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

Paul_Herring

EdInvestor wrote:

Only the 25% tax free cash sum is tax free. THE REST IS TAXED.

Erm - no it isn't.

http://customs.hmrc.gov.uk/channelsPortalWebApp/downloadFile?contentID=HMCE_PROD1_025394
indicates the income tax allowances for 2006/7:
65-75 have £7090
75+ have £7220.

http://www.direct.gov.uk/MoneyTaxAndBenefits/PensionsAndRetirement/StatePension/StatePensionArticles/fs/en?CONTENT_ID=10014671&chk=o2zBUd
indicates that the state pension for 2006/7 is £4381 (£84.25 p/w)

This leaves a tax free allowance of £2709 for a 65-75 yr old which will not be taxed.

Unless you can find some other way that the government guarantees to fill that £2709. Pension Credit doesn't count since (a) if you have another income you usually won't be getting it anyway and (b) even if you did get it it still leaves you below the income tax limit: http://www.thepensionservice.gov.uk/pensioncredit/home.asp shows the limit for MIG to be £5930.6

EdInvestor

Homer Simpson said

These people have a company pension (final salary)...

So I doubt they will have any age allowance left over.

Most people's age allowance in future will be used up by the basic state pension plus the state second pension - or the protected rights pension in lieu of S2P, anyway.

dunstonh

Whilst I totally agree with Paul Herring as it is a point I have highlighted before a number of times, I also have to agree with Ed as well. Especially with the "new" pension arrangements from 2012 more likely to eat up personal allowances more than the current system.

Personal allowances should be considered in any retirement planning situation. If used up already with other income (including state pension) then there is little point utilising the pension unless its for higher rate relief and/or childrens/working tax credit increases.

If personal allowances are still going to remain available in part or whole, then a pension is the most desirable income providing product to use because nothing else will come close to it for that purpose. You can include the 10% band in there as well.

Once you have paid enough in to utilise the personal allowance and lower rate band in real terms, then its time to look to ISAs.

Of course, this only applies to personal arrangements and not occupational/group schemes and there are some cases where there are exceptions.

don9999

What about housewives/househusbands?

When my wife worked she paid into a personal pension. She recently gave up work, but continues to pay monthly into the pension (effectively out of MY income).

It seems odd to me that she can continue to claim tax relief, since of course she doesn't pay any now. We have told the pension provider, but they don't seem bothered. Is she really allowed to continue to pay into a personal pension and gain benefit from the tax relief? ie. she is benefitting from 22% from the government.

dunstonh

Everyone can pay upto £3600 into a pension regardless of income and get tax relief.

EdInvestor

...she is benefitting from 22% from the government.

...and will pay 22% back to the Government when she takes the pension.So no benefit.

Only 25% of the fund is tax free.

eilz

Is there a for/against points between Pension vs ISA. And also, a little confused on tax free, is it 25% or 2/3K you get? Thanks.

EdInvestor

25%, that is one quarter of the total (personal) pension fund, can be taken out as a tax free cash lump sum after the age of 50 (55 from 2010).

dunstonh

Thats on personal pensions. The figure can differ on final salary occupational pensions.

don9999

People keep talking about the 22% tax when the pension is taken versus the 22% relief when the premiums are made.
I 'originally' thought that I would prefer the tax relief on the premiums, so that I would have more to invest, and the fund would grow quicker. Ok I would pay Income Tax on the ultimate pension, but it would be a bigger fund than otherwise, if I had not had the tax relief.

But......I don't think that's right now.....

Consider a simple scenario.
You put £1,000 per year into a simple pension account that pays 5% pa.
Ignore inflation in this simple scenario.

Year 1 Premium £1000 Tax relief £220 Interest £ 61.00 Fund £1281.00
Year 2 Premium £1000 Tax relief £220 Interest £125.00 Fund £2626.05
Year 3 Premium £1000 Tax relief £220 Interest £192.30 Fund £4038.35
Year 3 Premium £1000 Tax relief £220 Interest £262.92 Fund £5521.27
Year 3 Premium £1000 Tax relief £220 Interest £337.06 Fund £7078.33

You then take the pension fund (for simplicity, auume the fund is taken in one go).
So, you have £7,078.33 and the government takes 22% in Income Tax ie. £1557.23 - leaving you with £5521.10.

But.......

Consider the alternative.
Paying £1,000 into a 'non-pension' fund eg ISA, that also received 5% interest pa, but for which there is no tax relief at source, or Income tax at the end.

Year 1 P'ment £1000 Interest £ 50.00 Fund £1050.00
Year 2 P'ment £1000 Interest £102.50 Fund £2152.50
Year 3 P'ment £1000 Interest £157.63 Fund £3310.13
Year 3 P'ment £1000 Interest £215.51 Fund £4525.63
Year 3 P'ment £1000 Interest £276.28 Fund £5801.91

In this case you have a net fund of £5801.91 (assuming it is in something like an ISA where no tax is payable.)


Of course, you now have to think of the slight complications.

25% of the pension fund is tax free. That means you would only pay Income Tax on 75% of the fund (£5308.75) meaning tax of £1167.92, leaving a net £5910.41; which is slightly better than the non-pension route.

But the non-pension fund can be accessed at any time. You don't have to wait until pensionable age as with the pension fund.
Also, you're not forced to buy an annuity, when rates may be low.

Hmmmm.....I'm no longer convinced about the pension route.......

'Personally' I am in a Final Salary Company scheme, so am OK. I also pay 6% into an AVC scheme, into which my company contributes 3%, so I think that's good too.

But for my wife, who pays £100 per month into a pension fund......hmmmmm.....perhaps it should be going into an ISA instead.....?

Any comments?

Cheers,
Don