Should I Maximise Pension Contributions or Not?

F

fungie

Registered User
Messages
6
I'm unsure if I should maximise my pension contributions. On the face of it, it seems like a no-brainer due to the tax breaks but maybe it's not always the optimal thing to do.

I'm 30 years of age, with a good job and a mortgage. I overpay the mortgage as much as I can (10% due to fixed term) but I will pay off a lump sum when the fixed term ends before either fixing again or whatever is the best option at the time. What I've done previously is give about 10% to my pension directly from payroll as well as company contributions, then the year after, if I have the money and it isn't required for any other purpose, give the additional 10% against the previous tax year. I've just done this for 2019. Does this seem reasonable going forward? I may want to start buying some stocks too, probably index funds or ETF's (I'm aware of the tax implications), I'd only do this with spare money after maximising pension contributions for the year.
 
Hi fungie,

Without knowing your full financial circumstances, it's hard to answer the query fully. Have a look at the Money Makeover section here on Askaboutmoney and you'll see some of the other information that would be useful to provide to get a more comprehensive answer. For example, it would be useful to know if you have a rainy-day savings fund, if you have future savings needs that will arrive before you retire, e.g. kids' education, trade up the house etc. If you have other short-term debt or credit cards you should probably clear them off first. (My impression of you from your post is that you don't!)

There's also the question to be considered of what your tax position is likely to be when you retire. If your pension is already likely to push you into the high rate of tax in retirement, then the argument is not as strong in favour of continuing to max out your pension contributions, compared with a position where you're paying 40% tax now but will be on 20% in retirement.

If you're looking to buy ETFs or shares, you can do that within the pension if you want. You can set up an AVC PRSA with a provider that facilitates self-directed trading and use the fund to buy your shares and ETFs. In doing so, you don't pay Capital Gains Tax on gains, Income Tax on dividends etc. On the other hand, you can't access such funds until you retire and the eventual proceeds may well be taxed when you draw them out at that time.

Regards,

Liam
www.ferga.com
 
Hi fungie

The main issues are covered in this thread. It's a long read, but it's a very important decision so it's worth doing a bit of research.

Key Post - Pay down your SVR mortgage before starting a pension, but don't leave it too late

Summary of thread's conclusions (but it's worth reading the thread in full, as differing views are discussed) 1) If you have a cheap tracker mortgage, you should not pay it off early. Putting any spare cash into a pension fund(or some other investment) would be a lot better. 2) If your...
www.askaboutmoney.com
 
LDFerguson said:
Hi fungie,

Without knowing your full financial circumstances, it's hard to answer the query fully. Have a look at the Money Makeover section here on Askaboutmoney and you'll see some of the other information that would be useful to provide to get a more comprehensive answer. For example, it would be useful to know if you have a rainy-day savings fund, if you have future savings needs that will arrive before you retire, e.g. kids' education, trade up the house etc. If you have other short-term debt or credit cards you should probably clear them off first. (My impression of you from your post is that you don't!)

There's also the question to be considered of what your tax position is likely to be when you retire. If your pension is already likely to push you into the high rate of tax in retirement, then the argument is not as strong in favour of continuing to max out your pension contributions, compared with a position where you're paying 40% tax now but will be on 20% in retirement.

If you're looking to buy ETFs or shares, you can do that within the pension if you want. You can set up an AVC PRSA with a provider that facilitates self-directed trading and use the fund to buy your shares and ETFs. In doing so, you don't pay Capital Gains Tax on gains, Income Tax on dividends etc. On the other hand, you can't access such funds until you retire and the eventual proceeds may well be taxed when you draw them out at that time.

Regards,

Liam
www.ferga.com
Click to expand...

Thanks for your reply. Yes we have approx 8 months rainy day fund which assumes both of us lose our jobs simultaneously. This is unlikely as my partner is a doctor. While I could lose my job, my skill set is in high demand but a risk nonetheless. We've also the money already to pay wedding and honeymoon next year in addition to rainy day fund. We have no short term debt and already overpaying mortgage but are constrained by fixed term rules but will do a lump sum of 15-20% of mortgage in 4-5 years time. We only bought the house a few months ago so moving would be 5 years minimum, so the cash for lump sum could be used for deposit on new house if we choose.

I would say that I will be paying the high rate of tax on my pension but my thought process is to take advantage of my age (30) and compound interest since I can afford it. If my pension pot looks like it may be too large in 10 years I can divert away from it. I'm not a big fan of putting all eggs in one pot re neglecting pension for paying off mortgage early or vice versa. I think I'd rather do both and any leftover invest in non-pension related stocks/funds etc.
 
Brendan Burgess said:
You should check what the penalty is for paying more than 10%.

It might be a lot less than you think.

Brendan
Click to expand...

I wasn't aware you could? I know you can break the fixed term for a fee which can be large or small depending on interbank rates etc but didn't know you could pay a fee for more overpayment. I'll have to look into it to see if it worth it.
 
Hi fungie,

The best approach is as follows in my view:

- Firstly, maximise personal contributions

- Then overpay mortgage (assuming it’s variable or fixed with an option to overpay without penalty)

- If your mortgage is cleared, invest in your own name

Best of luck,

Gordon
 
Gordon Gekko said:
Hi fungie,

The best approach is as follows in my view:

- Firstly, maximise personal contributions

- Then overpay mortgage (assuming it’s variable or fixed with an option to overpay without penalty)

- If your mortgage is cleared, invest in your own name

Best of luck,

Gordon
Click to expand...

This seems pretty reasonable.
 
You must log in or register to reply here.
Back
Top