Tax relief on Pension contibutions ??

marmite3

Hi, hope you can help with this probably simple question

The maximum pension contributions, in any one year, for which you are entitled to tax relief, is related to your age and is expressed as a percentage of your gross income.

Aged under 30 - 15%
30 to 39 - 20%
40 to 49 - 25%
50 to 54 - 30%
55 to 59 - 35%
60 and over - 40%

I am age 37, last year income £53,442.64, I pay 4% per month £116.08, company pays 8% per month £232.16 and I pay £600 AVC per month.

£53,442.64 20% = £10,688.53

116.08 x 12 = £1,392.96
600 x 12 = £7,200

total £8,592.96

Does this mean I still have a allowance of £10,688.53 minus £8,592.96 = £2095.57 ?????? Or do the company contributions count towards the allowance ???

Is is advisable to put in your maximim allowance each year for full tax relief ??? ( if you are debt free, etc )

ManAtHome

Someone more expert will be along 'real soon now', but the rules changed a few years ago - you can now contribute up to your entire salary per year with fairly high limits (over £200k pa with a lifetime limit over a million).

marmite3

Thanks ManAtHome

Actually having checked I might be being a bit stupid here :doh:

I was looking at revenue.ie/en/tax/it/leaflets/it14.html in Ireland !!!!!! Dohhhh

I am in England

I suppose my second question still stands in some part. Is 20% of salary a ideal amount to be contributing at age 37 ?? Are there are disadvantage to bumping it up to 25 - 30% ???

This is taking into account a full cash ISA contribution each year and no debt.

Aegis

marmite3 wrote: »

Thanks ManAtHome

Actually having checked I might be being a bit stupid here :doh:

I was looking at revenue.ie/en/tax/it/leaflets/it14.html in Ireland !!!!!! Dohhhh

I am in England

I suppose my second question still stands in some part. Is 20% of salary a ideal amount to be contributing at age 37 ?? Are there are disadvantage to bumping it up to 25 - 30% ???

This is taking into account a full cash ISA contribution each year and no debt.

Depends on too many factors to say whether it's worth doing: your current retirement pot and plans will be huge factors, as will whether you are taking advantage of your stocks and shares ISA allowance on top of your cash ISA. You get the same tax treatment on investments but the flexibility to take the benefits as a lump sum whenever you wish, so it can be better for certain circumstances to put more money into vehicles other than pensions.

If in doubt, consult with an IFA.

marmite3

Could you expand please on the tax treatment on ISAs compared to pensions ?

If they are the same, then does it no make sense to fill your cash / share ISA first and look at contributing to the pension second ? As this would give me the flexability to cash out whenever. Or am I oversimplifying things.

I understand that a IFA is required for advise, im just looking to discuss.

CLAPTON

pensions give tax relief when you invest in them but the pension income eventually generated is taxed

ISAs have no tax relief at the point of investment but are tax free when you spend the income.

your tax rate now and expected upon retirement may influence your view as will the fact the ISAs are immediately accessible while pensions are tied up until you're 55

ManAtHome

marmite3 wrote: »

I suppose my second question still stands in some part. Is 20% of salary a ideal amount to be contributing at age 37 ?? Are there are disadvantage to bumping it up to 25 - 30% ???

That's the tricky bit - you need to guess at when you might retire, how much you'll earn between now and then, and whether your circumstances might change...

I still think it's a good idea to divert higher-rate tax earnings into my pension - as I'll end up paying basic rate, reduces liability from 40% to 15% (25% tax-free, then 20% on the annuity or drawdown). Paying it in early has the advantage that you can reduce later on when you have your mid-life crisis! Paying loads in early has the disadvantage that you're 'only' getting an extra 5% (compared with taking the cash and investing yourself), and the cash is locked away until you're old enough to get at it.

So, (to me), it's all a question of balance. As Aegis said, worth consulting an IFA unless you want to spend an awful lot of your time with a speadsheet and mugging up on pension legislation etc.

marmite3

Thanks for your replies. I want to learn this Pension / Tax stuff myself. I have a good back ground and understanding in the marklets so feel happy to make my own decissions and live with the conquences on my investments. I just need to understand the tax implications on these. Cam anyone recomend websites / books that help explain.

I have plenty of free time to learn

EdInvestor

Have a look at the 'Pension vs ISA' thread at the top of the forum, it covers all the issues.

marmite3

EdInvestor wrote: »

Have a look at the 'Pension vs ISA' thread at the top of the forum, it covers all the issues.

Cheers, I am trawelling through that now :j

IRWM

Hi,
I suppose everyone would like to know how much they should save now so they dont get caught short in retirement. I personally think its all about the life your accustomed to now and if you want to keep this life in retirement. i.e dont make any or little sacrifices.

On your salary if you contrbute 20% + thats a sginificant amount being saved so (im sure you will anyway) make sure you know the different types of pension vehicles sipps, PPP stakeholder etc and make sure you know the pro's and cons for each.

The FT weekend edition last weekend, published a full double page pull out guide to this and the pros and cons etc, it was excellent and i think it would be fab for you to scan over this.
Try the website for the financial times ( I cant post the link as im a newbe here) it may be on there. Pensions DIY it was called.

I also agree with Aegis, in that you have flexibility to take the benefits as a lump sum whenever you wish, so it can be better for certain circumstances to put more money into vehicles other than pensions.

Rememebr though this does require will power to not just cash in the investment at 50+ to go and buy that life time world trip cruise, Harley & MG convertible. !!!!!