How Much To Pay Into Pension Plan?

catz747

Hi,
My other half has a pension plan from a former employment with standard life, current value £600. He isn't paying into a pension now and is not eligible for his current company pension plan for another 18 months. As he has just turned 30, he needs to start making a contribution to this plan, my question is how do we work out how much to pay in?

Thanks

EdInvestor

Is he a basic rate or higher rate taxpayer?If the former he would probably be better to contribute to his investment ISA for the time being.

Paying into pensions is only beneficial if there is a company contribution for basic rate taxpayers.

McDuck

EdInvestor wrote:

Paying into pensions is only beneficial if there is a company contribution for basic rate taxpayers.

Am I alone in thinking this is a bit of a strange response? I accept that there may be better investments such as ISA's however I personally like the concept of investing in a pension as it forces me to save for my retirement and have no access to it till I'm 50 (if my understanding A day is correct).

Therefore there are times when it is benficial investing in a pension as a basic rate payer with Company Cont.

catz747

He's a basic rate tax payer, his company won't put him on the pension plan for a while but the old pension still exists, he and I have ISAs too though. I just hope when his current employer starts him on the pension scheme that they monies can be put together somehow.


So, to clarify, no-one is paying into a pension for him at the moment.

moneyandmountains

McDuck wrote:

Am I alone in thinking this is a bit of a strange response? I accept that there may be better investments such as ISA's however I personally like the concept of investing in a pension as it forces me to save for my retirement and have no access to it till I'm 50

As has been mentioned previously pensions like ISAs are just forms of tax wrapper. Assuming a discplined investor (i.e. you can trust yourself to keep not spend the money), then there are the following differences for a basic rate tax payer (assuming not contracted out of S2P).

1) Pension. Pay no tax now. Tax Wrapper on investments until retirement. Get up to 25% tax free lump sum at retirement.
Pay tax when income is taken at retirement. Some inflexibility of how income is taken e.g. drawdown / annuity purchase.

2) Investment ISA. Pay tax now.
Investments are protected from CGT and Income tax.
No tax when you take money out of the ISA.

In the same way as pensions, most Investment ISAs will allow combinations of regular and lump sum contributions.

EdInvestor

I personally like the concept of investing in a pension as it forces me to save for my retirement

How does it do that?

and have no access to it till I'm 50 (if my understanding A day is correct).

You won't be able to access any money in a pension after 2010 until you're 55.At that point (assuming the rules haven't been changed) you can get 25 % out in tax free cash. The rest has to be taken as income.You can't ever get any of the capital out.

Many people think this kind of inflexibility is not very suited to the needs of most people today.

Do be aware that the income from a pension in retirement is taxed, thus the tax relief you get at the start is only deferred - they take it back later.

EdInvestor

catz747 wrote:

He's a basic rate tax payer, his company won't put him on the pension plan for a while but the old pension still exists, he and I have ISAs too though.

Are those cash ISAs or investment ISAs?.You should use the investment ones for retirement planning.

I just hope when his current employer starts him on the pension scheme that they monies can be put together somehow.

There's not necessarily any advantage in doing that.

What you need to do is accumulate a pot of investments to fund your retirement.The pot doesn't have to be in a pension.The investments can be in property, shares, unit trusts, cash savings, bonds and gilts.As mentioned, a pension is just a tax wrapper, and a very restrictive one at that.

McDuck

EdInvestor wrote:

How does it do that?

As I deduct it at source from my pay - it creates a saving habit that is harder to cancel than a DD or SO.


You won't be able to access any money in a pension after 2010 until you're 55.At that point (assuming the rules haven't been changed) you can get 25 % out in tax free cash. The rest has to be taken as income.You can't ever get any of the capital out.

Many people think this kind of inflexibility is not very suited to the needs of most people today.

Do be aware that the income from a pension in retirement is taxed, thus the tax relief you get at the start is only deferred - they take it back later.

I personally like the lack of flex - as said before I can't get my hands on it till 55 (thanks for correcting me on ages) Therefore my personality suits pension over ISA. I may get better return on ISA than pension but If I've spent my ISA money I'm kinda up a creek..... Hope that clears up my thinking for you

catz747

EdInvestor wrote:

Are those cash ISAs or investment ISAs?.You should use the investment ones for retirement planning.

They're cash ISAs - Will have to look into investment ones
Also, he thinks that his current employer use the same pension people as his former employer (standard life).

Also, I get your point McDuck about pension money, in your head it is only for when you retire, especially for the weak willed (which I am sometimes)

dunstonh

I personally like the lack of flex - as said before I can't get my hands on it till 55 (thanks for correcting me on ages) Therefore my personality suits pension over ISA. I may get better return on ISA than pension but If I've spent my ISA money I'm kinda up a creek..... Hope that clears up my thinking for you

That is the only reason I tend to arrange new pension business nowadays for basic rate taxpayers (apart from those already retired). It is a valid reason. It may not be the most efficient technically but it has to do the job required and the flexibility of the ISA doesnt do the job required in your case if you have spent it 10 years earlier.

McDuck

dunstonh wrote:

That is the only reason I tend to arrange new pension business nowadays for basic rate taxpayers (apart from those already retired). It is a valid reason. It may not be the most efficient technically but it has to do the job required and the flexibility of the ISA doesnt do the job required in your case if you have spent it 10 years earlier.

Good point I am lucky as I have a good qual employer scheme (Er Conts 18% into DC Scheme) . + I claim the 18% difference