie on £40k might be likely to contribute?

You're young so no need to go mad. Say 10%, so £4k a year. And STICK to it every year....
If you do it monthly then you have the advantage of getting in low when the price is low. There's a name for that but I can't remember it.
I don;t do tat as I see what's left in the company at year end and decide how much corporation tax I want to pay.

Put more in if you can though.

With an ISA you're paying tax on the money before you can invest. With a pension you're not and can have 25% of it tax free at age 55.

[kaiser78]

You're young so no need to go mad. Say 10%, so £4k a year. And STICK to it every year....
If you do it monthly then you have the advantage of getting in low when the price is low. There's a name for that but I can't remember it.
I don;t do tat as I see what's left in the company at year end and decide how much corporation tax I want to pay.

Put more in if you can though.

With an ISA you're paying tax on the money before you can invest. With a pension you're not and can have 25% of it tax free at age 55.

It is called pound cost averaging I believe.
£4k a year isn't a lot even for a sprightly 34yr old, although appreciate is dependent on what funds are available.

[northernladuk]

It is called pound cost averaging I believe.
£4k a year isn't a lot even for a sprightly 34yr old, although appreciate is dependent on what funds are available.

Indeed but remember a pension is just one form of planning for the future. Need to take in to account other investments and plans. He may not be able to put more than 4k because he's buying BTLs, paying off mortgage early etc.
I don't think there is an answer to how much to put in a pension. What percentage of my investment money goes to pension might be better. Or how much do I want when I retire and work it backwards?

[Ebenezer]

100% of salary, which has just been reduced from £10600 to £8xxx due to NI rule changes. This leaves the whole of the personal allowance and BR bands free for dividends.

In the past I have made a larger employer contribution just before company year end, been thinking about not bothering this year in the interests of war-chest expansion. My year end is "post-brexit" though, so in the event of stock market armageddon I may (re?)-revise this view.