delaying pension- would this work?

HGLTsuperstar

Think I'm being overoptimistic, and already know the answer, but have a laugh and then confirm what I probably already know.
With the pension/ISA choice, and the new A-day rules, if you currently are a basic rate taxpayer, but will be higher rate within the next 3 years, would you be better to refrain from paying into pension at the moment and putting that same monthly amount into ISA then pay into pension as lump sum when reach higher rate and get 40% tax relief on the lump sum, instead of 22% now as you go along. Also if the pension has employers contributions of say 5%, would they pay 5% on that lump sum, or only on later contributions, in which case you've lost "free money" from the time in the ISA which, I'm guessing, outweighs the benefit of the extra tax relief?

Are my ramblings clear enough?

ReportInvestor

Crystal clear HGLTs, and what an interesting question that must affect quite a few people.

Obviously it depends on your other circumstances as well, but....

I'd be tempted to go for the pension up to the amount needed to get the maximum employer contribution as this is free money and might be reduced in the pensions' shakeup sweeping the country as employers struggle to finance pensions. If your's is not a final salary scheme (it sounds like it's not) then there is less chance of a nasty forthcoming shock.

On additional money, the ISA is clearly best - as you've already worked out, the chances are that you could invest that money later on in a pension while getting 40% tax relief.

In the meantime make enquiries about what your employer intends to do about lump sum contributions in 3 years time after A-Day, but I suspect you may draw a blank on this one. If not, please let us know the answer as it may help others in negotiations with their employer.

Congratulations on your increased earnings, BTW . Is it promotion or just the fiscal drag effect of earnings outpacing inflation and tax band settings?

ReportInvestor

Anyone in a final salary scheme should keeping an eye on the company's pension deficit & financial / stockmarket strength, either through your union rep.

This can sometimes give a clue as to the likelihood of any nasty changes when making decisions about pensions pre- and post-A Day.

Here is a Lane Clark and Peacock report on FTSE 100 pension schemes

Pages 37 & 38 contain tables by which you can compare your own company to others.

And some other background reporting from 2004 onwards