Pension Planning

shaunrc

Hi

Thank you to those that defended me!

However my logic was accurate and so that Ed's assertion is disproved let me explain it.

In this instance keith is a higher rate taxpayer so he could put £100 into a non-pension investment. Or he could put that £100 into a pension and as he gets tax relief on the contribution then the pension could receive £166.67. This is assuming he chooses to pay in all the tax relief as an equivalent to a net £100.

Then any growth on a pension will be on the £166.67 whereas in a comparable investment it would be on £100. So assuming there is growth (i did mention that there isnt always growth in my original posting) the pension fund will grow to a bigger pot.

Ed's follow up that you get taxed at the end has an element of truth about it but it does not clawback the growth. It is possible to be taxed on the growth and it may even be likely but as jamesd says take a look at this persons circumstances.

So the way I see it Ed owes me an apology followed more importantly by an apology to the original poster .

jem16

shaunrc wrote: »

Then any growth on a pension will be on the £166.67 whereas in a comparable investment it would be on £100. So assuming there is growth (i did mention that there isnt always growth in my original posting) the pension fund will grow to a bigger pot.

Ed's follow up that you get taxed at the end has an element of truth about it but it does not clawback the growth.

I don't usually agree with Ed but I can see where she is coming from here.

Take your examples;

£166.67 into a pension. After 20 years assuming 10% growth it would be worth £1121.

£100 into a comparable investment, assuming same growth and term would be £673.

If the pension pot is then taxed at 40% (unlikely but possible) then £1121 becomes £672.60 - 40p less.

So technically she is correct as far as basic figures are concerned.

However the ability to take 25% tax free will alter that as will the first £10k of taxable income being tax free. So of course will getting higher rate tax relief on the way in and basic rate tax on the way out. This is where everyone else is correct in that you have to take notice of the individual circumstances.

However one question which is yet to be answered. The op has a salary of £45 but only £27k of that is his basic salary. Does the other £18k bonus count as far as getting higher rate tax relief on his pension payments ? I had read that most bonuses do not count.

EdInvestor

jem16 wrote: »

I don't usually agree with Ed but I can see where she is coming from here.

Take your examples;

£166.67 into a pension. After 20 years assuming 10% growth it would be worth £1121.

£100 into a comparable investment, assuming same growth and term would be £673.

If the pension pot is then taxed at 40% (unlikely but possible) then £1121 becomes £672.60 - 40p less.

So technically she is correct as far as basic figures are concerned.

Yes this is what I meant, there is no growth on the tax relief. The only real advantage is on the 25% tax free cash ( but this is inadequate IMHO to compensate for the lack of flexibility of income and loss of the capital in a pension compared with other investment strategies.)

The OP will have clocked up full allowance to the 2 state pensions*, so is unlikely to have much space in his tax band for tax free pension income after retirement. He could benefit from the 40% tax relief going in but 20% tax coming out, if he is a high rate taxpayer.I mention this aspect in my post further up the thread.

To reiterate, IMHO private pensions are attractive if there is 'free money' available from an employer and/or the individual is a high rate taxpayer who will pay basic rate in retirement - or has a very low state pension entitlement and thus scope for additional pension income within the 10k age tax free allowance.

Others would be better using the annual 'use it or lose it' stocks and shares ISA allowance. Pension tax relief is now offered on a lifetime basis so that large lump sums can always be placed in a pension later if appropriate eg ,if the investor start paying higher rate tax.

Otherwise unless self discipline is a major problem, leave pensions until later.Even then I would advise people who think it's an advantage to lose control of their capital to try growing up first.

*He should get a forecast at https://www.thepensionservice.gov.uk

shaunrc

"Otherwise unless self discipline is a major problem, leave pensions until later.Even then I would advise people who think it's an advantage to lose control of their capital to try growing up first"

Thanks for the abuse Ed and also thanks for putting words in my mouth i did not say.

EdInvestor

shaunrc wrote: »

Thanks for the abuse Ed and also thanks for putting words in my mouth i did not say.

What abuse? That comment does not refer to you.There are other contributors to this board who often mention the fact that you can't get money out of a pension as an advantage. It may be so for some people but for others it's a major disadvantage.

It's also apparent that many advsiors don't mention this aspect when selling people pensions, so we have regular posts from people asking how they can get their money out. This is so common that it seems to me the issue is worth mentioning in any overall evaluation of pensions as I offered above.

jem16

EdInvestor wrote: »

There are other contributors to this board who often mention the fact that you can't get money out of a pension as an advantage. It may be so for some people but for others it's a major disadvantage.

