How To Bridge To Your Pension

I contribute a hell of a lot into my pension… If it ever slips out at work I’m met with guffaws and weird looks.. “You’re only 27!”, “That money will be STOLEN by the government!”, “You’re a weirdo!”. A horrifyingly large number of people don’t contribute anything into their pension, but the worrying thing is, even a lot of people in our FI/RE community also contribute small amounts or nothing at all into their pension, choosing to stick with things like ISAs or property.

I had someone comment on my last savings report asking how I intend to stick with my FI number when I can’t access my pension until I’m 55. I went into an off-road ramble in the comment response which ended with “I should probably make a post about this.”, so here it is! When retiring before your pension age, how do you last until you can withdraw your pension?


Why Pensions Are Awesome

First things first – Pensions in the UK are absolutely bloody awesome. There’s no other country which I know of that offers tax savings as good as this. If you’re in the higher rate tax bracket, contributing to your pension via salary sacrifice would instantly save you 42% of what you deposit from 40% income tax and 2% National Insurance savings. If you throw a student loan into the mix, you can add another 9% savings onto this, saving a total of 51%! Remember, this is a guaranteed return. If this was an investment fund and it stated – “Deposit £10,000 and it will instantly turn into £15,100!” people would literally be running over their Grandma’s trying to invest, so why aren’t more people doing this?

The awesomeness doesn’t even stop there. Pensions function in the same way as ISAs with their gains being completely tax-free. All that extra money you earnt from your 51% gain? It can now joyfully compound and the tax man won’t come after you for a penny. Oh, and the limit is £40,000 per year!! That’s more than double the $18,500 which Americans can contribute into their 401(k)s (their pension equivalent). Even if you weren’t a higher rate taxpayer, you would still save 41% in total as you’ll save an additional 10% with your National Insurance savings. Also, remember compound interest? You’re getting this extra money as soon as you invest, not when you retire. That extra 51% will be merrily compounding all of the way until your retirement. This could quite literally mean the pension depositor has amassed millions more than the devout ISA only’er. This generosity is bound to be stopped at some point. There are already talks of the Government scrapping the higher rate savings in favor of a 20% flat rate across the board. You should all be making the most of this whilst you still can!

But I Can’t Access Anything Until I’m 55?

Yes, that’s right – you can’t actually draw anything out of it. In fact, it’s completely out of bounds until you reach the ripe old age of 55. But, unless you’re planning on dying before then, you should probably still be depositing – you’ll be that age someday. You don’t want to be snatching 51% of insta-savings and years of that compounding from your future self. But you want to retire way before 55. So, what should you do?

Well, you build a bridge.

A pension bridge is what you can use to safely carry you over the (hopefully) long gap which will be your early retirement until you can reach traditional retirement age and gain access to your hefty pension pot. Your bridge – like a pension, can be any type of pot. It could be an after-tax investment portfolio, an ISA, or even just a bank account, the only difference is it can’t be locked away, you need to be able to draw down from it straight away.

Bridge pots can be a lot smaller than your pension pot. This is because it’s only got to get you to your pension pot, it doesn’t matter if it depletes whilst getting you there; your bridge can be falling down as you run over it! Your pension will be compounding, untouched, through-out all of your early retirement years, so it will make up for all of the extra you’ll be drawing from your bridge pot anyways.

Let’s Get Down To Business

What better way to explain this concept than with a real-life example. People – like the commenter, don’t see how I can have enough to retire with as I’m plunging so much into my pension. So, let’s use my exact figures as of this post and assume these things:

  • My current ISA pot is sitting at £11,759.75.
  • I continue to deposit £1000 per month into my ISA.
  • I do this for 6 more years (rounded up my FI date from 5.7 years).
  • My expenses in retirement are 10k per year.

Now let’s take these figures and fast forward 6 years into the future where a joyful SavingNinja is rejoicing and flipping his employers the finger as he hits his FI number. Using the newly added compound interest calculator in the Saving Ninja Super Spreadsheet, I should have £103,681.75 sitting in my ISA account. I’ll be 33 years old and I’ll need this pot to last me for 22 years until I can unlock my pension fortune. Ouch.

Adding my ISA pot of £103,681.75 into the also newly added Drawdown Calculator (seriously go check out the spreadsheet), it tells me that I’ll run out of money in 16 years and 2 months…Shit. That leaves me 5 years and 10 months off accessing my pension pot. What’s 49-year-old SavingNinja going to do? Eat beans and search down the back of his sofa? Maybe take up the pole? Well actually – there’s one more thing that we’ve forgotten to think about.


