Company Pensions 2012?

JoeCrystal

hugheskevi wrote: »

This is true.

But it may well be considerably better for an individual to save in a S+S ISA and later move the money to a pension as and when they have the advantage of higher rate tax or salary sacrifice.

Maybe, but what if you have no hope of getting into higher rate tax band or unlikely occurrence of employer offering salary sacrifice? Nevertheless, the 25% tax relief is very good and it could be better to save into ISAs but not necessary so.

Melmar

Ok starting to get confused now. I'm 47 and have been in company and government pensions all my life. I have now joined a small company with less than 50 people my salery will be £23,000 and no company pension scheme. I want to do the right thing to secure my future retirement income but don't know which way to turn.

jem16

Melmar wrote: »

Ok starting to get confused now. I'm 47 and have been in company and government pensions all my life. I have now joined a small company with less than 50 people my salery will be £23,000 and no company pension scheme. I want to do the right thing to secure my future retirement income but don't know which way to turn.

As you probably have used up your personal allowance with your other pension provision, the only advantage to taking out a pension now would be a further 25% tax free lump sum.

Have you got any S&S ISA provision as yet? May be best to concentrate on that for now.

hugheskevi

Maybe, but what if you have no hope of getting into higher rate tax band or unlikely occurrence of employer offering salary sacrifice?

Then you just put the money into the pension later in life and get exactly the same as you would have if you put the money in now, even if you don't enjoy higher rate tax relief or salary sacrifice - plus you keep the liquidity advantage of the ISA (which isn't unambiguously good, but in general more liquidity is better assuming decent financial discipline).

It's basically a heads you win, tails you don't lose situation.

I want to do the right thing to secure my future retirement income but don't know which way to turn.

To know where to turn, you need to know your destination

That involves working out what you want to have in retirement, how far you have got towards that, and what more you need to do. Then deciding how best to do what you need to do.

Using pension calculators and such like will assist you in doing that. Or you can consult an IFA if you prefer.

Lokolo

hugheskevi wrote: »

Then you just put the money into the pension later in life and get exactly the same as you would have if you put the money in now, even if you don't enjoy higher rate tax relief or salary sacrifice - plus you keep the liquidity advantage of the ISA (which isn't unambiguously good, but in general more liquidity is better assuming decent financial discipline).

It's basically a heads you win, tails you don't lose situation.

I'm not sure I agree with that, only because you get the gains from the extra 25% throughout the pension lift added on top.

As well, with the larger allowance you may not pay the tax you've received, it could be less.

hugheskevi

I'm not sure I agree with that, only because you get the gains from the extra 25% throughout the pension lift added on top.

Mathematically, it makes no difference.

In a pension, you make a contribution, get it uplifted with tax relief, and get growth on the total amount.

Put the same initial amount in an S+S ISA, it doesn't get any uplift, and it gets the same growth as the pension would have got.

Therefore, when you come to move it into the pension in the future, you get more tax relief added when it is put into the pension than you would have received had you put it into the pension immediately, as you get tax relief on the part of the ISA composed of investment growth. This exactly offsets the lower growth you got from having a lower amount invested.

Mathematically, assuming tax rates stay the same, you get the same outcome (also assuming same charges and investment returns in the ISA and pension, which would be normal). You also need to ensure you start in sufficient time in order to have enough taxable income (which limits what you can put in the pension and get tax relief) left to receive prior to retirement to shift the money into the pension. But, for people with reasonable earnings and modest pension pots just a few years should be sufficient.

As well, with the larger allowance you may not pay the tax you've received, it could be less.

Whether you put it into an S+S ISA now and move it to a pension later, or put it into the pension now, at point of receipt it is pension income so tax allowances don't matter.

dunstonh

The pension ends up higher by the amount of tax relief. That is all.

Take £80pm and grow it by 7%. Then take £100 (to reflect the pension with basic rate relief) and grow it by 7%. The final balance is still different by only 20% relief

Which would be a better investment - a SIPP or an S and S ISA?

As you can put the same investments in to both of the tax wrappers, the returns will be identical. It is just the tax handling and maturity process that is different.

Lokolo

hugheskevi wrote: »

Mathematically, it makes no difference.

In a pension, you make a contribution, get it uplifted with tax relief, and get growth on the total amount.

Put the same initial amount in an S+S ISA, it doesn't get any uplift, and it gets the same growth as the pension would have got.

Therefore, when you come to move it into the pension in the future, you get more tax relief added when it is put into the pension, as you get tax relief on the part of the ISA composed of investment growth. This exactly offsets the lower growth you got from having a lower amount invested.

Mathematically, assuming tax rates stay the same, you get the same outcome (also assuming same charges and investment returns in the ISA and pension, which would be normal).

But it doesn't take into account larger allowance which would offset part of the 20% tax surely?

If no personal allowance existed, I would agree but when you get it back, you would be paying less than 20% tax on your earnings because of the increase of personal allowance and the increase in personal allowance due to age.

dunstonh wrote: »

The pension ends up higher by the amount of tax relief. That is all.

Take £80pm and grow it by 7%. Then take £100 (to reflect the pension with basic rate relief) and grow it by 7%. The final balance is still different by only 20% relief

Yep I got that, but you are both assuming 20% tax on all of it, whereas with a higher personal allowance, surely you are not going to be paying 20% on all of it because of the allowance (I think I've said allowance too much in )?

hugheskevi

The personal allowance is irrelevant as in both cases all of the money is in the pension pot and paid out as (taxable) pension income. Hence whatever advantages you get from the higher personal allowance, you get in both scenarios.

The point is that the pot size is identical whether you put the money in immediately, or put it into ISA first and into a pension later (subject to caveats/assumptions in the previous post).

jem16

hugheskevi wrote: »

The personal allowance is irrelevant as in both cases all of the money is in the pension pot and paid out as (taxable) pension income. Hence whatever advantages you get from the higher personal allowance, you get in both scenarios.

In the case of the OP it is irrelevant as he is unlikely to have any personal allowance left over as he has other pension provision.

In the case of JoeCrystal (and others) it may not be irrelevant as the state pension would be around £7k/£8k (basic plus additional) leaving approximately £3k/£2k to use against the pension income.