Increase contributions to avoid all 40% tax

papa782

Hi

I think my pension needs a boost and I am considering paying all of my salary that gets taxed at 40% into my current plan (or start another).

I currently pay £500 per month into a Clerical Medical stakeholder which means that my taxcode is 903T

1) Do you think this is a good plan?
2) How do I work out how much to contribute?

Thanks

dunstonh

1) Do you think this is a good plan?

The clerical medical personal pension is better than the stakeholder. Especially if you have more than 25 years to go until retirement (its cheaper than stakeholder on their interim charge version).

2) How do I work out how much to contribute?

By deciding how much you want back in retirement and making an assumption on average rate of return to calculate how much you need to pay.

Remember not to let the tax decide how much you pay. If your income is going to be close to £21,800 in retirement in todays terms then paying extra into the pension now and getting 40% may not be cost effective. You really need to keep it under the £21,800 or go well through it. You dont really want to be just over.

papa782

thanks dunstonh

I thought that the tax benefits are one of the major reasons for saving in a pension.

I was looking at it the other way of 'how much can I afford to put in'. I assumed you can't put too much away...

Paul_Herring

papa782 wrote: »

I thought that the tax benefits are one of the major reasons for saving in a pension.

There are very few tax benefits to a pension - it's mainly tax deferral in that while you don't pay tax on it now, you will likely pay tax on it when it comes to collecting your pension.

This does of course exclude the 25% lump sum which is tax free; assuming that's still around when you come to retire...

papa782

I see.

Perhaps I should get involved in some equity ISA's instead??

I am sure they will do away with the 25% tax free lump sum when I retire. After all, when I got a mortgage they did away with MIRAS and when I got married they did away with the married man's tax allowance...

rich010273

Avoiding higher rate tax now and retiring to a tax haven would probably be the most efficient use of a pension. I'm guessing this will also become more difficult as the government gets strapped for cash.

Obviously means you wouldn't be able to use the NHS or equivalent and would have to provide your own medical insurance. Wouldn't really suit people who have a lower pension income at retirement age.

ffacoffipawb

papa782 wrote: »

I am sure they will do away with the 25% tax free lump sum when I retire.

Doubtful. The umpteen unfunded state schemes with millions of civil servants, teachers etc allow this tax free cash. There would be uproar if it was removed or taxed. The Unions wouldn't allow it.

And if the state pensions schemes pay it out tax free, so can private schemes.

pandora205

Oooh this has made me think.

I have an occupational pension plus pay AVCs to take me out of higher tax bracket. This means I'm paying quite a lot in contributions (15.9% I think) with both, plus of course my employer contributes to the occupational pension. Now I'm wondering if I should just do all those things I've been putting off (like replacing my kitchen).

papa782

I thought there would be general encouragement to contribute as much as you can to your pension...

Should I invest my full shares ISA allowance(and my wife's) before increasing my pension?

dunstonh

I thought there would be general encouragement to contribute as much as you can to your pension...

Nope. Things have moved on from the old salesmen days. Its not pension provision any more but retirement provision. That means utilising the most efficient means to fund for your retirement.

Should I invest my full shares ISA allowance(and my wife's) before increasing my pension?

See the ISA vs pension thread as that gives an indication of the optimal way to plan (personal allowances used up first with pensions and then ISA above that).