House equity.


Yes…House equity. People should most definitely be including house equity in their pot. If you have equity inside of your house which you could easily remortgage to release and still pay the same expenses, this is an asset! My 10k expenses are including my mortgage payments. In 6 years time, I could easily remortgage, take that equity, and pay the exact same mortgage fees, keeping my expenses at 10k per year. If I paid my mortgage off, my expenses would then lower by the same amount as the income I would have earned from releasing the equity. A house is basically just an alternative bank account.

So – adding my existing house equity of £26,887.50 into the pot and 6 years worth of £258.75 payments. My ‘house bank account’ equates to £45,517.50. I can (and should) happily add this onto my bridge pot. This brings it to £149,188.881, a pretty decent amount. Let’s go and put this back into the drawdown calculator.

37 years!2 This money should last me until I’m 70! I should definitely be able to leisurely cross the bridge and happily bask in the pension valley with lots of years to spare, and the awesome thing is – all of the time which I’ve spent crossing the bridge, I’ve not been touching my pension pot. This has been compounding away happily without anyone touching it. In fact, your remaining balance wouldn’t even have changed if you did have access to your whole pot. You’ll have exactly the same left. It doesn’t that you took 4% annually of only your ISA instead of 4% annually of your ISA and pension combined. You’ve still got the same final sum. The only thing that matters is that you made it to your pension without running out of money.

So, What Should I Do?

It’s simple, download the Saving Ninja Spreadsheet and play with the compounding and drawdown calculator. Choose a figure which you’d like to invest in an account which you can access whenever you want (like an ISA), compound it for the number of months it will take until you reach your desired total pot, then pop that figure into the drawdown calculator. If the calculator is showing too few years, decrease your pension contributions and increase your ISA contributions. But don’t forget to add your house equity to the drawdown pot!

Some Final Points

Remember, this is the FI/RE community. We plan to retire whilst we’re still youthful. For most of us, retiring won’t actually mean stopping work, it may just mean changing tact. I don’t know many 33-year-olds who want to go on a never-ending cruise for 50 years. They’ll be yearning to do something – and a lot of ‘doing’ results in earning. You should expect your bridge to be filled with at least some earning. This will mitigate your risk even more. If you’ve managed to amass some passive income streams before you retire – which I thoroughly recommend – this will also lower your reliance on a pension bridge even more.

If there’s one thing which I want you to take away from this post the most, it’s this – Save into your bloody pension. Don’t ignore it, the instant returns are insane. It doesn’t matter if you’re 18 or 30, you’ll be that age someday. If not, you’ll have a thankful spouse or another nominee which will inherit your pension and be glad that you took that 51% instant gain! Most countries even have a pension treaty, so if you moved to the USA the IRS wouldn’t come after your money. This is not the case for ISAs, they’d be on it like hounds, it’s tax-free status means nothing over there.


If you liked this article – please make sure you share it on your social networks. TSN is still a pretty new website, in order to grow into a sufficient Ninja Clan, we need to get the word out!

What’s your ISA/Pension split? Do you include house equity in your FI number? Join the conversation below.

  1. They may actually be way more equity than this if the house value goes up, which hopefully after 6 years it would have done. But you also can’t ignore the fact that it also could have gone down (think 2008).
  2. If you can’t get your equity into a tax-efficient wrapper, this figure may be a bit lower as the drawdown and compound interest calculator will assume that you’re saving in tax-exempt accounts and will therefore not deduct tax.

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26 thoughts on “How To Bridge To Your Pension

  1. I’m 37 and have always put a decent amount in my pension. I have 153000 in it now and contribute about 12% myself and 6% employer. I’ll also put my retention bonus in Jan 2020 in which is about 40k. I am debating whether to just absolutely hammer my pension and increase this to say 20% but I’m trying to build my non pension wealth a bit so its a balancing act

    1. Awesome! Remember – you can only put 40k into your pension each year, so be careful 🙂 What age do you plan on retiring?

  2. Ideally 50 but may start a family next year so that may put a dent in it lol. I want quite a fat fire so am aiming for a million plus property

    1. Pretty huge amount – it’s a nice goal to say you’ve breached a million pounds though 🙂 You’re probably pretty safe to put all of your savings into a pension, the extra gains you make from the tax savings will make it worth the extra tax you’ll pay to withdraw 40k directly from it. Unless they start putting up the pension age in the next 10 years, then you’ll have to look into shifting your strategy or locking your pension (if you have enough in it).

