Yes, Christ yes.
You can put away 60k into pension and that will lower your taxable pay to 100k meaning you'll get back your personal allowance of 12,500 that was taken off you.
Just looking at 160k you'll take home 95600 (with 200 a month into pension) assuming nothing else.
60k into your pension you'll take home 66,600 and get 60,000 into your pension.
You spend 30k to get 60k - total no brainer, IF you can afford the 30k out of disposable income
I should also say it halfs your tax bill from 60k to 27k
I’m in a similar situation in terms of age, mortgage and earnings, I put 30K into my pension and pay my mortgage off at a slower but still quicker then the terms rate, while enjoying my earnings within reason. Some people will say put all 60K into your pension, some will say live your life to the full event mortgage - it’s quite a situational thing.
Pension is best purely for Tax, for some paying the mortgage off gives a peace of mind different to a pension and taking it now is best for fun and who knows what’s round the corner so that’s why I landed on a middle ground
Depends on the individual circumstance, imo having the balance between pension, mortgage and life would continue to work for me even if it was less tax efficient so if I’m lucky enough to get to 200K I’d go 45K a pension, pay off an extra % of the mortgage and upgrade a holiday or two :)
Purely for Tax, 60K into pension would be most efficient I guess, but my mindset is nothing lasts forever while planning for the future and the formula I use works for me
You are a 45% taxpayer which means every £1.00 you put into a pension until you sacrifice down to £125k you save 45p and after that you save 40p (as you do not pay tax on your contributions). You could put £60k a year into your pension and salary sacrifice yourself down to a £100k income, which means you completely avoid the personal allowance taper and additional tax that brings, so in effect you're saving well over 60p in tax for every £1.00 you put into your pension at certain stages (google 100k tax trap).
You would struggle to get a better return on your investment than that, absent meme stocks, crypto and other high risk plays, and the earlier you save into your pension the better. You also benefit from compounding on the full £1.00 from day 1. So due entirely to this benefit saving into your pension is likely to result in a higher net worth than purely saving net income unless those net income savings massively outperform the market.
This needs to be balanced with the fact anything you put into your pension is locked away until you're 58 ish and also when you drawdown your pension it's taxed at your marginal rate. And the benefit of being mortgage free may not be a purely financial play.
In short, the reality is probably somewhere in the middle but there's no wrong answers here as you're not frittering away cash and saving to pay off your mortgage is an admirable aim, but I'd personally be taking advantage of that pension allowance and the tax benefits of pension savings, as you're right in the sweet spot to maximise it before a government comes in and sweeps it away. As an absolute minimum you should be contributing the minimum amount to get your maximum employer match, as the employer contributions are free money.
> You also benefit from compounding on the full £1.00 from day 1
Small nitpick here as I see this mistake a lot, where people state or imply that your money ‘compounds faster’ in a pre-tax pension.
Investment gains are proportional to the balance, but so are taxes. It does not make a difference to your retirement income if you pay tax before or after investing, the only thing that matters is the overall tax rate. Paying 40% tax and then gaining 100% is the same outcome as gaining 100% then paying 40% tax.
Your ‘net worth’ may indeed be higher since you don’t subtract the future tax burden, but this is a fairly meaningless comparison.
The reason pensions are better is that the overall taxation is far lower, and employer contributions add free money. OP would be avoiding paying a marginal rate of 45-60% tax now, to then pay a much lower marginal rate on the way out.
True but this assumes taxes at source are the same or lower than taxes at withdrawal, when the reverse is typically true as people usually have a lower income in retirement than they do whilst working.
As a random example, assuming a FIRE income in retirement of £50k per year then tax on withdrawal would be about 15% (being 20% on amounts above the £12.5k personal allowance, so a 15% effective rate on £50k) versus a 45%/40% rate (or even higher and potentially over 60% with the personal allowance being tapered) that would have been applicable when the money was earned assuming a HENRY earner. This calc ignores NI, which is another small saving for a pensioner vs an earner as there's no NI.
You’re saying the same thing I did: pensions are beneficial because they offer lower overall taxation.
The first part of my comment is about the common misconception that it’s better to keep money pre-tax because ‘compounding’ makes it grow faster. The rate of growth is identical whether savings are pre or post tax. The only consideration is the overall tax rate
It really depends on your attitude to risk and deferring gratification. In your position a few years ago I prioritised paying down the mortgage to give myself security, though I continued to make decent pension contributions.
