Pension Tax.

geraint85

At 27 years old, I just Joined my Company Pension, paying in 10% of my salary. My incentive for doing this was that it’s advertised as tax free. However, I’ve heard that Pensions are taxed when paid back… Is this true? Doesn’t seem very fair

Can anyone point out the advantages of taking out a pension (other than a convenient way of saving).



Thanks.

Lokolo

Yes but only on the income. You can take a 25% tax free lump sum.

So a very simple example, contribution £100k. You do not pay tax on £100k you would outside of the pension. You take 25% tax free. You only then pay tax on the rest of the £75k. If you are using salary sacrifice you are also saving 12% National Insurance as well, which you do not pay in retirement.

Additional benefits, employer contributions, if you do not receive any currently, you will soon.

Additional higher rate tax, input @ 40%, take out @ 20%, saving you 20%.

lvader

If your pension income is very low you might mot pay any tax.

geraint85

Ok.. so if I saved £100k into my pension fund, and took a 25% lump sum, I’d be left paying 20% tax on the £75k, amounting to £15k (15% of the total).. So a pension basically gives me a 5% reduction in income tax on anything I save, along with a convenient way of saving for retirement. but then on the other hand, I lose access to 75% of what I’ve saved.
I’m still not as impressed by the initial tax free promise.



I assume most of my tax free allowance would be taken up by the state pension..



Any other positives i'm not seeing?

dunstonh

My incentive for doing this was that it’s advertised as tax free.

They are tax free.

However, I’ve heard that Pensions are taxed when paid back… Is this true? Doesn’t seem very fair

Only the income but thats not the pension (caveat applies).

Can anyone point out the advantages of taking out a pension (other than a convenient way of saving).

employer contributions (free money)
tax relief on contributions
tax free growth
tax free payout on death (outside of estate)
25% tax free cash

I assume most of my tax free allowance would be taken up by the state pension..

It isnt. You still have about £3k left over.

grey_gym_sock

the description of "tax free" was incorrect. it's not tax-free; it's mostly a way to defer taxation, from now until when you draw the pension. (which is useful, as the state pension is less than the personal allowance.)

if you don't get an employer contribution, and don't pay higher rate tax, and it isn't a salary sacrifice pension (which would save you some NI as well as income tax), ... then the tax savings from a pension are quite marginal.

under the circumstances, an S&S ISA might be just as good as or better than a pension. or do a bit of both. (see this very long thread: https://forums.moneysavingexpert.com/discussion/375217 )

CLAPTON

geraint85 wrote: »

At 27 years old, I just Joined my Company Pension, paying in 10% of my salary. My incentive for doing this was that it’s advertised as tax free. However, I’ve heard that Pensions are taxed when paid back… Is this true? Doesn’t seem very fair

Can anyone point out the advantages of taking out a pension (other than a convenient way of saving).



Thanks.

is you employer paying into the pension too?



if so then that's free money going into your pension

geraint85

Dunstonh.. Can you explain this bit. How is the income not the pension? I dont think i'm understanding it correctly. thanks for your reply.

dunstonh
Only the income but thats not the pension (caveat applies).

geraint85

CLAPTON
is you employer paying into the pension too?

Yes. My company is paying 2% this year. 4% next year, and 5% for every following year. However, the minimum that I have to contribute is 4%. I opted for 10% as I thought I'd be getting 20% tax free.

kidmugsy

grey_gym_sock wrote: »

if you don't get an employer contribution, and don't pay higher rate tax, and it isn't a salary sacrifice pension (which would save you some NI as well as income tax), ... then the tax savings from a pension are quite marginal.

Hear, hear. Save in some other way until you satisfy one or more of greygymsock's criteria.

"However, the minimum that I have to contribute is 4%." That's what you should contribute then, unless your contributing more leads to your employer contributing more too.

bigadaj

Geraint, pay in the minimum you need to get the employer contribution. Ask them if you can salary sacrifice your contribution, as you get extra contributions from the NI saved, and they might share some savings of their NI contributions.

The other money then should be saved first to give you a cash buffer, probably using cash isas. Once you have a few months pay in there then look at shares isas as others have said.

Dunstons point is that you make contributions into a pot, and this can then be used to buy an annuity, or you can use drawdown, to actually pay you a pension.

The way to think about it is that you get tax relief paying into a pension, but pay tax on the pension you get out, whereas with isas your contributions come from taxed income, but any interest or growth is tax free. So your 10% you have been laying in has only actually cost you 8% of your salary, the other 2% comes from the government as tax relief.