Is there a downside to paying more into pension (if in early 50s)?

[redskytwonight]

DH and I are both in our early 50s. We have a decent amount of savings built up for emergencies plus money set aside to support DC through university. We are are in the fortunate position to be able to put aside money each month into savings.

On the basis that we're not far off the age that we can take 25% of our pensions as a tax free lump sum, is there any reason not to stop paying into savings and put the extra into pensions (defined contribution AVCs) instead? It seems too obvious to be true!

After the 25% tax free, pensions will be taxable. So it depends how much you are going to earn in retirement. If you put your savings into an ISA, you will have no tax to pay. When you take money out.

I think this one comes down to whether you ultimately have an inheritance tax liability. ISAs are in your estate, pensions are not.

At your age and financial situation I don't see a downside. You'll benefit from the tax relief you'll get when paying in so effectively receiving 25/40% extra going into the pot. If or when you draw down on your pension or are in a final salary scheme (which I suspect with you mentioning AVCs) you may have to pay tax but so what? You've had the relief when the money has gone in. I threw money into my AVCs at your age and situation and it enabled me to retire early. I do not regret it!

It seems a good idea to me. Especially if you will save at 40% as you put it in but take it out at 20%. But even if your tax is the same, as you say you have the tax free element

Like others have said, it's a question of pension vs ISA. You could also throw in ideas about whether you also want to just start spending more and/or working less if you have surplus income. All could be equally valid choices.

If you think you'll pay tax at the same rate on money you take out of your pension as income, I don't think there's any difference between putting money into a pension vs an investment ISA, except that the latter 'only' has a £20k annual allowance, so you may exceed this.

The value of the pension will vary, depending on the underlying investments. If you cash in when it's performing well - great! If the value has crashed - not great.

For me it's a balance between the certainty of cash savings (and whatever people say about the eroding effect of inflation, at least the capital isn't going to reduce) versus the uncertainty of investments and risk to capital. There have been periods (months/years) when my investments were worth less than the amount originally invested - never mind inflation - fortunately I didn't need to cash them in at that point

You don’t have to invest within a pension, interest is paid on Cash held within.
It’s prudent to build up a cash / cash-like pot that will be used for the first 2-3 years of retirement, then you don’t have to worry about market downturns, people retiring in the last couple of years have really been stung if not prepared 😉
If someone had say 5-7 years until they want to retire, I would currently recommend a short term money market fund, paying around 5% now that rates have shot up, pretty much as safe as cash.
As said before, if IHT might be an issue, pension is always best.
If you each build up a nice cash sum, each of you could drawdown £16k per year tax free with UFPLS, assuming you retire before state pension.

@BorgQueen are there any specific short term money market funds you would recommend? I’m actually looking to move some of my S&P isa into something a bit safer as earmarking for mortgage overpayment in a couple of years.

We use the Royal London one, very low charge of 0.10%.

DH has it in the SIPP he plans to use for early retirement in around 5 years. I’ve just the crystallised portion of my Sipp to it. I’m also going to use it when my savings bond matures in September, I’ll transfer the cash into my S+S ISA.

Here's a video recommended by another Mumsnetter comparing investing in an ISA against putting your money into a pension. I found it useful: L

In general, for a UK resident, advantages of the pension include income tax relief at the taxpayers marginal rate when the money goes in (40% if higher rate or 45% of additional rate), and usually a lower effective tax rate on that same money when it comes back out, thanks to the 25% portion that can come out tax-free, even if the taxpayer is still in the same tax band after retirement. Additionally, there is an exemption from IHT which can be beneficial if the pension is left to heirs, versus if money in a taxable account or an ISA is left to heirs..

There are also some disadvantages with the pension. First, the government keeps changing its mind about the rules, the allowances, etc. and if we get a change of government we can definitely expect some sort of change in the rules. Also, any money coming out of the pension, including investment gains as well as initial contributions, gets taxed as ordinary income. So if capital gains are earned within the pension, they can end up getting taxed at a higher rate than if those same gains had been earned in a regular taxable account and been subject to 10% or 20% tax instead of 15% or 30% (with those figures already reflecting the benefit of taking a 25% tax free portion). ISAs must be funded with post tax money, but after that, capital gains as well as income earned within an ISA would accrue without any tax at all. Finally, the money in a pension is generally locked up until a certain age, currently 55, which makes it not so bad for a person in their 50s, but also, if pension money comes out, the opportunity to put money back into a pension after that is generally lost, except for a small relatively token amount.