MSE News: The great pensions shake-up: What you need to know

Linton

ferox666 wrote: »

Interesting that the "experts" have not commented on OrganicFarmer's post on page1...hmm...

Not an expert but..

No-one has given a reply because its reads like a rant. Sorry, its difficult to give constructive comments on something completely non-factual. I can however give an alternative example. As soon as we realised the importance of pensions in my early 30's, my wife and I put everything permitted (at the time 15% of income) into our employers' pension and later started long term investing via an IFA (pre online brokers, pre internet!) with my stated aim of retiring at 55. Thanks to all this saving we were able to retire a month after my 56th birthday without any decrease in standard of living. All of our pension income comes from money purchase schemes, so no "gold plated" final salary pension.

dunstonh

ferox666 wrote: »

Interesting that the "experts" have not commented on OrganicFarmer's post on page1...hmm...

Couldn't be bothered as it was full of incorrect information and clearly written by someone who doesnt know what they are talking about, doesnt want to know or understand and prefers to rant about it instead.

There is no point engaging with people like that. You wont get past the chip on their shoulder.

jamesd

ferox666 wrote: »

Interesting that the "experts" have not commented on OrganicFarmer's post on page1...hmm...

The post itself gives the reason at the end:

organic_farmer wrote: »

Don't fall for

I suggest you don't fall for that post.

I suppose I'll address some of it. Income tax relief on pension contributions is provided at up to 50% at the moment. Here's how the 55% tax charge after your spouse also dies works out for a £1,000 pot:

50% tax relief: net cost on the way in, £500. Money in pot: £1,000. 55% charge leaves £450 of the £500. So it's only leaving effectively a 10% tax on the money going in.

40% tax relief: net cost on the way in, £600. The 55% tax charge is 25% on the net cost of the money going in.

20% tax relief: net cost on the way in, £800. The 55% tax charge is 43.75% of the money going in.

But it's not really as high as those numbers seem either. That's because of the 25% tax free lump sum. So reworking to allow for that:

50% tax relief: net cost on the way in, £500, less £250 tax free lump sum so just £250. Money left in pot: £750. Deduct the 55% tax charge leaves £337.50 in the pot. So you're still up by 35% on tax relief alone.

40% tax relief: net cost on the way in, £600 less the £250 lump sum leaves net cost of £350. The £337.50 in the pot for a net cost of £350 means you're down by just 3.6%.

20% tax relief: net cost on the way in, £800. Less the £250 lump sum drops it to £550. The £337.50 in the pot means the tax charge on what you paid in is 39%.

But I'm still not done because this was to provide pension income in retirement. What about the spending of the money that you did, which also reduces your effective cost?

Lets say you live long enough to draw down half of the money in the pension pot. How do the numbers look then? Probably obvious that top and higher rate people do well, so I'll just do basic rate.

20% tax relief. £800 initial on the way in, less £250 lump sum leaves £550. Then take half of the £750 as income, deducting that £375 leaves a cost of £175. The 45% untaxed part of the £375 left in the pension pot is £168.75. So you're in profit after all that, by about £7.

Live long enough to spend more of it and you gain more, live less time and you gain less or might see a loss. But overall a 55% tax charge isn't too bad an approximation to at least breaking even on the tax.

For simplicity I've avoided income tax on the income taken after taking the lump sum. The personal allowance and say a 20% income tax rate just moves the break even point a little and it's already close enough to explain why 55% is about break even for HMRC.