Pensions Planning: The NUMBER

gadgetmind

jamesd wrote: »

The current GAD limit prevents me from taking a level income from now through and after state pension age, so my income would increase substantially after state pension age.

Ditto. Hopefully the GAD limit will be increasing again soon.

gadgetmind

YoungBusinessman wrote: »

Jamesd and gadget mind can i ask how old use are and your projected retirement age?

I'm a shave off 50 and would like to be able to retire, or at least back off a bit, at the age of 55. However. the global economy may thwart such plans as even I can't control that.

Im starting to learn now as there is a lot of stuff to learn.

Yup, but fortunately the fundamentals are very simple.

Moby

Agree with most of the above with one reservation and that is....don't deprive yourself from enjoying the present by living too frugally. .....especially while you are young and have your health! I'm saving for an earlier retirement but I'm also spending money on things that I want to do now. I've just returned from a four week tour in India and the things I saw and did there were significant to me and were worth spending money on.

IMO its possible to become too obsessive about retirement, money, magic numbers etc. Remember life is for living NOW! The important thing is balance between planning for the future but also enjoying life in the present.

jingleberry

Linton wrote: »

Various points to raise - I will leave it at two.....

1) You shouldnt believe the tabloid press about pensions losing money. Pensions are just a wrapper like an ISA. Anything you can invest in an ISA you can also invest using a pension. If anything pensions are more flexible and have the added advantage of access to 25% of the finalcapital as a tax free lump sum.

2) Having a few BTLs is hardly diversification. IMHO you do need to be significantly in a broad range of shares or funds of shares. Over the long term the evidence is that they can be expected to outperform anything else.

For what it's worth here is my take on why pensions are a bit of a rip off: two reasons really. 1. The tax relief on contributions. Its not really relief. When you contribute to a pension all you are doing is deferring the income and the tax payable until such time as you draw the pension. The only real tax advantage, unless your marginal rate of tax has reduced by the time you draw, is the 25% lump sum.
2. Annuity conversion rates. Barely more income that you could generate yourself with the lump sum available - and they get to keep the lump sum after death!

jem16

jingleberry wrote: »

For what it's worth here is my take on why pensions are a bit of a rip off: two reasons really. 1. The tax relief on contributions. Its not really relief. When you contribute to a pension all you are doing is deferring the income and the tax payable until such time as you draw the pension. The only real tax advantage, unless your marginal rate of tax has reduced by the time you draw, is the 25% lump sum.

Which is why you use the tax wrappers appropriately for your circumstances. Pension to take 25% tax-free lump sum, to mop up tax-free allowances and if your rate drops in retirement from the tax relief gained in employment. Pension also to take advantage of any employer contribution. Then use the S&S ISA wrapper.

It's never one or another, it's all as appropriate.

2. Annuity conversion rates. Barely more income that you could generate yourself with the lump sum available - and they get to keep the lump sum after death!

Then don't use an annuity. It's not been a requirement for a long time now.

RenovationMan

jingleberry wrote: »

For what it's worth here is my take on why pensions are a bit of a rip off: two reasons really. 1. The tax relief on contributions. Its not really relief. When you contribute to a pension all you are doing is deferring the income and the tax payable until such time as you draw the pension. The only real tax advantage, unless your marginal rate of tax has reduced by the time you draw, is the 25% lump sum.

You've forgotten that higher rate taxpayers will get 40% tax relief on contributions to the pension, but will generally only pay 20% tax when they receive their pension.

jingleberry wrote: »

2. Annuity conversion rates. Barely more income that you could generate yourself with the lump sum available - and they get to keep the lump sum after death!

If you have a decent sized pension pot you can put it into 'drawdown' rather than taking it as an annuity. There are also other rules concerning inheritance so the lump sum is not lost on death. It might be worthwhile for you to google 'pension drawdown' and get yourself up to date.

jingleberry

RenovationMan wrote: »

You've forgotten that higher rate taxpayers will get 40% tax relief on contributions to the pension, but will generally only pay 20% tax when they receive their pension.



If you have a decent sized pension pot you can put it into 'drawdown' rather than taking it as an annuity. There are also other rules concerning inheritance so the lump sum is not lost on death. It might be worthwhile for you to google 'pension drawdown' and get yourself up to date.

