We’re always told that planning for your future is one of the most important things and pension contributions are the single best way you can do this planning.
You’re told by the government, every financial advisor and every finance YouTube channel about the importance of putting money towards your pension. Many recommend you contribute much more than the minimum requirement of 8%.
I am generally a big proponent of financial planning and I agree that planning for retirement is very important.
But it’s also really important to be aware of the fact that if you save too much into your pension, it can be a really bad thing.
The UK Government has introduced a Lifetime Allowance for pension pots which sounds very high – it is over £1,000,000.
But although that sounds crazy, if someone one a median wage contributes the minimum amount from 21 to 68 which is the current target retirement age, their pension pot will actually be bigger if it grows at an average rate of 8% per year.
If you happen to earn more than the median wage for a good chunk of your career or your investments do better, your pension pot could be much bigger than that.
And if it is… the UK Government will tax you 55% of any amount over the limit if you take it out as cash or 25% if you buy an annuity… before then taxing your annuity as income as well.
Unfortunately this is something that just doesn’t get mentioned at all when people talk about pensions and given that this may actually apply to a significant number of people as it stands, it’s important to take it into account when you’re making your financial decisions.
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Why You Shouldn’t Pay Into Your Pension (UK)
Pensions have long been touted as a crucial way to save for retirement in the UK. The government incentivizes pension contributions by offering tax relief on these payments, making pension plans an attractive option for individuals looking to secure their financial future. However, there are arguments against paying into a pension plan that shouldn’t be ignored.
One reason why paying into your pension might not be the best choice for some is the lack of control over your investments. When you contribute to a pension, you are handing over your money to a pension provider, who will then invest it on your behalf. This means you have limited say in how your funds are allocated and which investments are made.
With the lack of control, there is also the risk associated with pension investments. While pension providers may promise high returns, there is no guarantee that these expectations will be met. Your hard-earned money could potentially be tied up in poorly performing investments, resulting in a lower retirement income than anticipated.
Another drawback of paying into a pension is the rigid access to your funds. Under current UK pension regulations, you cannot access your pension savings until you reach the age of 55, and this limit is set to increase to 57 in 2028. If you have more immediate financial needs or wish to retire earlier, paying into a pension may not be the most flexible option.
Furthermore, the future of pensions in the UK remains uncertain. Government policies can change, leading to alterations in pension regulations, tax relief, and retirement age. It’s important to consider whether relying solely on a pension for retirement income is a wise decision, given the potential for unexpected changes in the future.
Instead of relying solely on a pension, some individuals prefer to explore alternative investment options. These options may include investing in properties, stocks, or starting a business. By diversifying investments across multiple asset classes, individuals can spread their risk and potentially benefit from higher returns than relying on a pension alone.
Additionally, for those who prioritize flexibility, other savings vehicles may be more suitable. Individual Savings Accounts (ISAs) are a popular choice for UK residents since they allow individuals to save and invest money tax-free. Unlike pensions, ISAs offer more control over investment decisions and enable easy access to funds at any time.
Ultimately, the decision of whether or not to pay into a pension is a personal one. It depends on individual circumstances, risk appetite, and long-term financial goals. While pensions have been championed as one of the most effective ways to save for retirement, it’s important to thoroughly assess the pros and cons before committing to a pension plan. Exploring alternative investment options and considering the potential risks associated with pensions can help individuals make informed decisions about their financial future.
And just a few days after I post this video, news comes out that the Government is considering freezing the allowance to raise extra tax… Who would have thought…
I have a works pension which is managed by the Royal London, I am now 55 years of age and trying to put as much in as I can afford. The company contributes 10% and I 20% but the pension this year as lost £1500. I contacted Royal London and they said we do not choose the investments your company does that, my account online it give you the impression you can change your own investments but when you hit save button it does not. The investment the company have chosen 80% of them are loosing money, when I got in touch with the person who deals with the company pension she seems not want to talk about it or moves the conversion in to another direction. Do you think some companies just tick the box because they have to provide you with a works pension by law and do not care about manage it properly.