The whole purpose of a pension is to provide an income in retirement. It is not meant to provide for a new roof, a new car, your son/daughter's wedding or whatever happens to turn up along the way. Before you know it that cosy retirement fund has disappeared along with the idea to replace it.

However let's assume you do manage to keep hold of it and it's there for your retirement. What control have you got exactly? If you spend it your retirement income suffers.

It's also apparent that many advsiors don't mention this aspect when selling people pensions, so we have regular posts from people asking how they can get their money out. This is so common that it seems to me the issue is worth mentioning in any overall evaluation of pensions as I offered above.

I'm sure there are many who were made fully aware of this fact at the time but conveniently forget when something turns up. These very same people would be the first to complain if they were able to get hold of it then wonder why they have no money when they retire.

EdInvestor

jem16 wrote: »

However let's assume you do manage to keep hold of it and it's there for your retirement. What control have you got exactly? If you spend it your retirement income suffers.

Depends on your investment strategy whether that happens. It's also often the case that people want to vary retirement income - taking more from the pot when they are younger for travelling and enjoying themselves on the basis they will need less when they are really old and probably finding it more difficult to get about.

So spending some of the capital earlier and taking a lower income later might be part of their planning.An annuity is a blunt instrument, you get the same every year. In the kind of very long retirements you get these days, that's an out of date way of looking at things.

In addition, anyone opting for a spouse pension is penalised during his or her own retirement by being forced to take less money - that's one reason drawdown is growing in popularity as it partly resolves this issue even though it's stiull hedged about with restrictions. .

Then of course there's the question of what happens to your pot of capital when you die.Strangely enough, most people really don't like the idea that the insurance company gets it, especially when they pay a pretty derisory income in return.And to add insult to injury, the pension income is taxed (quite a few people don't realise this either):rolleyes:

I think it's fair to say that these days there's a lot of disappointment attached to pensions: the only people who are really happy are those in the public sector and a few large blue chip companies who are in traditional final salary schemes.And to be honest, it's hard to see that the public sector schemes can last long in their present form when the taxpayer who is funding them is now generally so much worse off.

dunstonh

Otherwise unless self discipline is a major problem, leave pensions until later.Even then I would advise people who think it's an advantage to lose control of their capital to try growing up first.

You clearly dont realise what a good proportion of the general public that applies to. Especially the younger ones.

Then of course there's the question of what happens to your pot of capital when you die.Strangely enough, most people really don't like the idea that the insurance company gets it,

The insurance company dont get the pension. The nominated benefiary gets it. Please dont mix up annuities with pensions. Its not fair on those that are reading who may read your snippets and think you are right.

And to add insult to injury, the pension income is taxed (quite a few people don't realise this either)

Its taxable income but that doesnt mean it will all be taxed.

It's also apparent that many advsiors don't mention this aspect when selling people pensions, so we have regular posts from people asking how they can get their money out. This is so common that it seems to me the issue is worth mentioning in any overall evaluation of pensions as I offered above.

It is very clear in the documentation and the reason for doing a pension. When people are in financial problems they will often post asking just in case there is a way. That doesnt mean it wasnt told.

jem16

EdInvestor wrote: »

Then of course there's the question of what happens to your pot of capital when you die.

My pension is to provide for my retirement not for my children's. I brought them up to be sensible about making their own provision. I have and will continue to help them get started, especially in the housing market but I will not put my comfort in retirement at risk and neither do they expect it.

MrMicawber_2

IMO:
1) Everyone's first responsibility to themselves should be to secure the income they need in retirement.
2) After they have done this they can look to see about leaving lump sums etc to children or whoever else.
3) Until they have done this forget it. Play Russian roulette with your pension if you like. You can throw as many if's and but's into the conversation you like but if you don't have the income you need the rest pales into insignificance.
4) For most people pensions are the best mechanism. I really fail to understand that there is any debate about this. Quite simply most people are neither financially aware nor financially interested and would also spend the money if they could. For those who are aware, interested and disciplined then look at the variations on a theme (ISA's in particuar). I'm afraid, though, that anyone who thinks that the country is full of responsible, disciplined savers and investors who would not touch their retirement 'pot' if they were able is living in a rather strange type of parallel universe - let's call it cloud cuckoo land or perhaps la la land.
5) Unfortunately 'telling people to grow up' is a somewhat fatuous throwaway statement which is not at all helpful.