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

cheerfulcat

Any comments?

Yes. That's why I and others repeatedly say that there is no tax relief involved here, only tax deferral. For a higher-rate taxpayer who expects to be a BRT payer in retirement it probably makes sense to invest within a pension wrapper ( though the investor still has to make a guess regarding the levels of tax when he or she retires...). For a BRT payer it makes sense to go the ISA route first. IMHO MSE has called this badly wrong.

don9999

The difficulty is, that it is not 'easy' to compare the two.

My simple compariso, was just that. 'Simple'.

For example, I assumed that the pension fund would be taken in one lump. However, in reality, it would be taken over a long period of time.
And each year, there would be Personal tax Allowance of several £1,000, further reducing the amount of Income Tax payable.

And of course, who knows what the tax rate will be 10, 20 or 30 years in the future. If it is higher than the current 22% then those paying into pensions may be significantly worse off ie. getting tax relief at 22%, but paying Income tax of say, 26%. But if the tax goes down, they would be better off.

dunstonh

The difficulty is, that it is not 'easy' to compare the two.

Its very easy to compare the two as far as actual benefits are concerned. The exact same investment funds are available on pensions as they are on ISAs. So, the only difference is how the benfits are paid and the charges. Both of which can be directly compared.

For example, I assumed that the pension fund would be taken in one lump. However, in reality, it would be taken over a long period of time.
And each year, there would be Personal tax Allowance of several £1,000, further reducing the amount of Income Tax payable.

I dont follow as to what difference it would make. When you buy that annuity, the pension is matured. It doesnt exist any more. The income from the annuity is what exists and that can be compared against the ISA paying a regular income.

And of course, who knows what the tax rate will be 10, 20 or 30 years in the future. If it is higher than the current 22% then those paying into pensions may be significantly worse off ie. getting tax relief at 22%, but paying Income tax of say, 26%. But if the tax goes down, they would be better off.

All helps the ISA side as you can pay into the Pension later if it turns out to be better later. Whereas if you pay into the pension now, that is final decision which cannot be altered. ISAs give you options. Pensions give you none.

don9999

dunstonh wrote:

I dont follow as to what difference it would make.

The difference it makes is that in my hypothetical example, if you took the whole fund in one go, in one year, you would only get one year's worth of Income Tax relief.

But.....if you took an annuity you would get Income Tax relief of several thousand pounds each year.

dunstonh

The difference it makes is that in my hypothetical example, if you took the whole fund in one go, in one year, you would only get one year's worth of Income Tax relief.

You cant take the whole fund in one year so that isnt anything to worry about.

But.....if you took an annuity you would get Income Tax relief of several thousand pounds each year.

You dont get any tax relief on an annuity. It is taxable income depending on your personal allowances. Anything above the 10% band is taxed at 22% which negates the 22% tax relief you get on your contributions now.

So, if you have a personal allowance of £7280 at 65, you can earn that tax free. A married couples state pension is £7007. That leaves £280 a year you can earn tax free. If you have graduation/serps/s2p, then that will eat the remainder of the tax free allowance up and probably most of the 10% band. That means you are going to pay 22% on most if not all the personal pension income.

This example is quite good as it shows the husband shouldnt put a penny into personal pensions. However, the spouse in this example, who doesnt get a state pension in her own right, is the one that should have pensions (of one sort of another). She doesnt qualify for a state pension and not utilising her tax free allowance would be a waste of £1000 a year. So she should have a pension upto the point that provides £7000 income at 65 but not more. She then benefits from 22% tax relief but doesnt pay tax on the income in retirement. Anything above should go with ISA.

don9999

That last point is the crucial one - for my wife anyway.
Continue to pay into a pension fund, until it reaches the point where it would provide approx. £7,000 per annum in retirement - that way it would be all tax free.

The difficulty 'then' becomes how to determine how much the fund needs to be. This could be different, in different years, as the annuity rates change.

In our case, it doesn't need to be considered yet - she's in her mid-30s, and the fund is only about £25k. It's something we'd need to check annually as she gets (much) older.

dunstonh

That last point is the crucial one - for my wife anyway.
Continue to pay into a pension fund, until it reaches the point where it would provide approx. £7,000 per annum in retirement - that way it would be all tax free.

The difficulty 'then' becomes how to determine how much the fund needs to be. This could be different, in different years, as the annuity rates change.

You can never be exact as investment performance is always going to be an unknown. However, if you pay a regular contribution linked to RPI, then you will be there or thereabouts by the time you get to retirement. For those wanting more accuracy, then an IFA running any of the mainstream back office software available will be able to calculate it and keep it on track. If you dont want to use an IFA, then that is the choice you make and you can calculate it yourself.

I can only speak from the side of an IFA and can tell you that it would take 5 seconds to get up-to-date values, the backoffice software already has current annuity rates in it, so thats sorted. It then pairs them up, takes into account current personal allowances, state pension, charges, and current contributions and runs a projection/shortfall analysis taking a further 10 seconds to produce. If you assume 7% growth before charges you get a 4 page output showing the figure it will be. All in less than 30 seconds.

You still wouldnt end up exact but periodic reviews would get you close.

I think the main point here is that this site is meant to be a moneysaving site. Pensions are not the best product for most people now looking to save for retirement.

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Time to paint a picture of a typical couple and their current retirment planning. No occ schemes available in this case.

Husband has all the pension provision in his name, put it through a NU stakeholder because Martin's article "recommended" it . The wife has nothing because she doesnt work and like many people doesnt realise she could have a pension. They get to retirement, pension fund is £100,000. So, they take £25k as pension commencement lump sum and buy a single life annuity paying £5300 a year. They didn't buy an increasing one or joint one as it would have been a big drop and as they didnt save enough they couldnt afford it. The husband also gets £8890 a year state pension (inc serps).

So, day one into retirement, they have a gross income of £14,190 and 25k in the bank. Not too bad. (ignoring fact that they are paying £1262 more a year in tax because of bad planning by not using wife's income allowance)

5 years down the road, the husband dies. The pension annuity ceases and the state pension drops back and the wife is now on £4381 a year. Cant survive on that and doesnt get any pension credit as there is lump sums available.

5 years after that, lump sums all used up, now on pension credit but also had to equity release the house. No inheritance going to the children...

Biggest problem there is that all the retirement income was in the husbands name and the bulk of it died with him. Had it been in ISAs, the fund value would have passed to his wife and she could then invest it and take an income from it just as before.

EdInvestor

Women these days should be paying into the state pension if working and getting HRP if at home looking after children.The state pension situation for the latter is expected to increase dramatically over the next few years such that most wives should have their own state pension eating up most of their old age allowance by the time anyone now in their 30s actually retires.

I agree with DH that the ISA route is now the way to go for anyone on less that higher rate tax.You can now obtain pension tax relief (such as it is) by making a lump sum contribution of more than a million pounds right up to retirement: it is the ISA allowance that is "use it or lose it" on an annual basis.So there is no point in locking yourself into very restrictive pension arrangments now and losing other more flexible tax perks.

The rule only changed with A day in April, which is probably why most people havenlt cottoned on yet.

ireland_3

i have a pension which has been running for a few yrs now and was set up through the pension company direct, can i change it now to be discounted charges or claw back the charges from the initial set up?

dunstonh

direct, can i change it now to be discounted charges

Not using the same provider. Although you can change it to another provider. Not all pre 2001 pensions are more expensive than post 2001 pensions.

or claw back the charges from the initial set up?

Nope.