  3. My salary puts me in basic tax payer zone but recently my dividend passive income has risen to cross me over into the higher bracket so I’ve made use of salary sacrifice to put more in the pension for the future to maintain my basic tax payer status and also keeping my dividend taxes at 7.5% instead of 32%.

    Was discussing with a colleague about pension payments, I’m on a 12% match deal, my colleague is on a different deal but can still get 12% match if he’s prepared increase his personal contribution. He thought it was a bad deal for having to put more in, I thought he was an idiot for passing up on free money. His reasoning was a combination of not being able to afford it at the current time and seeing the value of pension pot going down rather than up and the feeling he got a throwing money down the drain. I left it with saying when its down a seeing it as an opportunity that my contributions will be getting more units during the lows and that have other savings/investment so to be spread out.

    My target for reaching FI is 50 but think it could be earlier, I have no plans to give up my current job before 50, whether I carry on after 50 depends on whether I’m enjoying my job and/or want to tip the balance more in me having more time for me, though if an exit opportunity came up (ie redundancy) then I would take it.

    1. Hey reckless,

      Yeah, I always strive to stay below the higher tax rate, don’t like throwing money down the toilet 🙂 I’ve tried not to let lifestyle inflation creep across the basic rate threshold – 45k should be more than enough for anyone to live off – I just pile everything after that into a pension and pretend my salary is 45k. Fingers crossed for redundancy! 😉

  4. I appreciate it may be a nice problem to face but any thoughts on the maximum pensionable allowance and it’s seemingly inevitable downward progression. I think it stands at £1m today but was £2m not so long ago. Any amount over this gets hammered with (I think) over 50% tax. Surely this and further meddling is a sign to adopt a balanced approach between pension and ISAs?

    My pension is at £300k right now (I’m 42) and putting in just under 20k per year.

    Also, while you get the basic tax relief back automatically I fine the additional rate tax relief comes only via a reduced tax code for the next year. I’m sure it’s still a positive but somehow it feels like it gets washed out – every year I seem to end up paying a tax bill despite having very simple PAYE earnings

    Great work on the site – always good to see new FI blogs coming out the UK. I’m hoping to kick mine off in the next month

    Cheers

    1. Hi Dan,

      Thanks for stopping by! Can’t wait to read your blog – let me know when it launches!

      The pension allowance is something to consider, although – super tax would only come into play once you have withdrawn that amount from your pension. e.g. You could have 2m in your pension fund, if you’re only withdrawing 30k per year from it, it would take you 34 years until you start paying super tax. You’d then be 89, you probably wouldn’t care at this point. I also don’t think your allowance has anything to do with inheritance tax, so if you died around about then, nothing would change (need to read up on that though).

      Obviously, you could think, why would you want all that excess in a pension then? The answer is the same as why you’d want a lot more than you probably need in any FI pot – safety. If your pot dropped by 50% in a recession, you’d still be able to happily take 30k per year out of it with no worry at all. There is also the hopeful thinking that within the next X amount of years until you retire, the allowance should hopefully go up based off earnings. I know this hasn’t been the case in the past, but we can always be hopeful. If you think you’re ‘done’ with your pension, you can always lock it – so you can no longer deposit, but you keep the current allowance. A lot of people did that before the last reduction.

      I guess really, no one bloody knows what’s gonna happen, but that’s the same with ISAs. I wouldn’t worry about it unless you were looking at overshooting the allowance MASSIVELY (like 3x). I may reduce my pension deposits down to employee match when I have a considerable amount in there. I’m going to aim on not having more than 1.5m, but I’ll probably forever contribute enough to get my employer match, as that’s waaayy too good to throw away (pushes insta-savings to what – 151%?)

  5. This is awesome! Just this week I had been looking at my overall FI plan and was perplexed on how to bridge this gap so thank you for this article, very insightful. Something tells me with state pension age rising our workplace pension age will do the same, what are your views on this?
    I’m off to check out this spreadsheet and make a new plan 🙂

    1. Hey K, thank you dude 🙂

      I’m literally ignoring the state pension, 68 is just way too old an age for me to consider it. If it happens, great – I’ll consider it a bonus. I’m not too pessimistic to think that it will be gone completely, but I do think that it will keep going up. You could say the same for the private pension, but the difference is – you can lock this. If you front load your pension and get it to a decent size whilst your still young, and the Government decide to raise the age from 55 to 60. You could actually ‘lock’ your pension so that for you, the age stays at 55, but you can no longer contribute anything into it. If I FI in 6 years but end up still working or working part-time, I may do this if the age keeps being pushed up. This is a good problem to have though 🙂

      I hope you like the spreadsheet! I’ve kept all of the Ninja resources on the Ninja Page which you should get the link to once you subscribe to the blog. I need to work on this and start appending it to blog update emails, so please let me know via email if you have any issues finding it! And be sure to drop by on the spreadsheet page to let me know what you think and if you have any suggestions for future macros/calculations! Need to add pretty pie charts 😉

      1. Thanks for replying to my earlier note SN. While on the question of spreadsheets and the like I wanted to quickly see how you go about calculating net worth and savings rate in your numbers. There are so many different ways to calculate both it seems and they can throw out quite differing numbers.

