Are pensions only for high rate taxpayers who own a house?

MadeToFit_2

It looks to me like the conclusion of the "ISAs v Pensions: The Official Retirement Debate" thread is that pensions are for

• high rate tax payers, and
• people who are likely to pillage their pension pot for a spending spree unless it is locked away.

Moreover, if you don't own a house then you'll have to pay rent after you retire. (I was shocked to find out how cheap mortgages are compared to rent.) Therefore saving for a deposit is a better investment than a pension.

Lokolo

No they aren't the only reasons. Matching contributions from company also put it ahead of ISAs.

And saving for a deposit - why does it have to be pension OR property deposit, why can it not be both?

dunstonh

How do you pay for the rent in retirement if you dont have pension income?

Most people buying their first house are in their 20s. A pension contribution at that age can be quite low. If they cant afford that pension contribution then they cant afford a house. If they choose to reallocate the money to the house then it wont make any difference in the scheme of things as pension contribution even if put towards deposit will make no meaningful difference.

The point of retirement planning is to plan for retirement. Everyone should be doing that.

Dunroamin

dunstonh wrote: »

How do you pay for the rent in retirement if you dont have pension income?
.

If you don't have pension income the state will pay (most of) your rent as well as top up your state pension with pension credit.

(Which doesn't make me anti pension because the more you can pay for yourself, the better.)

Bigmoney2

dunstonh wrote: »

How do you pay for the rent in retirement if you dont have pension income?

If the only income you have is the state old age pension then you would be entitled to pension credit, receipt of this benefit entitles you to housing benefit, so rent payed for you ( or most of it anyway) also council tax benefit will pay the council tax. Plus if you are rentng, maintenance/repairs are the responsibility of the landlord, so another expense thats paid for you.

jamesd

If you took those as the conclusions you mis-read it.

For the choice between investing for the long term for retirement or long term unemployment over age 40 or so, pensions tend to be better for generating income for basic and higher rate tax payers. Their limitation is the GAD limit which caps how much money can be taken out. That means you probably need to have some of the money elsewhere if you want to retire before state retirement age. the reduction of the GAD limit by 18% by the current government made this push away from being able to use pensions worse. If you don't plan to retire before state pension age the GAD limit isn't too bad even now, but it's a killer for using pensions much earlier for retirement.

For the choice between one of those things or accumulating a deposit for a first home, likely to be a flat rather than a house if it's bought according to need rather than desire, then a pension should be used if there's employer matching, unless it's only NEST, when it's likely to be better to give it a miss as these younger ages and wait for a decent alternative instead. Beyond that pension with employer matching, the ISA choice would be the way to go for longer term investing to accumulate a deposit, either with investments if it'll take more than a few years, or with cash if it won't.

The pension also shouldn't be neglected when it comes to clearing a mortgage because the combination of tax relief and use of investment makes it much more efficient than overpaying on a mortgage directly. The pension lump sum is available at age 55 and makes a great mortgage clearing tool, leaving the remaining 75% in the pension pot for later. Or not later if you've been really keen on retiring early and accumulated enough to retire at 55.

Pensions offer additional benefits to basic rate tax payers in a salary sacrifice pension, where they save the NI as well as the income tax, and for higher and top rate tax payers who will be basic rate in retirement. But these are extra benefits, they don't mean it's wrong to use a pension as a basic rate tax payer.

So to some extent you're right - getting out of renting into a low cost first mortgaged home is an improvement because of the certainty and potentially lower cost. But there are still cases where it makes sense to do other things as well.

For any parents, helping a child with their first deposit is a better financial move for the child than helping them with university fees. It gets them out of renting more quickly.

jamesd

Bigmoney2 wrote: »

If the only income you have is the state old age pension then you would be entitled to pension credit, receipt of this benefit entitles you to housing benefit, so rent payed for you ( or most of it anyway) also council tax benefit will pay the council tax. Plus if you are rentng, maintenance/repairs are the responsibility of the landlord, so another expense thats paid for you.

And the extra special bonus with that plan is that you end up having to live on means tested benefit levels of income that you have no control over for the final third of your life. It's a desperation move when planning has failed or when someone just didn't think much about their future, not an objective.

Don't count on those rules remaining the same. This government has plans to reform pensions in a way that will eliminate that possibility. It's already good for those on low incomes to accumulate some pension money because they can get income and savings from about £40,000 worth before it hurts means tested benefits too much, courtesy of the Savings Credit. It's those above that level that can end up losing out in benefits for having more pension under current rules and that's part of what the government is planning to try to tackle.

dunstonh

Dunroamin wrote: »

If you don't have pension income the state will pay (most of) your rent as well as top up your state pension with pension credit.

(Which doesn't make me anti pension because the more you can pay for yourself, the better.)

That is true but planning to be poor in retirement isnt really planning. It is failure to plan.

real1314

If someone only ever earns minimum wage, say around £200 a week after tax/NI; wouldn't the proposed £140 a week state pension be a reasonable pension plan, forming 70% of working income?

Would a person in this position be wise to spend money (that they may not be able to afford) on a personal pension?

I'm not sure where the income from £40k before means test is affected comes from, but I suspect the poster isn't sure either; Perhaps if they suggested the actual income this would generate, it would be more testable?

And what contribution would be needed over 40 years to generate a £40k pot?

I suspect that the salesman would actually benefit far more than the pensioner. :cool:

dunstonh

And what contribution would be needed over 40 years to generate a £40k pot?

A monthly direct debit of £27.40 assuming an annual growth rate of 4%. If it was increased to retain a real terms then it would be closer to £15pm

I suspect that the salesman would actually benefit far more than the pensioner.

Are you sure the £20 that would earned out of this is more than the £40,000 the individual would have?

jamesd

real1314 wrote: »

I'm not sure where the income from £40k before means test is affected comes from, but I suspect the poster isn't sure either

Good guess but wrong this time. I'm the person who did the calculation:

jamesd wrote: »

After reaching state pension age a single person can also get up to £18.54 a week in Savings Credit, more in some circumstances, as a result of putting money away for retirement. At 3% of capital available for income, roughly assuming an RPI annuity, that's equivalent to a pension pot of £32,000. In addition the first £10,000 of savings is ignored, taking it to around £42,000 worth of retirement savings.

real1314 wrote: »

And what contribution would be needed over 40 years to generate a £40k pot?

Using the Aviva Calculator a gross amount is £27 a month at 6% real investment return to get to £40,191. With auto-enrollment rules fully in place something like half of that would be payable by the employee, so perhaps £13.50 a month, £162 a year or £3.12 a week.

I suspect that a fair number of people on minimum wage of £6.08 an hour could afford this amount.

real1314 wrote: »

If someone only ever earns minimum wage, say around £200 a week after tax/NI; wouldn't the proposed £140 a week state pension be a reasonable pension plan, forming 70% of working income?

It could be but watch out for the risk that the coming pressure on taxes to pay for the peak state pension cost in the 2030 to 2050 time frame spoils that plan. Planning to spend 40 years working for minimum wage isn't really great either, but some people maybe able to do no better.