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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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.
SIGN UP FOR ETORO (MIN DEPOSIT $200)
https://med.etoro.com/B15358_A95689_TClick_SSasha.aspx
67% of retail investor accounts lose money when trading CFDs with this provider. Your capital is at risk. Other fees may apply.
GET A FREE SHARE WORTH UP TO £200 WITH FREETRADE
https://magic.freetrade.io/join/sasha-yanshin
You need to sign up and make any deposit to get the free share
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https://kit.co/sashayanshin
DISCLAIMER: Some of these links may be affiliate links. If you purchase a product or service using one of these links, I will receive a small commission from the seller. There will be no additional charge for you.
DISCLAIMER: I am not a financial advisor and this is not a financial advice channel. All information is provided strictly for educational purposes. It does not take into account anybody's specific circumstances or situation. If you are making investment or other financial management decisions and require advice, please consult a suitably qualified licensed professional.
Hey guys, it's sasha, this video might go against everything you've heard in terms of advice on youtube and everywhere else. In fact, it goes against some of the things that i've previously said as well and i'm sure a lot of people are going to be hitting the dislike button before i've even managed to finish the sentence. But just hear me out because it's an actual, really important point to what i'm saying that i'm going to demonstrate with numbers every single bit of advice out. There says that you should go and invest in your pension.
I've said it before in videos, every single other youtuber that you watch will tell you exactly the same thing, but it's really important to be aware of how the numbers actually work out and how you might actually be better off. Not investing in your pension account. Some of the things i'm going to be talking about, i reckon some people - probably don't even know about, and this is exactly why you need to listen up, because this is really important now. First, let me get straight to the point: saving money for retirement is a good thing.
Um, i understand it. I advise it and i think that it is good to plan ahead for your future. However, there is some things that you need to be aware of. When doing the right thing, because sometimes doing the right thing and making monthly pension contributions can actually be really bad, for you here is why, let's take an average person in the uk earning the average uk median wage according to the office of national statistics, it is 585 pounds per week using the latest available published data from a couple years ago, that's about 30 000 pounds per year.
The minimum amount you had to contribute in the uk, unless you opt out, is five percent by you, with your employer, adding a further three percent for a total of eight percent of your salary. Now i am aware that these are calculated slightly differently to how i'm gon na be talking about them here, but i'm just trying to make a point, and i'm gon na keep things super simple, so eight percent of thirty thousand four hundred twenty pounds is two thousand Four hundred and thirty three pounds per year in pension contributions, which is equivalent about two hundred and two pounds eighty per month now i did the math over here to keep cut to, to keep things simple, i'm going to assume that people start work at 21. Let's say the average person goes to university, which i think at the moment is correct and they get the paid this median weight for their entire working life until they're retired age 68.. Now i know that some people start working much earlier at 16 and i know some people are going to be earning much less and people are going to be earning much more.
Some people are going to start earning a lot less and then it's going to grow and they're going to be earning way more down the line. I don't want to keep things difficult and have one million scenarios, i'm just gon na keep things really basic so that you can understand the point i'm trying to make here um. Let's assume that your pension grows an average of eight percent per year. This is actually pretty reasonable, especially with the new sip pensions that are arriving. I personally i'm using the new free trade one. They are currently, i think, back to having an open list after having a short window when they accepted people, but i think it's going to be opening up again very shortly um. I think this is a reasonable, somewhat conservative, maybe even in some ways assumption from my perspective with monday contributions of 202 pounds 80, the total part at age 68. According to all these assumptions, going to be 1 million, 252 000 pounds and according to data that the government themselves published 50 or more of people in the uk will actually have pension pots that will be even bigger than this.
If they continue contributing, like everyone tells you that you should be doing now, here's the catch. A few years ago, the uk government passed some new legislation which introduced the lifetime allowance for pensions. This is the maximum amount you can have in your pension pot. At the point, when you choose to retire, this allowance is currently set at one million, seventy three thousand and one hundred pounds.
And yes, it does rise with the consumer prices index every single year by a little bit. But i am on purpose using a relatively modest assumption of eight percent on the returns. I think i could have said that to nine percent or even ten percent, depending on how you manage those investments over time and the kind of risks you take earlier on versus later on in portfolio. But i am not doing that.
I'm just keeping things really simple here. So for the sake of argument, i have reduced my returns in order to sort of not have to deal with inflation in talking about these numbers. So, although it seems like a completely impossible task, when people first think about it, when they're young, when you're first starting out and your first job is maybe paying you a very small wage, it seems a huge amount of money to save over one million pounds. In your pension it seems crazy, but the average person in the uk may well have a lot more than that in their pension pot at the point when they retire, because private pensions, based on these defined contributions that we now have are somewhat new and we haven't Had a generation of people who actually started out doing this come to the point where they retire and having those pension pots.