        I always struggle to determine how to work out my savings rate with respect to the pension contribution my employer makes for me. It’s a saving for me so it should be in there but its outside the monthly humdrum of my salary etc. I’m thrown whether to add these contributions to my income to arrive at a total before working out my total saving (pensions plus what I save per month out if salary) I’m not being clear but if I earn £5k per month net and save 0k myself but my employer puts in 1k. Is my savings rate 20% or something different? Sorry for such a incoherent question!

        Any tips as to how you calculate net worth and savings rate greatly appreciated – what you include or exclude. The first step to track things going forward is to have an accurate number today and I’m struggling with the right approach

        Cheers

        1. Good question. So – I always put everything which I’m actually saving (investing) into my savings rate calculations. My 13% employer match is being added to my total savings rate, any bonus I earn or extra income I make will also push up my savings rate number (if I invest it). The reason I do this is because the most important figure (for me) which the savings rate can tell me is this: How long will it take me until I’m FI? This calculation doesn’t care where your money has come from, it doesn’t care if it was from your main salary, or extra from your employer – it only cares about 1) Your expenses and 2) How much your investing. These are the two things that I’m using to calculate ‘Years To FI’ and your savings rate percentage in the Savings Ninja Spreadsheet. The spreadsheet assumes that whatever you don’t spend – you invest. That isn’t always going to be the case (same for me), I’m just treating it as a buffer and ignoring it as it isn’t important for the FI calculations.

      2. Thanks for all this info. Just wondering where you heard about the pension ‘locking’? I had a quick look and couldn’t find anything…

        1. Hi Dan!

          After some searching for this, like you – I can’t seem to find anything online! This phrase was probably something which I made up. When the lifetime allowance was reduced in 2016, I recall the government offering the ability for people who weren’t retired yet to ‘lock’ their allowance at the figure of 1.25m. They would then not be able to contribute any longer into their pension, but their allowance wouldn’t reduce. I may be muddling this up with an increase in pension age. I’ll have to find out more and get back to you on this one! Although, I guess previous offers don’t insinuate that the same offer will be given on future changes 🙁

  6. Good article. I cottoned on to the pension thing quite late, and had bought my house and saved my bridge (albeit I didn’t think of it in that way) before I really started hammering the pension (i’m 39 now). I’m technically FI, but about £300k away from the number I really want. This final stretch feels very doable with the pension allowances.

  7. Holy crap! I’m sitting here in the good ol’ US of A, and I am super jealous of your pension savings plan over there! My wife and I combined can put away a good amount, but we sure aren’t getting a 51% return on our investment!

  8. I’m older than you so by the time I reach FI (or as close as), I’ll be able to access my personal pension (SIPPs). That said, the pot I’m building is still a bridge, one which will fund my early retirement until I can draw down on my DB pension (at 65) and then my state pension (at 67). My ISA/SIPP ratio is around 30/70 at the moment but I want it to be closer to the other way round as I want to pay as little tax as possible (in drawdown) and ISAs offer that flexibility.

    Although I don’t plan to, if for some reason I end up depleting my entire pot before I draw down on my DB and state pensions, the combination of these two should provide a minimum ‘income floor’, ie cover all my basic needs and expenses so I’ll still be in a fairly comfortable though not extravagant position, assuming I have no other income (which won’t be the case).

    You’re on a very sweet deal with your company pension – my current work pension is set at the minimum, ie I contribute 3%, employer matches up to 2%. Next year, it’ll go up to 5%/3%. Bit rubbish if you ask me but better than nothing. At my last employer, my contribution was 7%, employer match was 14%.

    If I didn’t have my DB pension, my plan would be totally different and not so straight forward.

    1. Yeah this is the first employer that I’ve had which has had such a generous pension contribution. It’s also the first big corporation I’ve worked for, so probably why 🙂

      30/70 sounds about right, although I may argue that it could be less in the ISA as you’ll be closer to pension age when you retire. Have you worked out if the tax savings on the way in are better than the tax savings on the way out for the ISA?

