Is there such a thing as too much money in a pension?

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I've been reviewing mine and my Husband's collective plans for retirement. We are late 30s and are projected to have enough to sustain our current living standard (have accounted for inflation) thanks to compounding, at the current state pension age of 68 for us. The mortgage would be paid off and I haven't factored in receiving a state pension.

Savings are diverse and a mix of DB and various pension funds and a SiPP.

We are comfortable financially but do a lot of work budgeting and do make hard choices and sacrifices. Lucky enough to go on 1 holiday a year and run two cars. We will also likely downsize in older years to release more capital. Child does lots of expensive extra curricular and we plan to continue to invest in them in this way as well as saving for them.

I'm struggling to justify maintaining the high level of pension savings we make given the limitations on pensions withdrawal ages. We could also increase our current lifestyle. We don't plan on moving anytime soon and don't need to so this would likely be an extra holiday or experiences for us as a family. We have adequate but not extravagant savings plans for our child.

Anything we contribute from now to pensions will be towards retiring early.

I'm keen to hear from those who have retired. How do you know when you have the right balance between living in the now and enjoying life and making sure you have enough for the future?

I don't won't to live a more luxurious retired life at the expense of present life if I can avoid. I'm unclear how well balanced we currently are and projections are not guaranteed. We are still at the point where if our income stopped, after a year this would be an issue.

Does anyone think they saved too much or did anyone misjudge it and end up short? Should I focus more now on S&SI even though we'd lose a huge amount of tax relief as one of us is a higher rate tax payer? Did you realise that you needed access to cash with fewer restrictions?

On the annual leave thing, we also have no family support. My kids love their holiday clubs though - it’s not like they are in prison! They’re playing with their friends all day and doing activities we’d never be able to facilitate at home. Obviously not great if they have to go all summer, but most working parents have a balance and I don’t think should feel bad about it.

The balance between couples’ pensions is important - ideally you want them to be similar. Mine had a lot more in it than DH’s, so we’ve diverted part of his ISA into a LISA this year. If you’re under 40 you can still open one, can save up to £4k/year (out of ISA allowance), government tops it up by £1k. You can only pay in until 50 and then can’t access it (without a charge) until 60.

The tax break isn’t lost tho, it’s actually pretty good as you’ve gained compound interest on the 40% tax you would have paid at source for potentially a few decades. So paying the 40% when drawing your pension is still a pretty good deal IMO.

Thats not to say you shouldn’t also be filling up your S&S ISA allowance every year in your position OP

But why do you care about minimising it? In this situation, not to be too callus, but you’re dead. Unless it’s going to make a huge difference to your kids surely just pay the tax? Your kids are already getting monthly help now and will presumably be getting a good chunk as well when you die. I don’t get the mentality of protecting it from a rightful tax. And sorry I’m not picking on you personally, it’s a general theme I see on here that I just don’t understand. Either spend it and enjoy it. Or don’t

@KarmenPQZ
We want to minimise the tax our DC pay on our death as much as possible for several reasons, we’d rather they weren’t hit with a potential 60% tax bill so we plan to look at ways we can minimise that for them.
We are spending our money but honestly, we could spend more and further enjoy our retirement while we still have our health and our DC will still get healthy amounts each.
Personally, we don’t see anything wrong in trying to minimise their potential tax bill when tax was paid on the earnings whilst working, tax is being paid on pension income and our DC are tax payers.

Most people will want to minimise IHT and not pay potentially hundreds of thousands in additional tax. Particularly due to the point above which is that the IHT has to be paid before the property is sold.

We are prioritising annual leave together even if that means more holiday camp. I’ve also bought an extra week to give a bit of flex. This year we’ll have 4 weeks off together which we’ve not done before, one week off each re childcare and then the rest camps or the odd day at home while wfh. The latter I’ve found works better in the winter but I’ve found it harder in the summer.