So, that's probably why it kind of seems really crazy if your earnings go significantly above the 30 000 power mark that i use in these calculations. You could have a much much bigger pot when it comes to retirement age, especially if your retirement age is raised. Currently, it's set to 68, which is coming in. I think it's in 2039 by uk government, but if that continues rising like it has been, and it will continue to do then, possibly you will have an extra year or two of actually growing a pension pot. Even further, so what happens to money in your pension pot? If you go over this lifetime allowance as the average person according to these calculations, will you guessed it? You will be taxed on it and you will be taxed a lot. It's gon na get really ugly. If you take any of it as a lump sum when you retire, because you know when you retire, you're allowed to take 25 of your pension tax free, that's kind of the rules right, but any amount over the lifetime allowance, you will have to pay 55 tax On that money yeah, you heard that right 55 tax. Now, if you choose to take it out as an annuity, so sort of the monthly payments, instead, you will have to pay 25 tax on it, and then you still have to pay income tax on the remaining money.
Now the money advice service is really really helpful. In explaining that that means for every 1 000 pounds that you have in your pension over this limit, you're actually going to get 450 pounds back paid to you in your pension, which doesn't sound so great, suddenly does it now. I would wager a lot of people have never actually heard of this pension lifetime allowance, because for some reason, when the government introduced it, they didn't do a particularly good job of teaching. People explain to people, especially young people, who maybe don't think too hard about their pensions, because the government wants to go and encourage people to do the right thing, which is contributes to your pensions.
This is the really odd thing using the government's own data. There is a decent chance that more than half of all the people in jobs, contributing pensions for their lives will actually be breaking this lifetime allowance limit, because the minimum contribution pension set by the uk government at eight percent kind of force you to do so, and Then, when you can't do anything about it later on, when you already have built up all that pension, you can get hit with a huge tax bill for doing the right thing before any people pointed out. Yes, most of these pension schemes do allow you to start drawing down the money much earlier at 55. And yes, if your pension pot is growing really really well perhaps later on in life, you will actually be able to opt out and stop contributions to stop you going over that limit.
I do know these things. I am aware, but i'm guessing, that the majority of people will not want to retire at 55, because they're still going to be in work at that point and that's not going to be the actual age. And if you do choose to draw down the money at that point, then your monthly, an annual pension amount you're going to be buying through the annuity gon na be much less, and so i reckon a lot of people will probably wait somewhat longer before they actually Begin drawing down their pensions and, if you're going to be stopping contributions when you're in your 60s, the likelihood is the value of those contributions that point in time to your budget and to your monthly money that you have disposable is going to be far far different To when you're young, when you're earning much less money, when you have your first rent or mortgage or whatever and kids all of those kind of things, so i i do understand it. But i just think that most people probably need to begin thinking about these. About these things slightly earlier, don't take this wrong way. Pensions are really important and it is really really important that people go and plan for their future. You just need to be aware of some of these things around how you need to go and make those plans around what is the best way to actually put your money to use. Should you go and contribute way more to your pension than the minimum, or should you maybe find other avenues like, for example, investing your money instead or doing something else? I just thought that this is really useful and because so many people tell me things uh that maybe go against what i'm saying over here.
I just thought it's really critical for people just to be aware of what's happening around them when they're planning for the future. I hope you guys found this useful if you have please make sure you're going to smash the like button feedback algorithm. Thank you so much for watching. I really really appreciate it and i'll see you guys later.
You.
Most people retiring now have a pension pot of £50,000 plus get a state pension of about £9000 So roughly an income of 11,000- 12,500 p.a £1000 a month.
The fact that you are talking about a tax Issue people may or may have in 30 or 40 years because they have £1.25 million would be music to the ears of todays pensioners., better to focus on getting past the £500,000 mark before even considering such worries.
HI, HIDDEN FROM THE PUBLIC RET, 66, AND NOTHING FROM THE DWP, FOR THE FIRST TO YEARS NO PENSION PAYMENT FOR TO YEARS THAT'S NOW TODAY SO 66, NO ITS 67/,68/ 69 SO PEOPLE CHECK NOW ???
Way too simplistic, LTA will rise. Save into pensions, save into Isa's. Alternative is work till you drop, or retire a pauper. UK tax regime is incredibly generous for saving, use it.