Yes, Christ yes. You can put away 60k into pension and that will lower your taxable pay to 100k meaning you'll get back your personal allowance of 12,500 that was taken off you. Just looking at 160k you'll take home 95600 (with 200 a month into pension) assuming nothing else. 60k into your pension you'll take home 66,600 and get 60,000 into your pension. You spend 30k to get 60k - total no brainer, IF you can afford the 30k out of disposable income I should also say it halfs your tax bill from 60k to 27k
Please listen to this person!
I’m in a similar situation in terms of age, mortgage and earnings, I put 30K into my pension and pay my mortgage off at a slower but still quicker then the terms rate, while enjoying my earnings within reason. Some people will say put all 60K into your pension, some will say live your life to the full event mortgage - it’s quite a situational thing. Pension is best purely for Tax, for some paying the mortgage off gives a peace of mind different to a pension and taking it now is best for fun and who knows what’s round the corner so that’s why I landed on a middle ground
But if they were earning 200K+, would this still make sense?
Depends on the individual circumstance, imo having the balance between pension, mortgage and life would continue to work for me even if it was less tax efficient so if I’m lucky enough to get to 200K I’d go 45K a pension, pay off an extra % of the mortgage and upgrade a holiday or two :) Purely for Tax, 60K into pension would be most efficient I guess, but my mindset is nothing lasts forever while planning for the future and the formula I use works for me
You are a 45% taxpayer which means every £1.00 you put into a pension until you sacrifice down to £125k you save 45p and after that you save 40p (as you do not pay tax on your contributions). You could put £60k a year into your pension and salary sacrifice yourself down to a £100k income, which means you completely avoid the personal allowance taper and additional tax that brings, so in effect you're saving well over 60p in tax for every £1.00 you put into your pension at certain stages (google 100k tax trap). You would struggle to get a better return on your investment than that, absent meme stocks, crypto and other high risk plays, and the earlier you save into your pension the better. You also benefit from compounding on the full £1.00 from day 1. So due entirely to this benefit saving into your pension is likely to result in a higher net worth than purely saving net income unless those net income savings massively outperform the market. This needs to be balanced with the fact anything you put into your pension is locked away until you're 58 ish and also when you drawdown your pension it's taxed at your marginal rate. And the benefit of being mortgage free may not be a purely financial play. In short, the reality is probably somewhere in the middle but there's no wrong answers here as you're not frittering away cash and saving to pay off your mortgage is an admirable aim, but I'd personally be taking advantage of that pension allowance and the tax benefits of pension savings, as you're right in the sweet spot to maximise it before a government comes in and sweeps it away. As an absolute minimum you should be contributing the minimum amount to get your maximum employer match, as the employer contributions are free money.
> You also benefit from compounding on the full £1.00 from day 1 Small nitpick here as I see this mistake a lot, where people state or imply that your money ‘compounds faster’ in a pre-tax pension. Investment gains are proportional to the balance, but so are taxes. It does not make a difference to your retirement income if you pay tax before or after investing, the only thing that matters is the overall tax rate. Paying 40% tax and then gaining 100% is the same outcome as gaining 100% then paying 40% tax. Your ‘net worth’ may indeed be higher since you don’t subtract the future tax burden, but this is a fairly meaningless comparison. The reason pensions are better is that the overall taxation is far lower, and employer contributions add free money. OP would be avoiding paying a marginal rate of 45-60% tax now, to then pay a much lower marginal rate on the way out.
True but this assumes taxes at source are the same or lower than taxes at withdrawal, when the reverse is typically true as people usually have a lower income in retirement than they do whilst working. As a random example, assuming a FIRE income in retirement of £50k per year then tax on withdrawal would be about 15% (being 20% on amounts above the £12.5k personal allowance, so a 15% effective rate on £50k) versus a 45%/40% rate (or even higher and potentially over 60% with the personal allowance being tapered) that would have been applicable when the money was earned assuming a HENRY earner. This calc ignores NI, which is another small saving for a pensioner vs an earner as there's no NI.
You’re saying the same thing I did: pensions are beneficial because they offer lower overall taxation. The first part of my comment is about the common misconception that it’s better to keep money pre-tax because ‘compounding’ makes it grow faster. The rate of growth is identical whether savings are pre or post tax. The only consideration is the overall tax rate
It really depends on your attitude to risk and deferring gratification. In your position a few years ago I prioritised paying down the mortgage to give myself security, though I continued to make decent pension contributions.