Join company scheme?

scotsio

I have been reading one of the stickies in the pension section and found a few people saying that if you are a basic rate tax payer it may be more beneficial to use stocks and shares isa's rather than a pension.

I am 28 yrs old and married. My wife has roughly the same earnings and we have no kids nor are there plans for any. She has a company pension where she pays the minimum 4% but that was only to avoid losing the £3k pension contributions from her previous employer.

I am a basic rate tax payer earning between £25-30k depending on overtime. I am a bus driver and although I am pretty much in a dead end job I really enjoy it and don't think I'll ever want to move. I am happy leading a simple life. It is for this reason that I believe I will still be a basic rate tax payer by the time I retire.

I have been offered to join the company pension scheme.
I am required to pay a min 4%
The company will pay
Nil in year 1
4% in years 1 to 5
6% in years 5 to 9
10% over 9 years service.

Is this scheme worth joining? Would I be better off with ISA's.
I was thinking about buy to let too, as my current mortgage is quite small and like the idea of owning an asset that also generates income.

Linton

scotsio wrote: »

I have been reading one of the stickies in the pension section and found a few people saying that if you are a basic rate tax payer it may be more beneficial to use stocks and shares isa's rather than a pension.

I am 28 yrs old and married. My wife has roughly the same earnings and we have no kids nor are there plans for any. She has a company pension where she pays the minimum 4% but that was only to avoid losing the £3k pension contributions from her previous employer.

I am a basic rate tax payer earning between £25-30k depending on overtime. I am a bus driver and although I am pretty much in a dead end job I really enjoy it and don't think I'll ever want to move. I am happy leading a simple life. It is for this reason that I believe I will still be a basic rate tax payer by the time I retire.

I have been offered to join the company pension scheme.
I am required to pay a min 4%
The company will pay
Nil in year 1
4% in years 1 to 5
6% in years 5 to 9
10% over 9 years service.

Is this scheme worth joining? Would I be better off with ISA's.
I was thinking about buy to let too, as my current mortgage is quite small and like the idea of owning an asset that also generates income.

The company contribution is fairly good, very good if you stay for 9 years or more. This makes it very unlikely you would do better with ISAs and in my view you would be foolish not to join the scheme.

McKneff

This company is giving you free money, brilliant. You would never find that anywhere else.

Why on earth would you question it.

Grab it with both hands. 'Nuff said.

Nothing to stop you buying property too, if you can afford it.

scotsio

On the application form it asks me if I want to pay my contribution gross or net of income tax and I'm not sure what the implications are of choosing each option.
Can someone help me on this one?

mania112

scotsio wrote: »

On the application form it asks me if I want to pay my contribution gross or net of income tax and I'm not sure what the implications are of choosing each option.
Can someone help me on this one?

It's not really asking you that, it's asking if the sum you've entered on the application form is what you're expecting to come out of your bank, or the sum including the tax relief.

a £100 contribution from you, is actually £125 in the pension because there is a tax relief credit added to your contribution.

So in the above example if you've entered £100 as the sum you want to pay, that's NET, if the sum you've entered is £125, which includes the tax relief, that would be GROSS.

More than likely you would tick NET because you've entered the sum you want to come out of your bank.

scotsio

Ok so the company is giving me free money. I'll take it!!
Now as for my contribution to it, should I just pay the minimum - purely to take advantage of my employers money? They will still pay 10% after 9 years even if I am still only paying 4% - I could then put the money somewhere else OR should I just heap lots more money into it?


Also why do some people say that basic rate tax payers would be better off with isa's?

mania112

To answer your question, in year 1 - it might be better off being in an ISA.

However the MAIN problem with an ISA (over a pension) is that it's too tempting to take the money back out before retirement.

Linton

scotsio wrote: »

On the application form it asks me if I want to pay my contribution gross or net of income tax and I'm not sure what the implications are of choosing each option.
Can someone help me on this one?

If £100 is paid gross, £100 is paid into your pension and £100 is deducted from your taxable income, so you pay £20 less tax.

If £80 is paid net, £80 is paid to the pension company company who claim £20 from the government making the equivalent of a total gross payment of £100. You have course havent gained the £20 reduction.

The overall effect is exactly the same for a standard rate tax payer, but paying gross makes tax administration simpler for higher rate tax payers.

So in your case it doesnt make any real difference. Perhaps paying gross simplifies filling in ones tax return, I dont remember.

mania112

scotsio wrote: »

Also why do some people say that basic rate tax payers would be better off with isa's?

Basically, a basic rate tax payer will get basic rate tax relief

a £100 contribution will be increased by 20% to £125.

Sounds good, but don't forget they'll tax you on the income again, so it sort of evens itself out.

If you were a higher rate tax payer you'll get 40% relief. However, when it comes to taking the income at retirement, you might be back to a basic rate tax payer, so you'll save yourself money on the tax at retirement.

So for a basic rate tax payer the tax efficiency outweighs the benefits of the tax relief in a pension.

But as i said in a previous post, the ISA money is too accessible and should not be used as your primary retirement income vehicle.

mania112

^ just re-reading my posts 'basically' i'm too tired. Night!

scotsio

mania112 wrote: »

It's not really asking you that, it's asking if the sum you've entered on the application form is what you're expecting to come out of your bank, or the sum including the tax relief.

a £100 contribution from you, is actually £125 in the pension because there is a tax relief credit added to your contribution.

So in the above example if you've entered £100 as the sum you want to pay, that's NET, if the sum you've entered is £125, which includes the tax relief, that would be GROSS.

More than likely you would tick NET because you've entered the sum you want to come out of your bank.

My employer only lets me put the amount I want to pay as a percentage of pay - minimum 4%.
Here is what it says on the letter:

"This scheme only operates as a percentage. Please ensure you delete either gross or net as this tells us how the tax relief should be treated. If you select gross we reduce your chosen contribution by the tax relief which is then paid to your pension account by HMRC. If you select net we deduct the amount you have chosen and HMRC pays the tax relief over and above your contribution."

Apologies if this is what you explained above I just can't get my head around that paragraph. It sounds like both options end up with the same result? If so why do I get the choice?