Hey guys, it's Sasha. Let's say you are somebody in your 20s, 30s or 40s and you're trying to decide should you put your money into your pension or should you invest it instead Because every single bit of financial advice out there will tell you that the number one thing you should put your money into is your pension every month. When you get paid after you've paid your tax, the first place your money should go is the retirement account and most people will have an automatic deduction every single month set up in the US. It's the 401K in the UK is the workplace pension.

Same difference: you pay money into your pension before tax in most cases, so there is a tax saving there. Your employer contributes some money on top of the money that you contribute in the UK. When you put in five percent, the employer pays another three percent in the US. Matching is not mandatory, but most big employers will also have some kind of a matching scheme and every financial advisor on the planet will tell you it is a no-brainer Of course, you should be putting money away as much as possible into your page so that when you retire you can have a happy retirement.

You can play golf every day until you're 150, but the truth is, it's a bit more complicated than that. I am going to walk you through the five very good reasons not to contribute to your pension or at least not contribute as much to your pension as you would otherwise. Now before all the financial advisors turn up in the comments to tell me that I am an idiot. Here is an important disclaimer because you know financial advisors are a bit like vegans.

There is nothing that a financial advisor likes telling other people more than that they are a financial advisor. And I know that they will have an absolute field in the comments saying Stacy you're so dumb. Pensions are the best way of saving money for retirement. Stop spouting nonsense.

Well here is the disclaimer: I Strongly recommend that people plan properly for their retirement. and I Do think that most people should be paying into their pension because the tax, benefits and additional contributions from your employer do make pensions very Andy But but there are some very big drawbacks too. Things that you need to be aware of and in this video I Want to focus on them to provide a slightly different perspective and for some people, a pension just won't be the optimal path. I Know how crazy? So first let's talk about the return that you get on your investment because there is this conventional wisdom that pensions are absolutely amazing for getting a really high return on your money for your retirement because one you can pay into your pension before tax.

So if you pay, say 40 marginal tax depending on where you live, you know roughly. Then for every hundred dollars or 100 pounds or whatever that you put into your pension, your paycheck only reduces by sixty dollars So right away, you've just made a 67 return on your money. Straight away, you just spend 60 pounds of dollars and your pension pod grew by 100. Boom The problem is that because you don't have to pay tax on your pension right now, you do have to pay tax on your pension in the future when you get there, so it looks like you're making a load of savings.

That's how it's presented. But what you're really doing is you're delaying the point at which you pay tax. And again, the conventional wisdom is that when you retire, your income is typically going to be lower. and the second benefit is that when you contribute into your pension, you're contributing from the top end of your income, the top tax bracket that you're paying out of all the different ones you're paying.

And when you retire, that gets distributed across all the different kind of tax brackets. And typically people will be earning less as their pension compared to when they're in working life. so you're gonna have to pay less tax. And there are two issues with that.

First, when people make this point, they are typically comparing the 20 or 30 year old paying into their pension right now to the 80 year old who is receiving their pension right now. And that's not the right comparison to make because you're comparing completely different Generations in completely different situations is apples to oranges Because the pensioner who is now 80 would have been paying into their pension 60 years ago and 50 years ago and 40 years ago and so on. And nobody knows what tax is going to look like in 60 years, but people are living longer. Social Security Costs will only increase, so there is a risk that taxes will be a lot higher in the future.

If you look. historically, taxes right now in the US and the UK are actually pretty reasonable. They're somewhat low, but there have been times in the past when taxes went absolutely bananas. At the end of World War II the top tax bracket in the U.S skyrocketed to 94, and the number of people paying income tax increased from seven percent before the war to 64 after the war in the 50s and 60s.

For decades after, what, the top tax bracket sat at 91. So although you're saving on tax right now, you don't really know what it is that you're trading it off against in 50 years or whatever. And historically, right now, the level of tax is low. so there is a chance that when you come to actually pay the tax, you're actually going to be paying a heck of a lot more.

And if there was a major disaster, a big war, whatever just before you happen to retire, you could well be deferring to pay much higher rates of tax instead. Now, the same second benefit to contributing to your pension is that company contribution. This will work differently depending on where you live, but often the employer either matches or almost matches your contribution up to a point. And for many people, that means if you pay five percent into your pension, your employer might add another three percent, maybe even another five percent doubly new contribution.

And that seems like a complete no-brainer right? Your money doubles the moment that you receive it. That is a 100 return immediately. So that means pensions win by knockout versus not paying into your pension. And this is where the second reason not to pay into your pension comes in because when you pay into your pension, you then have to invest your money.

