I’ve recently had a look at our family finances and I’ve become increasingly concerned with the high level of family spending and high levels of retirement saving – including workplace pensions & the LISA.
With the cost of childcare, we are actually spending more than we get in “take home pay”. Luckily, we have strong cashflow from a plethora of sources including: P2P lending, Dividends from shares, Dividends from ISAs, Saving account interest, VCT dividends, Co-operative investments. These investments are all accessible now and not subject to pension rules and we’d be living off them in case of FIRE.
With my job, I can “salary sacrifice” into my pension and this has the effect of saving me both 100% of my NI Contributions and 50% of the employer contributions. Effectively, for a basic rate tax (and NI) payer, instead of receiving 68p on the pound (after 20% Tax, 12% NI) I can get £1.069 (£1 + 6.9p employers NI). That alone is an uplift of 57%. However, that money is 1) not accessible until I’m 58 2) Is taxed on the way out meaning the uplift is only 34% (after assumed 20% tax and 25% TFLS).
By comparison the LISA gives you a 25% uplift and non Salary Sacrifice pension contributions for lower rate tax payers give you a 6.25% uplift- making it hardly worth it.
And up until I’ve been maximising my pension and we’ve been cashflow negative when it comes to income/outgoings. We can handle that because we have strong cashflow from elsewhere, but it is a drag to be robbing Peter to pay Paul’s pension.
The way things are now anyway, with a combination of my old-final salary pension, SIPPs and (not that I’m counting on it) state pensions – we should be fine in retirement. It’s the 20-25 years before then that I am concerned about.
So what have I done different?
After thinking deeply about my Ready, Aim, Fire and FIRE vs. Pension posts and how I’ll fund FIRE whilst still having money for the things we find fun, I have decided to significantly scale back my workplace pension contributions and take the tax hit on the income. At the same time, a lot of my VCTs are coming up to the end of their 5 year holding period and I’m able to sell – and in this case reinvest. VCTs are an interesting investment and definitely not for everyone but I’ve found them useful for me in the past and the 30% tax rebate allows me to get an uplift similar to salary sacrifice but with access to the money sooner.
The end result should be more an extra over £10,000 in FIRE funds (assuming a May FIRE date) and that’s before the tax relief is applied. That £10,000 is equivalent to £400 a year with a SWR of 4% and goes someway to providing security now.
So that’s it, I’ve deliberately chosen to pay less into my pension to retire earlier! Counter intuitive maybe, but so much in life is like that.
This change in trajectory funnels more money into my FIRE funds and it won’t cost me much – plus what price can you put in Freedom?