Is it worth to have a pension when company doesn't pay?

daxu

Hi,

I tought I know the answer to this question (answer was yes for me), but now I am bit confused.
For example, it I take 100 or 150 per month and put into a pension, won't it be the same that I set a share ISA and put the 100 or 150 per month in? The pension is tax free, but when it pays out money, I will be taxed. The ISA I got taxed now but I won't get taxed later.

If I am a high rate tax person, it is may be better as I may be taxed in a lower level when retiring. But who knows what going to happen at that time?

So, is it worth to have a pension when a company doesn't pay? Should I just set a share ISA instead?

Cheers

wotsthat

Hi

I think that the general consensus is that for a basic rate taxpayer the pension wrapper may not be the best option as in exchange for the rebate a number of restrictions are imposed on what happens to the fund and then the income is taxed anyway to negate the initial rebate anyway. I've run these sums and can see that to all intents and purposes the rebate is a red herring and shouldn't play a part in the decision.

However, I'd like to know the answer to your second point i.e. what is the position for a higher rate tax payer or someone who is getting contributions money from an employer. I've seen answers saying the benefit is only marginal, given the restrictions at retirement to others saying they wouldn't invest in a pension no matter what.

The caculations are beyond me but I'd really like a clever person to try and explain what effect the higher rate rebate and/ or employer contributions will have.

ReportInvestor

We have established on MSE, after furious debate that changed some IFAs' long held views, that there is no advantage in starting a pension early versus saving into an ISA and then putting the money into a pension later.

For many people, after A-Day rules, there is the additional advantage that even more could be put into a pension with 40% tax relief if they delay until their career has progressed and they have become higher rate taxpayers.

But a key question now is whether this tax regime will continue. The LibDems are going to campaign at the next election, AFAIK, on the basis of abolishing 40% tax relief on pensions.

If that were ever to become government policy, all the sums change .

jamesd

ReportInvestor, can the poster collect the higher rate tax the poster is paying back from the ISA being converted into pension contributions later?

You might also consider the situation if the employer will accept salary sacrifice pension contributions, since that transforms the NI contributions into higher pension contributions. If the employer places limits on this, it appears that there may be significant benefit in using pensions initially.

For the case of basic rate tax and no salary sacrifice I agree with you, so long as the employer isn't giving an immediate 100% return on investment with contribution matching.

EdInvestor

Re the benefits for higher rate, the ISA is still a use it or lose annual allowance whereas the pension tax releief can be accessed right up to the year before retirement ( when there is no limit other than the lifetime allowance, currently 1.3 million quid).

So IMHO it makes sense to wait as long as possible bearing in mind that you are limited by your annual salary.So if you want to use the pension tax relief don't leave it until you get made redundant, never to work again.

But as a general rule max out the ISA first.

yesbutnobut

ReportInvestor wrote:

We have established on MSE, after furious debate that changed some IFAs' long held views, that there is no advantage in starting a pension early versus saving into an ISA and then putting the money into a pension later.

Hi ReportInvestor,

can you point me to the thread in which this is debated?

Many thanks in advance

ReportInvestor

I fear it may be lost in the mists of time (more than 6 months old???).

But the principle is simple.

Invest £100 (gross) into a pension and see it grow @ 10% for one year = £110.
Invest £78 (net of tax) into an ISA and see it grow @10% for one year = £85.80

Put the £85.80 into your pension with basic rate tax relief ( i.e. X it by 100/78) and you get the same £110 .

But it took a while to convince some people who had been telling a different story to their clients for a decade :rotfl:

The problem was that most people thought that the compounded growth on the tax relief would "obviously" make the pension more valuable - but it doesn't when you do the sums.

ReportInvestor

jamesd wrote:

ReportInvestor, can the poster collect the higher rate tax the poster is paying back from the ISA being converted into pension contributions later?

You've got it.

Obviously don't go from being a higher rate taxpayer to basic rate taxpayer or unemployed in the meantime.

But you go from basic rate taxpayer to higher rate taxpayer later it works in your favour.

If you stay the same it's neutral.

There may be some family tax credit and benefits issues that might tweak it back in favour of investing in a pension for some people, but on the whole I like to keep my money options open as long as possible.

I do wonder, however, if the 40% tax relief on pensions will continue for ever. The LibDems and the influential pensions' lobbyist Ros Altmann want to get rid of it [to help pay for a beefed up state pension that would scale down Gordon's means testing]. Or suppose there was a future overhaul of the tax system that extended top rate tax up the scale to £50K. If you were earning £42K now & were due to finish your career on £50K then you would get top rate tax relief no but not later.

We see through a glass darkly.