And the problem with the vast majority of pension schemes is that you have to invest your money into one of their prescribed funds and very often the choice is limited. Very limited. Some pension schemes can be better, some can be worse, but most are really very restrictive and many of these funds are stupidly risk-averse to a point where a 20 20 year old's pension is carrying a huge portion and low yield bonds for no reason whatsoever and another big chunk in just plain cash losing value. Every year, the pension advisors who get a fee for selling you this dog will tell you that this is good for you because you see it manages your risk.

Of course the truth is is BS There is absolutely zero reason where somebody who is a 20 year old should be carrying any cash in their Investment Portfolio And the outcome is that vast majorities of these funds severely underperform the market. If you look at the statistics 90 plus depending on which date you look at, as much as 94 or 95 plus of these funds will lose to just the average of the stock market. The stock market has an average return of about nine percent a year over the long term. Some might argue that this will not continue to happen because you know things are not going to be as good in the future.

That's always the argument. Others will say that because of human Innovation because of the advances in technology in the AI, robotics, etc. For you, future growth will actually be higher than what we've seen before, but let's say it'll stay exactly the same. Let's say it's just a nine percent per year, continues along the same trajectory and has been quite consistent along that in the long run so far.

Now, imagine the fun that you're investing in just slightly underperforms. Many of these funds actually only return five percent or six percent a year. On average, some do a lot worse than that. But let's say that you happen to invest in a really good fund and your fund returns seven percent.

only a little bit less than nine percent. And here is the calculation. Let's call your pension contribution X dollars. Then let's say that you have a really nice employer and they go and double your contribution.

So you'll receive two X dollars into your pension and then you invest it for the next 50 years and you get a seven percent rate of return on your money. At the end of the 50-year period, you have 15 8.9 X dollars. So every one dollar that you originally put in then became two dollars when your employer contributed and then became 58.91 after growing at seven percent a year for 50 years. But let's say instead you invested the money into the S P 500 Index.

So you didn't go and put it all into the pension and you didn't get the employer contribution. So you just start off with One X one dollar and then you earn just a little bit more. Nine percent return per year for the same 50 years and at the end you have 74.36 So the Paradox is that getting a slightly better return on your money is actually way more important and way more powerful than doubling your money up front. Now, this actually proves another important point if you are older, if you are close to retirement, if you are not 50 years away or 40 years away from your pension or whatever, then the argument flips completely the other way.

And actually doubling your money up front is Way way way better than whatever. return you're going to get in the stock market, so you should 100 absolutely take it. But for those who are a bit younger, there is just something to think about. And not only that, but there is another problem.

And that's fees. Because you see pension accounts love to charge you fees. That's why they exist and fees will eat away at your investments in a much bigger way than anyone actually thinks. You will usually have two separate fees.

First, the funds that you invest in will charge you a fee because some are more expensive, some are cheaper. But often these sorts of funds that you have to invest in through your pension will charge around one percent a year. and then the pension provider will also charge you their own annual management fees or whatever it's called in the US that sometimes called the 12 B1 fees. So I think sometimes they're called the monthly management fees.

whatever, whatever they are, these can also often be as much as 0.7 to 1 per year depending on which particular pension provided it is that you use. So for the privilege of investing your pension, you will often be paying around two percent a year in fees between those two places where you're paying them, which doesn't sound like a lot, it's just two percent, right? But if your pension is only growing at say, five or six percent a year on average, which is extremely common, then two percent out of the five percent is actually eating 40 percent of your growth. This is insane. If you think about this completely wipes out the growth in your pension.

It is massive because if you just shoved your money into the S P 500 Index ETF, you can do that by just paying 0.03 in the US or 0.07 outside the US for the ETF fee. and you can get a free or an almost free broker account. So instead of paying two percent fees per year that significantly reduces your return, you can pay pretty much nothing instead if you do it outside of a pension. But this is just the start because there are three more problems with putting your money into your pension.

and these problems might actually be a lot worse. First, remember that when you put money into your pension, the money is then locked up until you retire. And even when you do retire, there are strict rules on how exactly you can draw the money down with particular products are available to you, and that means that the money that you put into your pension is completely inflexible. If there is any reason for you to need the money in the next 50 years, you just can't access it.

and right now you might not be aware of when you might need it in the next 50 years. Or you could maybe access it depending on where you live, but You might probably have to pay a king's Ransom in taxes and fees to do it and you'll lose a giant chunk of it. What if in 20 years time you have an urgent medical issue that requires a load of money? Maybe somebody in your family has an urgent medical issue that requires a load of money? What if you don't have the right kind of insurance or the insurance refuses to cover that particular thing? What if you have a health condition that means your lifespan will be limited, will be shortened, you might not get any benefit from the pension at all. What if you have some other emergency requires a large Financial outlay Now I Know the financial advisors out there will say that you should keep a keep a big off emergency fund for all of these potential things.