On pensions, we’ve had the same dilemma. We will inevitably be paying 40% to get some of it out of my husband’s one. However, we have modelled isa v pension and it is still worth paying in at the moment for the company contribution. However we will need to be prepared to pay a higher rate on withdrawal and not leave money to be eaten by inheritance tax plus marginal rate of kids (which feels very punitive).

I wouldn't favour an all your savings in your pension approach.

The chances of a future govt coming along in the next 30 years and changing the way pensions work seem very high indeed to me. Making unused pension savings subject to IHT was a huge change recently.

Pensions are good because money goes in, up to a limit, pre-tax. But they are less good because you don't really have control of your own money so it is more vulnerable to legislative change...

ISAs are attractive because the money goes in post tax (less good) but income and capital gains when you realise the ISA are tax free.

I'd advocate a balanced approach.

I’d keep saving. As a poster pointed out the market is unpredictable. I watched 50 something coworkers lose half their pension savings during the crash of 2007/8 when working in Florida. The value of the homes also dropped by 30-50% in a matter of months. Yes, some areas bounced back but many of my former coworkers had to delay retirement until 70 (for them retirement age was 57) You can think you are on track and then something happens.

All your projections are going to be based on average inflation, average pay raises and the ability to work until you are state pension age.

Any of these could be hit by disaster. One of you could become ill and unable to work, or you could find your job made obsolete or be made redundant and then find no one wants to hire a 55yr old and that’s it, you’re forced into early retirement.

Look at the assumptions in your projections and start running the numbers as if a disaster had happened- like you or your husband or your child totally disabled and the other can’t work FT in a demanding job due to caring responsibilities. Run numbers for inflation at 8%. Run numbers for if the market crashed and you had only half your pot at age 59, where would you be for retirement?

There are many calculators online you can use to stress test your pension savings plan.

@KateSixer The isa allowance each year is much less than the pension allowance, but yes, a balanced portfolio.

No, if you save 40% tax on the way in but pay 40% tax on the way out, there's no tax advantage over putting the money in an ISA * if you're over the maximum allowed as a 25% tax-free lump sum. Once you're over the maximum TFLS, you'd be better putting it in an ISA so you can access that money at any age.

*Here's the Maths!
Assume £10k gross earnings (£6k after 40% tax). If you put it in a pension your £6k is grossed up to £10k. Let's say your investments double to £20k. You then pay 40% tax on the way out, so you have £12k from your pension.

If instead you put it in an ISA, you put your £6k after-tax earnings in. It doubles to £12k and you take it out tax-free i.e. the same amount as from the pension.

But OP isn’t over her tax free lump sum is she?

Plus with a pension if you’re an employee you also get an employer contribution.

ISAs are good but also limited to £20k

I was paying loads extra into my pension with the plan to retire at 55. The date has already moved on to 57 with no guarantee it won't change again. I'm now making sure I max out our ISA's so can use that to live on if we still decide to finish work at 55.

Something else to consider, once you reach 80, you'll probably not spend as much so even if you subsidise with savings in the earlier years that would probably be okay as you'll be unlikely to need the savings later on. (This is just based on my experience with older relatives, 80 seems to be the cut off for them becoming 'elderly'.)

That’s what I did. Felt I had enough in my pension so only paid in the minimum that my employer would match in the later years. Saved into my ISA instead that has paid me a salary from age 54 to 55

Did I misread? I thought it was £3m in pensions (presumably split between her and her DH.)

Something else I’d flag is that some pensions have a protected pension age which means you can access them earlier than 57, if you started paying in prior to Nov 21. I have one that I can access at 55 regardless of what the govt does, so check the details.

No I think she was saying that if she contributed at the current rate for the next 30 years then with growth they will have £3m in pensions at age 68.

So I think the talk of £3m is a little preemptive at the moment because the likelihood is the pension rules will have changed and in 30 years time £3m isn't going to be worth what it is now.

