Pension, or not to pension...

GrumpyOldMan_2

This is the problem I have with pensions.

Say I save £300 a month for the next 30years, that's £108K (excluding any interest earnt).

Now after 30years I retire and invest my £108K in a building society earning say 4%, so i get an annual income of £4320. After I die, my spouse can still get her hands the the £108K or continue to draw £4320 income.

Contrast that with a pension fund. To keep it simple, lets assume the same figures as above. Now, when I die, the pension company get to keep my £108K pot of money - yes I can elect to get 50% of my pension payable to my wife but that would reduce the initial annual income further.

Now, I would need to live 25 years after retirement just to get my £108K back and break even. (25yrs X £4320 = £108K).

So why would I want a pension, because even if I made 25years after retirement, and died the following year - if I had a pensions my pot of money would die with me (or provide a smaller pension for my spouse) but if I had gone the savings account route, my spouse could then elect to get her hands on the pot of money, continue to draw the income or a mixture of the two. Moreover, when spouse dies, there is still a pot of money to pass over to the children.

So my question is, why do I need to hand over my money to a pension provider again????

(BTW I do have a pension to which I save £300 each month but it still makes me wonder why I am doing this because it just doesn't seem to make sense, given the above scenario).

And to throw another scenario in, I could be putting that £300 towards another BTL property - which after the mortgage is paid off - I can still draw an income from via the rental income and still have the capital value of the property.

Look forward to your responses. :beer:

lvader

What if you held loads of gold, do means tested benefits take gold ownership into account?

dunstonh

This is the problem I have with pensions.

And I will de construct your problems

Say I save £300 a month for the next 30years, that's £108K (excluding any interest earnt).

they dont earn interest but I will ignore that for now

Now after 30years I retire and invest my £108K in a building society earning say 4%, so i get an annual income of £4320. After I die, my spouse can still get her hands the the £108K or continue to draw £4320 income.

Firstly you wouldnt have £108k because you wouldnt have got tax relief. You would have £86,400

£86400 at 4% = £3456. Take off 20% for tax = £2764 a year.

Contrast that with a pension fund. To keep it simple, lets assume the same figures as above. Now, when I die, the pension company get to keep my £108K pot of money - yes I can elect to get 50% of my pension payable to my wife but that would reduce the initial annual income further.

So, the bank figure to beat is £2764 a year net.

Your fund is higher due to tax free growth and tax relief and your annuity rate with 50% spouse is 5%. Although you could easily do income drawdown instead of annuity and your spouse gets 100%. When she dies or you are both dead your children can then be paid the remaining pension fund minus a tax charge.

So, 108,000 @ 5% = £5400. Minus tax = £4320

That's £1556 a year higher with the pension.

Now, I would need to live 25 years after retirement just to get my £108K back and break even. (25yrs X £4320 = £108K).

No you wouldnt.

20% relief going in. 25% tax free cash coming out. Only just under over half the money. So, in very simple terms and ignoring growth, 55% of what is in the pot is your money lost (assuming you didnt do income drawdown or value protect). With the higher income you wont need to erode your personal savings. So, you save money there.

jamesd

As dunstonh says, you're forgetting the tax relief. At retirement with the pension you get £27,000 cash plus the taxable income from the remaining £81,000. With the ISA you get the tax free income from £86,400. With a personal income tax allowance of almost £10,000 before you pay any income tax that pension income might almost be as tax free as the ISA income if you're not a well off pensioner.

Your wife can inherit the whole of your pension pot, just use income drawdown instead of buying an annuity. After a tax charge it's also inheritable by the children after she dies.

mitchaa

dunstonh wrote: »

And I will de construct your problems



they dont earn interest but I will ignore that for now



Firstly you wouldnt have £108k because you wouldnt have got tax relief. You would have £86,400

£86400 at 4% = £3456. Take off 20% for tax = £2764 a year.



So, the bank figure to beat is £2764 a year net.

Your fund is higher due to tax free growth and tax relief and your annuity rate with 50% spouse is 5%. Although you could easily do income drawdown instead of annuity and your spouse gets 100%. When she dies or you are both dead your children can then be paid the remaining pension fund minus a tax charge.

So, 108,000 @ 5% = £5400. Minus tax = £4320

That's £1556 a year higher with the pension.



No you wouldnt.

20% relief going in. 25% tax free cash coming out. Only just under over half the money. So, in very simple terms and ignoring growth, 55% of what is in the pot is your money lost (assuming you didnt do income drawdown or value protect). With the higher income you wont need to erode your personal savings. So, you save money there.

I read that as saving £300pm into an ISA post tax. This would then grow with inflation for the next 30yrs to which he would then keep at 100% capital and take the income generated by the interest.

So aswell as having the income generated by the interest, he still also has the original capital.

I can see where he is coming from.

However, it's not very tax efficient to be saving £300 post tax just now and then you have to consider you are missing out on free money by the way of employer contributions. £300pm personal contribution is more than likely to be £600pm going into the pot with employer contribution.

1 question...Why would he have to pay tax on the income generated post 65? If its under the £10kish threshold he wouldn't be liable for tax surely?

Another benefit would be that he would be generating an income for the next 30yrs aswell pre retirement although obviously he would be taxed as it would supplement his main earnings.

dunstonh

I read that as saving £300pm into an ISA post tax. This would then grow with inflation for the next 30yrs to which he would then keep at 100% capital and take the income generated by the interest.

Doesnt matter if its post tax or pre tax. The pension ends up with a bigger pot.

So aswell as having the income generated by the interest, he still also has the original capital.

Yes does. However, he has a lower income and then use to use the savings to make up the difference. So, the erosion of savings is more likely than it would be with the pension.

1 question...Why would he have to pay tax on the income generated post 65? If its under the £10kish threshold he wouldn't be liable for tax surely?

Add on the state pensions and you are looking at 5k-8k. So, a good chunk of it is going to be taxable. Even if the whole amount does end up being tax free it doesnt matter as I applied the same tax level to both.

Batchy

You missing out on a few assumptions

your all assuming 20% tax relief, when it could even be as high as 40%

I am avoiding making personal pension contributions as im tettering on the edge of 40% I will ISA it, and then lump sum to the 20% level each year. I am capable of doing this calculation each year without a problem.

So stick it in an ISA/ or just savings, so I dont lose tax free status availability for a year or so, then whack it into a pension with 40% relief. Straight away, it buys more money, with a circa 2 years of substantial growth already achieved through tax relief. Put it in lower risk ... great lump sum tax free back on retirement. plus an income for the rest of your life.

GrumpyOldMan_2

Thanks dunstonh for your detailed response. I did not know about the income drawdown option that would allow the capital to pass to my estate. I will need to look into this.

To answer the other responses, I am only a basic rate tax payer and my employer will only contribute 2% of my basic income.

dunstonh

Despite me pointing out some of the positives, it doesnt mean you should disregard the alternatives. Pensions have advantages in some areas but they are not the answer to everything. A combination of pension and ISAs is usually best. Going 100% pension or 100% ISA will not be the best way for most people.

Free money from the employer certainly helps the pension more though.