No I realise that if if your marginal rate of tax drops when you start to draw the pension, you are better off. However as I see if if you are paying 20% tax while working, and 20% when in retirement, your only tax advantage is the 25% lump sum.
And of course you are right - you dont need to take an annuity nowadays you can use income drawdown. But arent there restrictions on how much you can draw down each year which are linked to (guess what?) annuuity rates?

RenovationMan

jingleberry wrote: »

No I realise that if if your marginal rate of tax drops when you start to draw the pension, you are better off. However as I see if if you are paying 20% tax while working, and 20% when in retirement, your only tax advantage is the 25% lump sum.

If you can get employer contributions to your pension, or you're a 40% tax payer then the decision to pay into a pension is a non-brainer. For basic rate tax payers, the decision isn't as cut and dried, especially now that the age related allowance is being withdrawn.

However there ate still benefits to pensions for basic rate taxpayers as pension savings cannot be accessed if you get into financial difficulties (i.e. even if you are made bankrupt, your pension pot is untouchable*), the pension savings are disregarded for means-tested benefits and also the amount of working and childrens tax credits you receive are based on income after you have paid into a pension scheme (i.e. WTC and CTC subsidise your pension contributions).

* Unless you deliberately put money into a pension scheme to hide from your creditors.

gadgetmind

jingleberry wrote: »

if you are paying 20% tax while working, and 20% when in retirement, your only tax advantage is the 25% lump sum.

And your personal allowance; a lot of people start drawing their private pension long before their state pension kicks in, and you can even defer state pension and play some fun tax tricks when finally drawing it.

restrictions on how much you can draw down each year which are linked to (guess what?) annuuity rates?

Yes, 100% GAD is very limiting. I expect there to be a lot of pressure to return to 120% and/or sever the link to 15 year gilt rates.

jamesd

jingleberry wrote: »

as I see if if you are paying 20% tax while working, and 20% when in retirement, your only tax advantage is the 25% lump sum.

The personal allowance for income tax also helps in retirement when it's likely to be a larger portion of total income. If you're in a scheme that uses salary sacrifice you get an extra 12% employee NI saving and perhaps some of the 13.8% employer NI saving on the money paid into the pension:

£100 gross paid in plus £13.80 employer NI = £113.80 in pension.
Net cost: £100 - £20 income tax - £12 employee NI = £68

113.80 / 68 = 1.67 so you have 67% more in the pension pot than it cost you.

Now take a 25% lump sum, that's £28.45 tax free and now the net cost is down to £39.55 and for that you still have 75% = £85.35 generating taxable income. Deduct 20% from that to allow for tax and it's still £68.28. Easy enough to see that whatever investments you use that are the same inside and outside the pension you're going to get more income from £68.28 than £39.55. Like 68.28 / 39.55 = 1.73 times as much. And that's after tax and before considering the effect of the personal allowance.

73% more income than you'd get if you didn't use the pension is a pretty hard deal to beat. While this is an uncommonly favourable one, some basic rate tax payers do get a deal this good.

jingleberry wrote: »

arent there restrictions on how much you can draw down each year which are linked to (guess what?) annuuity rates?

They are linked to the 15 year gilt rate and that's supposed to be related to annuity rates. It's not much related to how much income investments can generate during drawdown. But look at that 73% more figure. Even with the GAD limit it can end up being possible to receive more income than you'd get outside the pension.

Say your investments can generate 6% income. Outside the pension you get 6% of £39.55, £2.73 and I'll assume that's in an ISA.

Inside the pension the GAD limit at 2.5% gilt yield for a 55 year old man is 4.4%. So you can take a maximum of 4.4% of the pre-tax £85.35. That's a limit of no more than £3.75. Which is a limit higher than the actual income you get outside the pension, which is £2.73. Inside the pension the £85.35 on the same 6% generates £5.13. You can take £3.75 of that but have to leave £1.38 in the pension for later. Assume the personal allowance is all used and deduct a full 20% income tax from £3.75and you get to £3 after tax.

So even with the GAD limit you end up with £2.73 outside the pension or £3 from the pension as your income, 9.9% more from using the pension than not.

The GAD limit at a more normal gilt rate of 4.5% would be 5.8%, £4.95 before tax, £3.96 after. Still not enough to allow the full £5.13 of income to be taken but now it's 45% more than outside the pension.

Different deals will vary in how the numbers work out and I've deliberately chosen one of the most favourable basic rate tax cases but hopefully that shows how even with the current low GAD limit you can end up getting more income from the pension as a basic rate tax payer.