Pensions-unrealistic expectations?

[Monster6]

This is a ‘money in the future’ related WWYD…I’m hoping for some good advice, and maybe a bit of a check-in. I’m mid 40s, in a stable 20yr relationship, 2 teen kids. I find myself worrying about pensions/future money so much these days! With the WASPI women in the news a lot, my thoughts really have turned to retirement age and the completely unrealistic expectations I may have to EVER stop working.
I have about three pensions, totalling £30k, some savings in ISAs etc, probably only about 10k, a joint mortgage which has £80k remaining, on a £350k home. When I started my career after a few false starts I was 28. I paid into a pension, however due to taking years out for childcare and going very part time…I think at one stage I was only able to put in about £40 per month!! 🙈 (full time childcare was so expensive, I made the decision to look after my own kids) I am now self employed and putting in 21% of earnings into a SIPP. To that end, I do expect my pension savings to grow significantly. I just would like to know, any other (younger) middle aged mums (44-46) with this dilemma? What are you doing about it if anything, and could you share some tips please! We do plan to downsize home once kids are grown. We’re also overpaying aggressively so should be MF in 6 yrs.

Because you pay the tax when you remove money from the pension. Suppose you want to invest £1000 of your salary for ten years, and you get 4% returns each year

Scenario 1: You do it in a pension, so you don't pay any tax on the £1000. After 10 years, you will have 1000 1.04^10 = £1408 in your pension. But when you take the money out the pension, you need to pay 20% income tax, so you ultimately have 1408 0.8 = £1184

Scenario 2: You do it in an ISA, so you have to pay 20% income tax. Your £1000 is now only £800. After 10 years, you will have 800 * 1.04^10 = £1184. There is no further tax to pay

You have the exact same amount of money in both scenarios (ignoring the tax free lump sum)

Basically 1000 x 1.0410 x 0.8 is equal to (1000 x 0.8) x 1.0410. It doesnt make a difference whether you pay the tax up front (ISA) or at the end (pension), you still have the same amount of money at the end.

The main advantage of pensions comes when you are able to reduce your tax rate from 40-45% (higher rate tax), or when you can avoid national insurance/student loans.

ugh, the forum keeps breaking the formatting of my posts

The PCLS is quite a big deal though, and is the key benefit difference in your example.
Plus as mentioned, the thresholds where tax rises / benefits reduce / student loans.

@ItTook9Years that sounds like you are bang on sorted. ✔️ 2 Mat leaves was the nail in the coffin for my early career; there was no way I could go back to work full time with 2 high demand kids. At the time of starting our family, my partner already earned double what I made (although still not lots!) with more scope for progression so I guess we did make the decision to invest in his career by default. Going back part time on a very small wage for 4-5 years absolutely impacted my potential. He paid for any childcare we did use (2 full days a week for each child, so 4 days) I guess if I had a Time Machine I’d think of all this 10 years ago but I’m hoping there’s still time…

Whether its a big deal depends on your perspective it bsaically reduces your tax rate from 20% down to 16%. Thats certainly not nothing, but you can argue about whether its worth having your money tied up for decades (compared to an ISA). You are also more vulnerable to changes in tax regime what will you do if basic rate income tax is higher when you retire than it is now (Scotland already has higher tax rates than England, for example).

I dont really look at the UK as a country and get the impression that tax will be lower in 20 years time than it is at present.

But the Op will be investing that 20% or 40% (currently if you're a high earner) tax and that will hopefully be worth more at retirement, at least it should be.

With downsizing obviously house prices change constantly plus there are fees but you do need to get your head round going back down the ladder. For instance is you have enjoyed being in a detached house so you have more peace and quiet could you go back to a terraced? when I look at what’s for sale smaller houses seem so much more expensive.

Sorry I’m also with another poster about your rather raise my own kids comment. But that’s a decision you have made and you have attributed your low pension with it.

Mortgage is only worth paying off if it’s higher interest than return on investment. Mine is 1.59% and it is lower than interest rate.

21% is pretty good. I think you just have to keep up this. I mean there isn’t any trick other than save as much as possible as early as possible.

@ViciousCurrentBun i totally agree. We don’t have a huge house, it’s just in a really good school catchment hence the relatively big price tag. But I do think nice smaller homes cost relatively more

Have you actually looked at what you can downsized to too? I have and there isn’t much I can move to that can release a large sum of money. Don’t forget fees and costs.