I do agree though that pensions are not as tax efficient as people think if they will be paying 40% on the way out but the combination of

1. employer contribution
2. 25% tax free (to £268k)
3. personal allowance and basic rate tax bands on both the input and output years

make pensions the first port of call.

If you're in a position where you have hit/are approaching the £268k then other options need to be looked at. If you're not getting an employer contribution then the restrictions around pensions mean they need more careful thought.

I've had to take detailed advice on this recently since I've hit my £268k tax free limit at age 52.

ISAs are obviously an extremely valuable tool and if you can put money into a stocks and shares isa then you should do. Cash isas are massively eroded by inflation and so the "tax free" status of the interest you earn is not as valuable as it looks (although better than a normal savings account where you will also lose some to tax).

Generally the recommended order of savings is:

pensions
stocks and shares isa
cash isa
savings account

premium bonds are tax free if you win anything but they are a poor investment for most people unless you are very lucky and win big. You might be lucky and do better than if your money was just in a normal savings account and subject to income tax on the interest but you might do far worse. They're a better option for top rate or higher rate tax payers who will pay lots of tax on savings interest than they are for someone on basic rate tax who would be far better off putting their money into a savings account.

Thank you @Era that's all very clear.

We are in this position. DH and I are in our 70s, probably under the IHT thresholds with house, pensions and ISAs, and hadn't touched our pensions as we didn't need to. So, about a year ago, we started drawdown. Each month we each take a lump which us 25% tax free and 75% taxed, and put it into ISAs. Also trying to keep below the 40% limit and keep the number of accounts low to keep it simple for our kids when we die. Problem we have is the pensions have performed well this year, and instead of reducing are still worth around the same as when we started to drawdown. We dont live frugally, but want to ensure we have enough to cover care and medicak costs should it be needed. Dental implants on the horizon so that will put a dent in it. Nice problem to have.

We use a mix of cash and SnS ISAs, but due to our age, more in cash ISAs. This year we put the max into fixed cash ISAs with inflation beating rates, from our premium bonds account. Will build up PBs with a view to having the full ISA allowance at the start of next FY. The PB is also our emergency fund. We get wi s most months, but average around 3% over the year, so not brilliant. At the moment we have a pretty even split between our house value, Stock market savings in our pensions, and cash in ISA and PBs, so we feel we are well balanced.

£20k per year. They build up nicely over a few years.

My DH and I prioritised paying into pensions as we were always rubbish at saving and this way couldn’t touch the money plus it had the biggest income tax incentive.
We retired 4 years ago at 55 with joint points of 1.5 million. We’ve spent loads and still have that amount left, we have an amazing lifestyle. We do pay a lot of tax and I’ve never thought about inheritance tax.
When our DC were younger we switched to an interest only mortgage so we could enjoy multiple holidays each year with them and fun stuff each weekend.
We haven’t taken the most conventional financial route but it’s worked for us.

Further to my previous posts, DH’s pension is, despite us taking from it every month for 3 years, is worth a more than it was when we first started taking from it. We’ve also taken several 000’s from ISA’s, that have regained what we’ve taken. I started taking my 2 occupational pensions this year but they basically top up what I take from savings for my day to day needs (nails, haircuts, clothes etc with me paying for the occasional lunch or dinner out).
I fully appreciate this is very much a first world problem and a fantastic position to be in but as I’ve mentioned earlier, it is likely to cause problems for our DC further down the line and I haven’t even factored in state pensions for us both in 4 & 5 years time, assuming we’re both still living then.
We definitely need to take financial advice beyond what our IFA gives us on a regular basis.

Please can I double check your list here. Are you saying a third of your worth is in house, a third in the stock market. And a third in cash ( isa and PBs).

just curious not critiquing

If DC are old enough to not be hard work, you don’t have to all go on holiday together. If you’re on leave, you can have an adventure just the three of you. We always had a family holiday, but DS and I first had three days of theatre in London without (now) xh when ds was 4. Dh did similar on my working weeks.

Note - it was lockdown, not independent holidays with ds, that killed our marriage.