and that emergency fund will be sitting there in cash or something like cash and earning pretty much nothing. And a big emergency fund earning pretty much nothing for your whole life that you maybe maybe will want you for something really important is a massive waste. What if you decide to move country in the future, moving and repatriating your pension might not be too difficult or it might be a huge pain in the ass and cost you a giant boatload of fees in the process? What if you want to start a business in 10 years time and you need Capital you can't just go and raid your pension fund like you could with your investing account and life is funny like that. Today you have a steady job, everything is good, and you're 100 sure that this none of these scenarios will ever play out.

But then life happens and in 20 years time it might all look very different. Then there's the risk of your pension getting a tax rate in the future. This is a very real risk that many people just don't really consider. A few years ago in the UK the government imposed a new tax and absolutely nowhere called the lifetime allowance.

If your pension went up over 1 million pounds, you had to pay a penalty of 25 if you draw down as an annuity or something similar. Or you had to pay 55 tax if you take it out as cash 55. That's insane. Now most people didn't care because one million pounds doesn't sound like a lot, just over a million dollars.

But in the 12 years that this limit existed, it didn't increase with inflation. In fact, it reduced from 1.8 million pounds to 1 million pounds. And if you discount one million by the two and a half percent rate of inflation average for 50 years it becomes 290 000 pounds. Which a typical annuity payout at the moment is an annual pension of about 16 000 pounds.

just like income tax started out as only being there for the very wealthiest and eventually everyone had to pay it. The same sort of thing can easily happen with pensions, so suddenly that one million limit that existed doesn't sound like much at all. Now, a few days ago, the UK government actually scrapped this allowance in the latest budget because it was extremely stupid. But at the same time the Labor opposition said that if they came into power, they would just put it right back and a similar sort of tax rate could easily happen in the US or in other countries, it could happen tomorrow.

It could happen in five years. It could happen in 25 years time. So you will be sat there paying into your pension every single month like a good boy. You know, doing the right thing and one morning you'll find out the government of the time just decided the blue that you should have a maximum limit on the size of your private pension that you have accumulated and if you go over that limit they will go and tax you say 55.

Like what actually happened if that same thing happened with just regular Investments. It doesn't really matter in the same way because if you really had to, you could just liquidate all of your investments into cash and decide what the best thing to do with you cash is. Maybe there's a different way of earning revenue on your cash? Maybe there's property that you can get into Whatever is the right thing at the time, but with a pension, you don't have a choice because your money is locked and you have no way to cash out and you just have to sit there. If the government decides to kick you in the teeth.

You just have to take it and you have no comeback. And the last problem is that on average we're all living longer. People are spending longer and longer in their timing, and when you come to retirement, there is a number of different as to how you can draw down your pension. I'm not going to get into the details here, but whichever way you decide to do it, you typically don't have the luxury of just taking all the most out of it as cash unless you're going to pay a huge amount of fees and penalty taxes.

So you have to get some kind of an annuity, a steady payment plan. There's millions of different options, the specifics vary depending on the country, and the issue is that people are already living to an average range age of 88 or whatever in some countries, and in 50 years time when you're retiring, that number might be a hundred. You might be retired for three decades or longer, and this means that whatever pot that you have saved up will have to stretch longer and the annual payout as a result is going to be lower. If Instead, you had your cash pile outside of the pension.

You would have the flexibility to have it invested in other kinds of assets that both appreciate and generate cash at the same time. For example, you could have rental properties, or you could have a small business or a few small businesses. and the beauty of mixing in those sorts of Investments is that you can live off the profits without necessarily even needing to use up the actual investment. The body of the money still sits there.

You don't have to waste it and use it up. Now there are some options in retirement that also allow you to do something maybe a little bit similar, but these are way less flexible and they come with huge fees Because remember, your pension provider is not a charity. They want to make a boatload of money of selling you one of these things. So the choices you have on how to manage your money in retirement are very different.

I Hope that gives you something to think about. Just don't take it the wrong way. Make sure that you do save for retirement because it is very important, but just don't do it blindly. Make sure you are aware of and understand the downsides too.

If you found this video useful, please don't forget to smash the like button for the YouTube algorithm. Thank you so much for watching I Really appreciate it and as always I'll see you guys later foreign.