Pension MoneySaving: Buy a different way to boost returns Article Discussion Area

Elnafinn

Yes I appreciate that there are tax benefits but even taking those into account there must be a crossover point in the years coming up to retirement that you are not going to get the benefit of the late contributions back unless you manage to live a very long while after retirement

Using an extreme example the last contibution of say £200 made in the month before the pension becomes payable at 65( say increased to £220 to allow for tax break compared with ISA and say accumulated interest equal on ISA and pension) Say a joint life annuity of 4% that would mean that you would both have to live to late 80s to break even
Or am I missing something

Elnafinn

Aegis
Thanks for that comprehensive calculation
My own crude effort was posted before your respose appeared

Aegis

Elnafinn wrote: »

Yes I appreciate that there are tax benefits but even taking those into account there must be a crossover point in the years coming up to retirement that you are not going to get the benefit of the late contributions back unless you manage to live a very long while after retirement

Using an extreme example the last contibution of say £200 made in the month before the pension becomes payable at 65( say increased to £220 to allow for tax break compared with ISA and say accumulated interest equal on ISA and pension) Say a joint life annuity of 4% that would mean that you would both have to live to late 80s to break even
Or am I missing something

You don't need to purchase an annuity. If you opt for an unsecured drawdown instead, you can drain the pension by selling assets and taking income directly from the disposal proceeds. These then get taxed at your usual levels, and you choose to do what you wish with them. If you already have sufficient income to live on, what you can choose to do is to take the additional income and gift it, re-invest it outside the pension, etc. The aim of the game is then to try and get as much of what's inside the pension to the outside, and you'll generally find that you run out of pension pot before the typical annuity break-even position.

Of course, this has the disadvantage of not providing a guaranteed income for life, so you need to weigh that up against the idea of annuitisation. Typically it's the more financially secure who can afford to take this option. If you're unsure about where your income is going to come from throughout retirement, then an annuity might still be the best bet.

Again, this is a very complex issue and should really be discussed with a professional. Remember that my example included no investment growth: with a 5% annual growth rate the £15,000 could instead be over £17,000. Inside the pension the growth and income is as tax free as an ISA, so this growth rate is higher than you would typically see outside the pension. Of course, if you have an ISA then the sole differences between the products are the tax relief on contributions and the inflexibility of the pension, so you might want to consider an ISA instead of a pension if you are worried about getting your money's worth.

It would be a shame to miss out on the opportunity to gain 40% tax relief on contributions but to only be taxed at a lower rate on the eventual payments (assuming you aren;t going to be a higher rate taxpayer from your pension income, that is!), but if you want full access to all of your money whenever you want it then it's possibly going to be the choice for you.

As I said before, a very complex question.

Elnafinn

Thanks for that comprehesive response Aegis
You do indeed appear to know your subject and no I will not have the worry of being a higher rate taxpayer after retirement

Paul_Herring

Harry_Powell wrote: »

As a higher rate taxpayer you're receiving 40% tax relief on contributions into your pension and will pay 20% tax on your pension income when you retire.

Not necessarily - it's entirely possible to pay 40% on your pension.

Aegis

Paul_Herring wrote: »

Not necessarily - it's entirely possible to pay 40% on your pension.

Or 0% for that matter, though you'd have to have a pretty small pension pot for that to happen with the state pension using most of your personal allowance..

Paul_Herring

Aegis wrote: »

Or 0% for that matter, though you'd have to have a pretty small pension pot for that to happen with the state pension using most of your personal allowance..

Hmm - just (probably mis-)remembered something - isn't the effective tax rate even higher than 40% in some circumstances? (Where your tax free allowance is decreased above a certain income level...)

Aegis

Paul_Herring wrote: »

Hmm - just (probably mis-)remembered something - isn't the effective tax rate even higher than 40% in some circumstances? (Where your tax free allowance is decreased above a certain income level...)

Indeed it is, between £100k and £100k plus twice the personal allowance your effective tax rate is much higher than 40%.

There's also the 50% tax rate coming in next year, but what a monster pension pot that would be!

Paul_Herring

Aegis wrote: »

Indeed it is, between £100k and £100k plus twice the personal allowance your effective tax rate is much higher than 40%.

There's also the 50% tax rate coming in next year, but what a monster pension pot that would be!

Not the one I was mis-remembering. The level is around 22K (though thinking about it, it's more likely to affect the 20%ers.)

Harry_Powell

Paul_Herring wrote: »

Not necessarily - it's entirely possible to pay 40% on your pension.

Quite, but anyone with that sort of invested wealth wouldn't be logging onto MSE for advice.

In order to be paying higher rate tax as a pensioner, you'd be earning over £40k on a pension. Given that the (quick) annuity calculation is £6k per year for every £100k invested, one would have to have £666,666.00 invested. With that sort of growth one would expect either the person to be pretty savvy or have a decent financial advisor to grow £200 per month into that sort of fortune.