Pension funds are mandated to hold a portion of their assets in government bonds. Considering that government bonds are yielding less than the current rate of inflation (which is likely to keep dropping, perhaps below 0 like in other EU countries – coupled with increasing inflation), exposing your long term wealth to that means you are taking on quite a lot of risk. I stopped paying into my pension for this reason. I'd prefer to hold my wealth in hard assets that I directly control like gold and bitcoin and just short fiat.
Sorry but this is bad advice. My employer pays 13% contributions if I pay 5%. That, along with the tax savings, means I'm getting a huge boost to my pension for free, basically.
Also I can choose what funds I pay into and what proportions.
Making videos basically suggesting not paying into pensions is a bad idea, especially if someone who is clueless about personal finance watches this…
A little alarmist but I think you need to be very careful with your language, this may have already been mentioned previously, the LTA is NOT "the maximum you can have in your pension pot at retriement", but simply a threshold at which point you will have tax implications at the point of crystalisation, and even then it's more about the excess over that threshold whatever it may be when the time comes. Still a very valid overal point and something that more people need to be aware of especially middle income earners who are just over the higher rate tax threshold so they know they could be caught later on if they go mad with the pension pot savings we're all encrouaged to contribute to.
I would say just get a bigger house ,it’s something you can use and then downsize when older and probably make a better profit ,I am literally just getting back what I put in. My raf pension is a sweetener though ,no contribution and will mean I think I can scrape through lol bring on death ,I need to die when I’m 82 as I will have spent all my savings ,lol I think I will just blow my brains out or maybe poison or maybe that place in Switzerland,who knows I might be lucky and die before 🙋♂️😂🏴
@Sasha Yanshin No – this is mostly nonsense – and is essentially click bait. Or you have zero idea what you're talking about.
You took assumptions that conveniently suit your working thesis and then backfilled it.
You clearly don't understand how the LTA works and the significance of the Crystallisation events that trigger the tax. You simply don't get charged 55% of your entire pot once you breach the limit – rather on the amount you choose to crystallise.
Also with careful planning, this can be managed easily.
Instead of carefully explaining this nuance, you're (literally) breathlessly spreading FUD about not paying into pensions – and the lemmings that subscribe to this channel are falling over themselves to agree with a view point that wrongly validates their decision not to save for the future.
Delete this nonsense or update it.
Sorry Sasha, but your wrong. The only person that will benefit from not paying into a pension is your employer. Most employers pay between 3 and 10% into each employee's pension. Imagine the saving of not paying into every employee pension.
This is misleading me information calculations.
1. 8% profit rate every year is too optimistic.
2. The pension contribution is paid before tax (so there is huge saving from tax income and NI).
3. SIPP contribution is after paying Tax and NI.
4. There is no extra contribution from employer to SIPP
4. Life time allowance raises with inflations (unless you have huge income with high pension contribution, there is low risks I exceed the life time allowance).
I think you have to show the calculations on fair way. The way this video is presented emphasis the benefits of SIPP but it does not show any disadvantages of SIPP or the benefits of normal pension.
Can't stand ppl making videos that pretend to be about explaining things but are actually just argument pieces (and misleading ones at that).
The lifetime limit is over 1 million pounds, currently.
The typical pension saver aged 35-44 has 35k in their pension.
Assuming 8% growth in assets but no growth in the LTA is a critical thing you gloss over as it doesn't fit your narrative/sales.
Even if ppl pay 55% tax (and this is pretty damn unlikely) its still not a bad deal, given the employer contribution and tax relief.
But the vast majority of us won't get anywhere near, we'll be waiting for state pension age and topping up from our 300k pots.
You’ve misunderstood some absolute basics. You would have £1m in todays money. It’s assumed the lifetime allowance will rise with inflation – its set at 1m at the minute because that’s a luxury pension amount well well above average.
There’s no need for anyone on average salaries to worry about the lifetime allowance, and at the point you have that kind of money you should be getting professional financial advice
I get the spirit of what is being communicated here. It is possible to breach that lifetime allowance in good circumstances. I think though the upsides should be clarified.
1) The fact that you might be able to accrue that much money could simply mean that you are able to retire earlier (or at least access your pension pot earlier). You aren't required to wait until state pension age to start accessing that money. If you approach the lifetime allowance at 60, say, then there's nothing stopping you enjoying that money straight away
2) The up front tax breaks aren't inconsiderable. Via salary sacrifice, for every £1 put into the pot, the employee can be contributing anything between 68p to 38p. (38p in the £1 for those with a taxable income in the £100k-125k bracket.) That's a rather efficient uplift compared to investing from taxed income.
3) You are correct that there are no guarantees in life when it comes to governments adjusting the rules re. pensions. But the same is also true for any investment vehicle. E.g. maybe the rules are changed for ISAs in future too. To me, that is a reason to take advantage of multiple investment types.
