Pension contributions

Gettingeven

If I am going to be a 40% tax payer in retirement, is there any point in making pension contributions now? I will have substantial rental income on top of the state pension and I'm currently contributing £250 pm gross to a SIPP. What's the point? My current fund value is @ £185,000.

bigadaj

Well you can get the tax free lump sum.

You are currently only putting in three grand a year which isn't a huge amount, 200 grand would currently buy what ten grand a year, so this would only get you a quarter of the way to higher rate tax on its own.

This might also give you the flexibility of retiring earlier and or more comfortably, and certainly before the state pension licks in, which is late sixties at best.

Perelandra

Are you currently putting anything into an S&S ISA? In the situation you describe, this might be a better option, due to the greater flexibility and lower (probably....) governmental risk involved.

Gettingeven

bigadaj wrote: »

Well you can get the tax free lump sum.

You are currently only putting in three grand a year which isn't a huge amount, 200 grand would currently buy what ten grand a year, so this would only get you a quarter of the way to higher rate tax on its own.

This might also give you the flexibility of retiring earlier and or more comfortably, and certainly before the state pension licks in, which is late sixties at best.

I'm not convinced that the tax free cash is reason enough to pay into a pension when I'm going to get taxed on the income at 40%. I also think that the govt has its beady eye on the tax free nature of the lump sum, don't you?

Gettingeven

Perelandra wrote: »

Are you currently putting anything into an S&S ISA? In the situation you describe, this might be a better option, due to the greater flexibility and lower (probably....) governmental risk involved.

Yes, I do pay the maximum into ISAs each year.

Perelandra

Gettingeven wrote: »

Yes, I do pay the maximum into ISAs each year.

Fair enough.

VCTs it is then!


In your situation, I think the only time I would consider putting more into the pension would be as you approach retirement, and could then ramp it up to the (currently) 40k/year mark, rather than the 3k you're currently doing. That way, you'll have time to see if the tax-landscape have changed sufficiently to remove any benefit for you of an additional pension pot.


Couple more thoughts:

A larger pension pot gives more choice around timing of taking the benefits, and around flexible drawdown.

Is there any chance that you'll be living abroad during retirement?

dunstonh

I also think that the govt has its beady eye on the tax free nature of the lump sum, don't you?

No. Seeing as in 2006 the tax free lump sum payments were increased, it is unlikely they would backtrack now. Plus, the availability of the tax free cash lump sum helps the economy by feeding cash into it. Stopping it would take that away and produce no immediate tax gain with the tax income feeding in over the years. However, the lost cashflow to the economy would be immediate and the tax loss from that would have a greater impact.

I'm not convinced that the tax free cash is reason enough to pay into a pension when I'm going to get taxed on the income at 40%.

What about death benefits? Is your estate above the IHT threshold?

PaulCooper

Don't forget about NI, when you receive money as a salary it's taxed at whatever rate plus NI. When you receive benefits from a pension, there is no NI to pay, I realise it's only 13% difference

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but
Paul

bigadaj

OP it might just be me but you it sounds like you are complaining. There's an old adage that you only pay the tax if you earn the money so no real cause for complaint.

Don't forget there is a school of thought that pension contributions should only attract tax relief at the standard rate of tax, which I agree with to be honest. I currently try and match my pension contributions to wipe out the 40% tax paid, but wouldn't have any great problem with the government cutting this back, not to say it wouldn't change my behaviour though.

Gettingeven

I'm not convinced by your arguments regarding pensions at all.

Take away the 40% tax relief and what have you got? I know that given the choice between a stocks and shares ISA and a pension with 20% tax relief, I'd go for the ISA every time. Far more flexibility, I can take a tax free income that roughly equates, or even betters, the annuity rates currently available, and I can pass the fund on to my kids afterwards. I could even use the ISA to buy a couple more houses to rent out for income if I wanted to. The current structure of pensions is to restricted.

Gettingeven

dunstonh wrote: »

No. Seeing as in 2006 the tax free lump sum payments were increased, it is unlikely they would backtrack now. Plus, the availability of the tax free cash lump sum helps the economy by feeding cash into it. Stopping it would take that away and produce no immediate tax gain with the tax income feeding in over the years. However, the lost cashflow to the economy would be immediate and the tax loss from that would have a greater impact.



What about death benefits? Is your estate above the IHT threshold?

Don't agree with your comments about tax free cash at all. If the government wants to stop it, then it will stop. Arguments about the effects on the economy are pointless, as you could make the same case about every tax that's ever been brought in. It all sucks money out of the economy. Tax on insurance policies, tax on plane journeys, tax on everything, basically. Even auto enrolment could be seen initially as a tax as it will be taken direct from worker's wages. This will reduce net pay. Wont that have a negative effect on the economy? People will have less to spend?