      For example – If you were saving 1k per month into your pension via salary sacrifice and you were a basic rate taxpayer (31% savings) and did so for 20 years, with an average growth of 6% per year you’d have £463,351.10.

      If you instead took the 31% tax hit from income and national insurance from that £1000 and saved the remainder (£690) and in turn did this for 20 years, you’d have £320,402.26 in your ISA.

      That’s £143,948.84 more you’d have if you’d put it into a pension. You’d be able to take £115,837.75 out of your pension tax-free if you went with the pension route. That wipes out any ISA benefit in my eyes. This is doubly so if you’re a higher rate taxpayer.

      Obviously, this was an extreme case 🙂 but just seems that the benefit of having the compounding of the extra savings more than wipes out the tax cost of withdrawing the pension over your personal allowance.

      1. Thanks for the detailed response.

        Unfortunately, I don’t have the time luxury of leaving my SIPPs to compound for 20 years! I still invest monthly into them so do benefit from some tax relief, just that I’m pumping more into my ISA than my SIPPs right now as I want the cushion of flexibility that ISAs offer. At some point, I’ll build up my cash ISA as back up for any stock market fluctuations, so I don’t have to sell when prices are rock-bottom.

        During the ‘bridge years’, I don’t intend to pay any tax whatsoever (although I’ll probably continue to pay my NI). At the point when I stop working fulltime, I’ll have to also rely on my other income (rental) which is taxable, hence the juggling act required to stay under the threshold, although if I’m still matched betting, then that tax free income will definitely come in handy!

        I haven’t done the complete maths yet because I think I’m still too far away from my goal to get into that sort of detail, but perhaps in the end, it might not be 30/70.

  9. Have you thought of putting the higher rate tax relief into your ISA pot? The first 20% gets automatically added by your pension provider but the second 20% has to be claimed in a tax return and when you receive the money from HMRC there’s no stipulation regarding where you need to put the money… Seems to me like quite a good way of getting all the benefits of a pension without having to completely lock in the tax relief until you’re 55.

    1. Hi Dan,

      It doesn’t quite work like that. Using salary sacrifice and just income tax savings – If you contribute £10,000 into your pension, only £6000 would actually be taken from your salary. If you were to take that £6000 (£10,000 – 40%) instead and contribute that into your SIPP, HMRC wouldn’t give you £4000. They’d give you 40% of £6000 (£2400). To get £4000 extra you’d need to contribute £10,000 into your pension. It all works out the same in the end (minus the additional NI and student loan savings).

      1. But correct if I’m wrong, you always have to use a tax return to claim the higher rate tax relief (it says so quite clearly here – https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief). In fact many, many people don’t claim this extra tax relief (see https://www.magma.co.uk/300million-pension-tax-relief-unclaimed/). This tax relief is given to you in cash and I believe you’re then free to do whatever you like with this cash.
        I really don’t want to be confrontational at all (and I really appreciate you blog!) but according to that HMRC link I’m not sure you’re correct in saying that you would automatically get £10000 in your pension from sacrificing £6000 (regardless of SIPP or workplace pension). You’d automatically get £8000 but would then have to go and claim the extra £2000 yourself. (this pension calculator would seem to agree – https://www.hl.co.uk/pensions/tax-relief/calculator)
        Happy to stand corrected though!

        1. Hey Dan,

          I’m happy you’re commenting 🙂 I’m always up for a discussion!

          So, with regards to the tax relief, you 100% don’t have to claim anything back if you’re contributing through ‘salary-sacrifice’. This means that your pension contributions are taken before you get taxed. If you’re a higher rate taxpayer, let’s say earning 55k per year and you contribute 5k in one tax year into your pension via salary sacrifice (needs to be set up by your employer), it would then be like you’re earning a 50k salary and you’d get taxed accordingly. BUT, if you took that extra 5k as income instead, you’d lose 42% of it (40% higher rate income tax and 2% ‘Above Upper Earnings Limit’ national insurance), so you’d actually only see £2900 in your bank account. So – from putting that 5k into your pension via salary sacrifice, you’ve effectively made (or more like saved) £2100, which is 42% of £5000. No claiming needed.

          So, if you don’t use a salary sacrifice scheme, you would have to claim the extra higher rate 20%. The difference with this though is that you actually have to deposit the amount you want to claim for. So to have the same amount of ‘relief’, you’d need to deposit 4k into your SIPP, get the 1k extra added automatically making it 5k. You’d then have to claim an extra 1k back from HMRC, because you would have already paid that extra 1k when you got paid your income. It’s not extra money.

          I hope this helps dude 🙂

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