4) The reality is that for a lot of people their incomes will never hit the median, or they may only enter the workforce later than 21, or they may take a break from f/t employment (children, ill health, etc). Due to messing around at university, I only got my first "real" job when I was 29. Those eight years from your example would make all the difference to the projected growth of what I put in.
In the end, if you do end up with a pension exceeding the lifetime allowance, you've done pretty well for yourself…
That is really terrible advice you have given with absurd figures.
1. If the lifetime allowance increases with CPI at just 2% a year, then it will go up from £1,073,100 to £2,776,000 in 48 years time. Your total lifetime figure is less than half of that (£1.2 million).
2. Most people will get nowhere near the lifetime amount and if they do they could stop contributing before they reach an amount that would grow to the lifetime amount.
3. 7% is a more realistic, even optimistic, long term growth on a pension fund not 8%.
5. When you put money into your pension you pay zero income tax, when you withdraw it you can take 25% tax free lump sum and just pay income tax on the rest. Most people will not pay any income tax on some of the pension as the state pension is not as high as the personal tax free allowance (£12,570) and 20% on the rest. So bringing the tax paid on the money down from 20% to less than 15%.
6. Some companies have a salary sacrifice scheme. This means they also pay no National insurance on their pension contributions. This means someone paying 20% income tax would save 33% on contributions, take 25% tax free when they retire and pay less 20% on the remainder, as some of the income will be within their personal annual allowance (currently £12570). Meaning their tax bill will drop from 33% to less than 15%.
Whilst the maths stacks up to a point there is one big thing missing. 8% contributions will be made up of 3% minimum from the employer, so assume for this 5% from employee. That would mean the actual contributions for the employee over the 48 year time span would be less than £75,000. Granted nobody likes paying tax, but if you've only paid in £75,000 and you get pot over over £1.2 million with the rest coming from growth, employer contributions and tax relief that's an extremely good deal! If you've got to pay some tax above the life time allowance from a £75,000 initial investment then then what an amazing outcome that is!
Pension ! You can forget pensions ! Look at all the companies that have gone to the wall ! What do you think has happened to their pension schemes ? Good luck rummaging through the wreckage trying to find it ! Pensions are a ponzi scheme and they have already run away with them !
Are you actually qualified to give financial advice? You are using todays LTA and comparing against a future fund value. You are doing what pension providers did in the 80's by using an unrealistic growth rate and not taking into account inflation. The reality is that the vast majority of people will never hit the lifetime allowance and even if they did (which they wont) its really not a bad problem to have. Did you mention that funds held in a pension are free from Inheritance Tax? Or that the death benefits to a spouse are tax free? At least do a bit of research on a subject before purporting to be an expert
If you own your property. Take all pension out at 55. Sell property and rent. You can enjoy the early pension money and the time your money runs out from renting, your probably going to be dead. If your not you will get free accommodation in a care home, because you won't have any money left to fund it yourself. SIMPLE. Or you can carry on, with a basic life.
Somewhat interesting but by having a larger pot the individual has the option to retire early and enjoy retirement, no one really wants to work to 68. I am on target to go at 60 and have more discretionary income than I do now as still currently paying a mortgage.
This sort of click bait nonsense will only serve to dissuade people who will never be able to create £1m pension pots and should be taking advantage of tax breaks and employer contributions to help save for retirement and securing the future of their families.
Your presumption of 8% a year isn’t valid, as the way pension funds are set up are to be largely equity based to begin with but over time decrease and become more heavily invested in bonds, then cash. Therefore the rate of return decreases over time to be very cautious when nearing retirement age.
HELP! Different circumstances… I work as a teacher but for a 2-year contract with a high chance of extending it. However, I am usually moving countries so there is the possibility of staying in the UK for approximately 5 years – to 10 years. Is it advisable to pay into the teacher's pension? Thank you anybody!
But what about political changes etc, what about if we have the same changes as some other countries. The gov collapsing or when I retire in 29 years, will the gov beable to give us all that money. IDK . Definitely something to think about
Check out bald and bankrupt channel video called noone visits this country. He's in Moldova capital where a old man on the street explains how they get only 40euro pension since their country was left by the Soviet union.
It’s a good video but you can work for 20-25 years and retire at 55. Why would you keep working if you have a million dollar pension pot at risk right….but you are right recent market performance has made this a potential risk for a bigger population…..
Here's the best retirement advice you'll ever hear.
Have a side hussle and invest as much as you can privately.
The government aren't there to provide for you, you are providing for them.