I put a lump sump into a pension 15 years ago. If I took the whole lot back as a lump sum, 25% tax free and the remainder taxed, it's doubled in value in that time from what I put in, including the tax relief at the time. Obviously the good old saying, investments can go up as well as down but I dont think that's a bad return in this current climate.

I always compare things as is, that’s all. Given the variable of future tax is so unknown, it could go either way really. State pension might not exist, therefore more of private pension might be available within tax free allowances, but we won’t dive down that rabbit hole.

On downsizing, I feel a bit emotional about that so I am not relying on it. I like the romantic idea of having my children and (hopefully) grandchildren come to stay and our home being the anchor of the family as they scatter to wherever, and for them to look forward to and enjoy coming back to their childhood home.

Reality will bite at some stage of course. For me I would rather not be driven to downsizing out of necessity to but to have choice over when that happens - ie do it in my 80s rather than 60s

@Monster6 I'm 58 so in the final dash to retirement (7 years to go).

I'm currently putting 23% of my salary into my pension. We are also overpaying on our mortgage so that will hopefully be paid off this time next year. Once the mortgage is cleared I will be upping pension contributions to 43% of my salary.

Paying off our mortgage is important to me as our house is currently only in my name and I want to get it into joint names with DH. We are looking even further down the track and thinking about funding care at some point.

Downsizing is a hugely personal decision. We aren't keen to end up in a bungalow as both sets of parents did if we can avoid it. They downsized property but not possessions so ended up horribly cramped.

But the 25% lump sum is tax free? So no tax to pay on the way in, or out? I’m sorry for being dull but I really don’t understand why you’re ignoring that massive benefit.

also pensions normally ( not always) grow more than savings accounts the tax free lump sum is worth a lot also when you start receiving your pension who have your personal allowance before you pay any tax on your pension, so if your pot (approx 600K) is big enough to pay out 20,000 a year you will only be paying tax on 8000 of that, ( plus the tax free lump sum would be approx 150,000 which is not a tiny sum)
but even if a much smaller pot of 200,000 , £50,000 tax free is still not a tiny sum and the annuity of 200,000 would currently be under your personal allowance until you start claiming the state pension too
with savings accounts you can only get £1000 interest a year tax free, obviously there is no tax on ISA's, cash ISA's have over many years much lower ratesof return than pensions and though stocksand shares ISA would generally perform better though just like anything in stock market the value can go up and down

I didnt ignore it, I mentioned it a few times. It effectively reduces your tax rate from 20% down to 16%, which is nice.

Its just a much smaller benefit than the "25% government topup", which is very misleading.

Wrong way around

the money into the pension- now - will have longer to grow, 20 years.

overp the mortgage then paying into the pension will shorten the amount of years left for growth, that you’ll never get back

the op has a loan to value of £80k to £350k so can get good deals as 76% approximately is there’s.

.i think what the PP means about your mortgage being too low.. is most people/ a good proportion in the their 40s are leveraging assets now to create wealth later.

Eg i pay the minimum on a 30 yr term on our house. 30 yrs would take me to 65. No way am i actually paying a mortgage until I'm 65...
We will raise our kids in this house then sell and release the value AND/OR use savings to overpay once we are off the current rate. We locked in on an under 3% rate when we remortgage we will take longest term again. Everything extra goes in pension first then s&s ISAs.
Overpaying the mortgage is fine when savings rates are 4-6% and your mortgage is 9% but for most people it doesnt make long term sense even if your mortgage rate is 5-6% the market outperforms that ( I'm at about 15% annual average over 8yrs on my savings but i accept thats luck/ unusally good) and if you put it into a pension the tax relief added massively outperforms mortgage overpayments if you are any kind of higher rate tax payer.

This isn't quite true. My marginal tax rate is 45% my pension goes in before I am taxed. I very much doubt my pension will all be taxed @ 45% and the lump sum is tax free.

Stocks and shares ISA. And into a trust such as Scottish mortgage trust
( SMT )
google this and compound interest calculator

Yeah thats literally what I said in the second paragraph

ISAs a person can access anytime
ISAs are tax free

Pensions have restrictions related to age
about when a person can access them
Current age is 55 going up to 57