How to work out pension relief vs tax pay?

stphnstevey

Hi

A recent payrise has taken me into the higher rate tax band. I was trying to work out if it would be best to make AVC's that would take me down to the lower tax band.

I like to understand the figures, so was trying to work out
a) The tax I would pay on that money at 22% and 40%
b) The relief that I would receive if I put it in a pension

I have read that tax relief at 22%, if I invest £78, the goverment would add £22 to make it upto £100. In the same way, tax relief at 40%,if I contributed £60 the goverment would add £40 to make it upto £100.

If i didn't put that money into a pension, then at 22% rate I would pay £17.16 tax on £78. At 40% tax I would pay £24 tax on £60.

Why doesn't the tax I would pay on the money match the tax relief I would receive?

dunstonh

AVCs are a virtually dead product now. Most occupational schemes will have either closed theirs or be closing them in the coming years. FSAVCs already cease to exist.

I have read that tax relief at 22%, if I invest £78, the goverment would add £22 to make it upto £100. In the same way, tax relief at 40%,if I contributed £60 the goverment would add £40 to make it upto £100.

Not technically correct but close. Your direct debit would be £78 and the insurance company would make it up to £100 as they claim the £22 back from the Govt. You would be required to declare the pension contributions on your tax return where the other £18 would be taken into account. Giving you a net contribution of £60.

If i didn't put that money into a pension, then at 22% rate I would pay £17.16 tax on £78. At 40% tax I would pay £24 tax on £60.

You are applying the percentages to the wrong amount. Pensions are treated as gross to which you apply the tax relief to. i.e £100 with 22% tax relief is £78. A further 18% higher rate relief is applied to the £100 giving you £18. £18 plus £22 = £40.

Twopints

The tax relief is effectively the tax being given back to you.

Tax @ 22%: You get paid £100, £22 is taken in tax. Any money that you then invest (in a pension or elswhere) is therefore already taxed income. If you put it in a pension, the tax is given back i.e. the £22.

The £78 that you quote has already been taxed.

Edit: Oops - cross-posted

rodo_2

I have a frozen pension from a previous employer which has a transfere value of 6k. The administraters are now winding up the accounts and will transfere the fund to Scottish Equitable if I don't reply within the next couple of weeks. Is there any other vehicle that I can use to better value. I do not contribute to this fund but it is aquiring interest. I once had a private pension fund frozen with Prudential and it dwinddle down to nothing because of admin fees eating at it. I don't want the same thing to happen here. Any ideas?
Many thanks.
Rodo.

dunstonh

I once had a private pension fund frozen with Prudential and it dwinddle down to nothing because of admin fees eating at it.

Prudential have never offered a pension product where the fees have been higher than the returns and the vast majority of their pensions come out at 1% p.a.

Is there any other vehicle that I can use to better value.

Is it going across as a section 32 buy out bond or a personal pension? Is there GMP involved or just ordinary rights?

stphnstevey

dunstonh wrote:

AVCs are a virtually dead product now. Most occupational schemes will have either closed theirs or be closing them in the coming years. FSAVCs already cease to exist.

Whats it called now when I make additional contributions then?

dunstonh

You can call if Fred if you like

The product AVC is basically being phased out as there is little need for it now. People in occupational pensions can do Personal pensions, stakeholders and SIPPs and charges are lower today than they were 10 years ago and that has made AVCs less attractive. It is no longer a requirement for an occ scheme to offer an AVC and they are starting to close to new members.

leaphaze

dunstonh wrote:

People in occupational pensions can do Personal pensions, stakeholders and SIPPs and charges are lower today than they were 10 years ago and that has made AVCs less attractive.

I have 10k which I was intending to use to increase my company pension (over 10 months). However, my wife suggested I setup a stakeholder pension for her, thus spliting the tax payable when we come to draw on our pensions. Only trouble is, she is a lowly paid local gov worker with a small occupational pension. She's on around 5k so not paying much tax.

I assume that the gov will only rebate the tax she's actually paid, or are pensions a special case (he hoped).

Paul_Herring

leaphaze wrote:

I have 10k which I was intending to use to increase my company pension (over 10 months). However, my wife suggested I setup a stakeholder pension for her, thus spliting the tax payable when we come to draw on our pensions. Only trouble is, she is a lowly paid local gov worker with a small occupational pension. She's on around 5k so not paying much tax.

I assume that the gov will only rebate the tax she's actually paid, or are pensions a special case (he hoped).

Well based on the 2006/7 tax bands: http://www.hmrc.gov.uk/rates/it.htm

Personal allowance: £5,035

She shouldn't be paying any PAYE (she's probably paying NI however,) assuming she hasn't had a P2 (notice of coding) changing her tax code.

If she were to contribute £3900 (the maximum this year allowed based on her salary excluding any occupational contributions) to a stakeholder, she would receive a rebate into the pension of £1100 taking the overall contribution up to £5000 - essentially free money from HMRC.

It may be worth considering it.

leaphaze

Paul_Herring wrote:

essentially free money from HMRC.

It may be worth considering it.

Hi Paul, thanks for your reply. This is what I was thinking of, but didn't dare hope for.

My wife does pay a little tax and has a normal tax code, so I think she's getting nearer 5.5k. I keep on asking her exactly how much she earns, but somehow the conversation is hijacked and we end up going in a completely different direction!

I assume what you're doing is taking the salary and multiplying by 78% to get the maximum contribution, with HMRC chipping in the rest?

Paul_Herring

leaphaze wrote:

I assume what you're doing is taking the salary and multiplying by 78% to get the maximum contribution, with HMRC chipping in the rest?

Yes - but remember you must take off any contributions currently being made to any existing pensions schemes:

leaphaze wrote:

Only trouble is, she is a lowly paid local gov worker with a small occupational pension.