Pensions Versus Savings

EdInvestor

homersimpson wrote:

my friend has works pension and is buying added years to he can get max works pension. this pension is contracted out so he will get additional state pension.

If he's contracted out, it means he won't have additional state pension.

He wants no/litle risk. he looked at some stakeholder pensions providers (e.g. standard life, norwich union etc) and they have funds with minimum risks (e.g. cash deposits). some of these funds however are only paying about 3% returns and he could get more than that in a building society account but then he would not have the extra 22% from the gov that stakeholder pensions provides.

Is he aware that he will end up with only a quarter of this? Pension money is tax free on the way in, but he will pay tax on the way out ( apart from the 25% tax free cash). He will also lose all access to the capital forever.If he already has a good pension and is very risk averse, then he'd be better to stick to ISAs IMHO as he will pay charges on a cash deposit in a pension, hence the lower return. Income from his ISAs is tax free, as is the capital which is available any time.

EdInvestor

margaretclare wrote:

At times it has been tempting to stop it, but I really do like the 22% which is added to every pound that I save, and I can take another 25% tax-free in 5 years' time.

This is a misconception.

The Government adds 22% to the money going in, and then takes the 22% back when you pay tax on the pension income later - apart from the 25%.

If you didn't get the 25%, there would be no tax perk attached to pensions at all - and nobody would invest in them.

But the 25% is the only perk, and many people think it's not enough to compensate for the requirement to buy an annuity, the limits on how much income you can take and the restriction on accessing the money before 50 (shortly to rise to 55). None of these restrictions apply to an ISA and nor is it taxed.

cheerfulcat

EdInvestor wrote:

If you didn't get the 25%, there would be no tax perk attached to pensions at all - and nobody would invest in them.

But the 25% is the only perk

No CGT in a pension...that's a pretty big perk to overlook :-)

EdInvestor

CGT? There's none in an ISA either

dunstonh

MC is correct about the tax relief in her case. If you ignore growth and commence it immediatly a net contribution of £2808 (3600 gross) would give a return in excess of 10% p.a. What ISA can give a guaranteed return like that? Also, if MC was to pass away, the pension funds would not be included in the estate for IHT purposes but the ISAs would.

If you didn't get the 25%, there would be no tax perk attached to pensions at all - and nobody would invest in them.

Wrong.

Ed, you really ought to consider that pensions have advantages and disadvantages as do ISAs. That other thread in savings forum where you suggest an ISA instead of a pension is just plain wrong. In this case, you are also wrong.

cheerfulcat

EdInvestor wrote:

CGT? There's none in an ISA either

That's not the point. You said that there was no other tax relief in a pension apart from the initial income tax relief when there is in fact also the *considerable* advantage of no CGT chargeable.

The frustrating thing is that I actually share many of your views, but I don't think that it is fair to make the case against saving in a pension wrapper worse than it actually is. Better to lay out the actual *facts* and let people make up their own minds, rather than try to lead everyone down a path which may only be suitable for some...

EdInvestor

Better to lay out the actual *facts* and let people make up their own minds..

Indeed so.One tries. Pity others don't do the same.

It's patently obvious that when many young people ask about "pensions" they are talking very broadly about saving up so as to get a retirement income, not about the technical pension tax wrapper.

Yet they are told that getting a pension ( in its tax wrapper meaning) is a good idea, even when there is no employer contribution and the individual pays basic rate tax.With A-day coming up, which will switch tax relief from "use it or lose it" to the lifetime limit, how can this sensible?

There's no longer any need to save in a pension with no employer's contribution until you're much older.You can get a lifetime's worth of tax relief when you're 50 or 60 without needing to put up with any restrictions at all.

cheerfulcat

EdInvestor wrote:

Indeed so.One tries. Pity others don't do the same.

It's patently obvious that when many young people ask about "pensions" they are talking very broadly about saving up so as to get a retirement income, not about the technical pension tax wrapper.

Yet they are told that getting a pension ( in its tax wrapper meaning) is a good idea, even when there is no employer contribution and the individual pays basic rate tax.With A-day coming up, which will switch tax relief from "use it or lose it" to the lifetime limit, how can this sensible?

There's no longer any need to save in a pension with no employer's contribution until you're much older.You can get a lifetime's worth of tax relief when you're 50 or 60 without needing to put up with any restrictions at all.

The maximum amount you can save in an ISA every year is £7000. ISAs have five years left to run. There is absolutely no guarantee that their tax-free status, including that of the income from them, will continue after that, nor that there will be a tax-free replacement. Granted, the tax-free status of pensions is also not guaranteed - in fact, I suspect that eventually they will be made compulsory and the income tax relief scrapped - but any future government will find it a lot harder to mess with "pensions" than with "savings".

There is also nothing to say that the apparently generous rules regarding lump sum investments into pension wrappers will a) actually come into being and b) continue to exist for the next 30 or 40 years - the time that many people have left to retirement. I think that it is a massive mistake to base long-term investment plans on schemes which were meant to be short term. By all means, encourage people to use ISAs for savings, but I for one would not put long term savings only into ISAs - putting all your eggs in one basket is never a good idea, whether investment basket or wrapper basket...

EdInvestor

CC,

If I'm not wrong, like me you favour HYP type investment.So as you know there's actually no real need to be distracted by the tax issue at all.

It beats me why people are so besotted with it.

margaretclare

EdInvestor wrote:

This is a misconception.

The Government adds 22% to the money going in, and then takes the 22% back when you pay tax on the pension income later - apart from the 25%.

If you didn't get the 25%, there would be no tax perk attached to pensions at all - and nobody would invest in them.

But the 25% is the only perk, and many people think it's not enough to compensate for the requirement to buy an annuity, the limits on how much income you can take and the restriction on accessing the money before 50 (shortly to rise to 55). None of these restrictions apply to an ISA and nor is it taxed.

Ah yes, but in my particular case, I'm on an age-related tax allowance. £7090 in the current tax year plus half of the married people's tax allowance (we were in the last group of people to be able to claim it, and we split it between us). This extra 22% that is being added to my contributions is valuable because these are the last few years I'm ever going to be able to save. In addition, the tax allowance will be a little higher when I'm 75 when I plan for this stakeholder to mature. I have a few things that I want to do with this 'windfall' in 5 years' time!

Aunty Margaret