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Is there really a difference on your pension between being a 20% or 40% taxpayer....

cusssi
Posts: 106 Forumite
Basically if your being taxed on the earnings when you retire, then surely there is exactly no difference of the amount you will end up with in your pocket?
You will get 40% relief but get taxed 40%.?
Also when you buy an annuity, is it that payout that you will be taxed on each month?
Thanks
You will get 40% relief but get taxed 40%.?
Also when you buy an annuity, is it that payout that you will be taxed on each month?
Thanks
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Comments
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You only pay 40% tax if your pension income is in the 40% tax band... You can get 40% tax relief putting in, but only pay 20% when getting it. Just because you paid 40% when earning, doesn't mean you will pay it when getting pension income!
For 20% payers the benefits are limited really to salary sacrifice (saving NI) and employer matched contributions.0 -
And you can draw 25% tax-free from your pension pot which lowers the overall tax rate.0
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Basically if your being taxed on the earnings when you retire, then surely there is exactly no difference of the amount you will end up with in your pocket?
You will get 40% relief but get taxed 40%.?
Also when you buy an annuity, is it that payout that you will be taxed on each month?
Thanks
Say your salary is £50K so you are paying 40% on about £8K if I remember the tax bands correctly. If you just take the income the tax amounts to £3.2K.
If you put £8K from your gross pay into a pension £8K goes into the pension and you no longer pay any higher rate tax.
Assuming there is no investment return. Lets look at your £8K pension pot when you retire:
1) You can take out 25% tax free which leaves £6K
2) If the annuity was cost neutral and you had other income which used up your tax allowance but were still a standard rate tax payer you would pay 20% tax on the £6K - £1.2K tax
So by using a pension you have saved £2K of your original £8K being taken by the taxman.0 -
I didn't even realize that pension income would be treated the same as a normal wage income, e.g tax allowance ...
With regards to the annuity, I read somewhere that you get a 20th of your pot - per year as a rule of thumb. Is this right?
Thanks0 -
I didn't even realize that pension income would be treated the same as a normal wage income, e.g tax allowance ...
With regards to the annuity, I read somewhere that you get a 20th of your pot - per year as a rule of thumb. Is this right?
Thanks
I would take these as to being the best with a pinch of salt, but they are a decent guideline.
http://www.hl.co.uk/pensions/annuities/annuity-best-buy-rates
But yes, pension income is like normal taxable earnings income, but no NI (NI is a tax no matter what anyone says otherwise).
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I didn't even realize that pension income would be treated the same as a normal wage income, e.g tax allowance ...
With regards to the annuity, I read somewhere that you get a 20th of your pot - per year as a rule of thumb. Is this right?
Thanks
It depends on your age, whether you want a surviving spouse pension, where you live etc. At 65 5% is rather low for a fixed annuity, 6% would be a better figure. For one that increases with inflation the figure is around 3%.
Annuity rates now are very low. Hopefully they will rise when global interest rates start rising.0 -
Sorry I didn't quite understand the bit about the inflation...
So if you had £100k in the pot and wanted to buy an annuity, at around 6%, which would be £6k per year - is that correct.
You then said about one increasing with inflation 3% -what did you mean. Did you mean you would only get an annuity of £3k per year and this figure would increase each year with inflation?
On a side note, does anyone know of the top of their heads average increase for pensions over the long term, I'm guessing their better than ISA current rates? If the B of E rates went up, would the pension rates aswel?
Thanks0 -
Sorry I didn't quite understand the bit about the inflation...
So if you had £100k in the pot and wanted to buy an annuity, at around 6%, which would be £6k per year - is that correct.
Yes
You then said about one increasing with inflation 3% -what did you mean. Did you mean you would only get an annuity of £3k per year and this figure would increase each year with inflation?
Yes
On a side note, does anyone know of the top of their heads average increase for pensions over the long term, I'm guessing their better than ISA current rates? If the B of E rates went up, would the pension rates aswel?
Thanks
By pensions do you mean the pension pot whilst it is being invested before being converted to an annuity?
If yes - most pension pots are invested in share and bond funds. The return you get will depend on the type of funds you choose and to a lesser extent which particular funds. The performance will be volatile - ups and downs - but over a long time period you would expect to get a lot better than a cash ISA return: 5%-10% is not unreasonable.
As investments, pension returns are not directly dependent on the BoE rate.0 -
.... or if you mean the % annuity, this will be dependent on the long term gilt yields which are loosely related to the BoE rate. When these increase annuity rates will increase, all other things particularly life expectancy being equal, but not in proportion as a lot of your annuity is you getting your own money back.0
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