Analysing cost benefit of a pension

christhedon

Hi,

I'm currently thinking about a private pension vs just investing money yourself.

Positive
You get a tax break upfront when paying into a pension.
No capital gains tax to pay while your money is growing.
Pension law may change

Negative
You can only draw out 25% lump sum at 55% not all of it
You may die before the annuity gives you all the money in your pension pot.
You have limited assets to invest in
Pension law may change


Any of those points incorrect?

Any extra points?

Thanks,

Chris

jem16

christhedon wrote: »

Hi,

I'm currently thinking about a private pension vs just investing money yourself.

Positive
You get a tax break upfront when paying into a pension.

Very useful if you are a higher rate taxpayer and a basic rate taxpayer in retirement.

Negative
You may die before the annuity gives you all the money in your pension pot.

You don't have to buy an annuity. You can use drawdown where the pot be inherited by your spouse/dependants.

You have limited assets to invest in

Pensions today can utilise exactly the same investments as non-pensions so it's not limited.

What about your employer? Does it not offer any pension?

Linton

Positive - the 25% is tax free

Positive - the pension pot is protected from bankruptcy and you foolishly taking and spending the money early. It also is disregarded in calculating benefits.

Positive if you buy an annuity - even if you live much longer than average you cant run out of money. But you dont need to buy an annuity from a pension, and you can buy an annuity from money saved in say an S&S ISA. So the advantages and disadvantages of an annuity are independent of whether you go for a pension or not.

mania112

Positive
You won't spend it before retirement.

dunstonh

You may die before the annuity gives you all the money in your pension pot.

You have that as a negative. The annuity can have death benefits factored into it (or dont buy an annuity). However, prior to retirement, early death is a positive with pensions a the full fund value is paid out tax free to beneficiary.

You have limited assets to invest in

20 years ago that was correct. Today there is virtually no difference between most of the mainstream tax wrappers.

zagfles

Positive.
DWP won't deny you benefits because of your pension savings.
Your tax credits/benefits might increase because of your pension contributions.
If you die before taking the pension your dependants can usually inherit tax free.

grey_gym_sock

yes, investments in a pension are exempt from capital gains tax, and also from income tax.

however, the income tax exemption only saves tax on dividends when you're a higher-rate tax payer - though it saves tax on bonds and REITs even for basic rate tax payers.

and the CGT exemption only saves tax if you have enough invested to exceed the annual exemption, which most ppl don't.

all the above advantages are also available in S&S ISAs. so they don't help you choose between ISAs and pensions.

but (for example) pensions would be more attractive if you're a higher rate tax payer who's already maxing out S&S ISAs.

mark5

A family member of my wifes whos getting on a bit made some bad/silly decisions with investments a few years back.

For me this gives pensions a big plus, it takes away the responsibility of looking after the money and gives you a guaranteed income each month.

dunstonh

mark5 wrote: »

A family member of my wifes whos getting on a bit made some bad/silly decisions with investments a few years back.

For me this gives pensions a big plus, it takes away the responsibility of looking after the money and gives you a guaranteed income each month.

It doesnt i'm afraid. If you have the same investment in an ISA, unwrapped or in a pension then you get the same returns other than tax.

mark5

dunstonh wrote: »

It doesnt i'm afraid. If you have the same investment in an ISA, unwrapped or in a pension then you get the same returns other than tax.

I was speaking from the point of view of having taken an annuity from a pension fund at retirement you are able to retire knowing that you will be paid each month.

Most people who retire are more than capable of looking after investments at that age (55-65) but can the same be said for someone whos getting well into their 80's?

chucknorris

christhedon wrote: »

Hi,

I'm currently thinking about a private pension vs just investing money yourself.

Positive
You get a tax break upfront when paying into a pension.
No capital gains tax to pay while your money is growing.
Pension law may change

Negative
You can only draw out 25% lump sum at 55% not all of it
You may die before the annuity gives you all the money in your pension pot.
You have limited assets to invest in
Pension law may change


Any of those points incorrect?

Any extra points?

Thanks,

Chris

For me the biggest advantage is that with a decent sized pension you can spend more of your capital in retirement. My wife and I were quite surprised when we actually starting thinking about how much we have to spend each year (in retiremement) to use up the money (we don't have children) to avoid being the richest person in the graveyard. The problem is what happens if one of you live 10-15 years longer than you expected and you have spent most of it? A decent pension means that you have hedged this situation to some extent.