Why is there nobody encouraging Yung people to go out and blow all their wages on having a good time ?
All the people I know who talk about pensions and retiring etcetc are amongst the most boring people on the planet ❤❤
This needs updating seeing as the Lifetime Allowance has been abolished in 2023
How to unclaim the state pension?
All good in theory. Then investigate these: Student loans on average £40,000 owed: Rent £1500-2500 per month : School fees if private £16000 per year; Food bill £400 per month ; Car loan £400 per month : Energy bills £2500 per year. Childcare £800-900 per month . The average person in the U.K. has a debt including mortgage of £34,000 . Unsecured debt £5400. Lose your job and there are no pension contributions then you’re done and dusted. Pixelated . 20% of males are dead by 65.
Who in the world makes these rules 55% tax is outrageous, I'm opting out of this bullshit.
Note that as of March 2023, the lifetime allowance has now been abolished.
This has fortunately been removed since the start of this tax year
0:48 You want to get straight to the point? How about cutting out the first 47 seconds?!
Let me just ignore the effect of 40 years of cpi which debunks my entire point. This guy is a tool.
Have you changed you mind now that the lifetime allowance has been abolished? Albeit, the tax free cash amount is still 25% of £1.073M
Finally someone who talks sense
A few things that weren't considered
1. You contribute a percentage of your gross income QUALIFIED EARNINGS
2. 8% is too ambitious I know your basing this on the 10% average return of the market over a long period historically and subtracted 2% for inflation but 2 years ago especially and still now the markets were extremely overvalued so that 10% return is only that high in these market conditions, when the market is down and you calculate what the long term market return is historically it's much less than 10% it fluctuates you have taken the unlikely best case scenario. 4% inflation-adjusted is much better to use as conservative and most likely it will be is 5-6% inflation-adjusted. That 10% historical return is also based on 100% equity and includes dividends most people are automatically in a 50/50 or 60/40 equity/bond split and never change it don't even know they are in that and that historically is a much smaller return.
3. Using median wage makes for a very inaccurate forecast as the majority of young people earn less than the median in their early career so calculating higher than-likely contributions early is risky because of the effects of compound interest, even if someone earns more than the median wage later in their career and catch up contributing and on average in whole career was the median wage it still won't equal the same total you got, will be less because they got less in earlier and compounded slower, the sequence they invested is different.
4. The average person doesn't work 47 years straight especially full time, the year's of contribution will be considerably less.
Basically a scam
Dude, how about some alternatives? Put the private pension amount into s&p 500?
LMFAO ..the average person in the UK will have practically fXck all in a pension pot when they retire ..Your delusional if you think most people are going to have over £1,000,000.00 in there pot ..WOW! Your clearly affluent and surrounded by affluence ..Most people have nothing .. I live in the North of England and this is comical .. PS ,I semi retired at 36 and hate working .. I am 50 now and laugh at what's going on in the West .
This video needs to be updated and heavily caveated since the life time allowance is now being abolished.
problem is phone these cnts up and its a 15 minuet wait per call ,then they wrong department i will put you through ,then the phone goes dead you keep getting thank you for waiting all our lines are are busy get they want to push you on to going on line , thry give you a phone number to ring and off we go again thank you for your call continue to wait ,call back later .
Second time im calling minuets are racking up ,.
My wife died 2 days a go im trying to inform them, as an organization they a bunch of dont give a fk office workers , wrong extensions wrong depts ,then your told you wont be getting the bereavment payment ,no wondert the country is in in the shitter and they are all still picking up pay cheques !
As someone who plans to die before i retire, no joke, i just need the routine of work and don't fancy watching repeats of tv with my tank and catheter, i get what your on about, but i think in my boat im better off paying it, it goes to the family so, but if i was single and healthy id not pay into it.
Seems like the government have cottoned on as they will be elevating the limit in tomorrow's budget due to extremely important people like doctors and surgeons retiring early due to the tax issues you explained. Perfectly capable experienced people with another 10 years of work in them being taxed out of employment.