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Is a pension really worth it?

HarryN_2
Posts: 8 Forumite
My pension advisor tells me that my company could pay up to £50,000 into a personal pension and that this is allowable for corporation tax - a saving of 20%. I am already fully ISA invested but am put off by pensions.
With a pension in most cases you can only withdraw 25% as a tax free lump sum and cannot withdraw the remaining 75% of the pension pot, and although the pension can pass on to a spouse after death, the pension pot does not then pass on to descendants.
By comparison you can invest in shares or buy property outside a pension and that can provide both an income in retirement and with proper inheritance tax planning nearly all can be passed on to family.
Is there a good reason for taking out a pension which I have overlooked?
With a pension in most cases you can only withdraw 25% as a tax free lump sum and cannot withdraw the remaining 75% of the pension pot, and although the pension can pass on to a spouse after death, the pension pot does not then pass on to descendants.
By comparison you can invest in shares or buy property outside a pension and that can provide both an income in retirement and with proper inheritance tax planning nearly all can be passed on to family.
Is there a good reason for taking out a pension which I have overlooked?
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Comments
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A few advantages of pensions:
1) You pay into a pension with tax free cash. If your company pays into your pension you can save NI as well. Buying a property is from taxed income.
2) If you use a pension to buy an annuity the income is guaranteed. The income from a property may vary, and will possibly stop completely for a while.
3) A pension largely looks after itself. A property requires you to constantly manage and maintain it, or you pay someone else to do it. It could be an increasing chore in your very old age.
4) You can withdraw 25% tax free cash from a pension. You cant withdraw cash from a house unless you sell the whole thing.
5) You can probably get a higher net income from a pension.
6) Diversification: A pension can be invested in a wide range of assets and so is reasonably safe barring a global catastrophe A house is just in one asset type. Events could have a major impact on its long term value and income generating potential.
If you have sufficient money you could do both. Or with a pension, if you could arrange to have guaranteed income (including state pension) of £20K the rest could be put into flexible drawdown which would allow you to withdraw as much as you like, taxed as income.0 -
Tax relief, employer's contributions and diversification. And income from it can be given to the younger generation along with some of the TFLS if you want.
For instance, as a basic rate taxpayer, say you put in 80, and it becomes 100 immediately with tax relief. What savings acct or property can do this? Then take employers contribs- say they match at 80. Both your 80 and their 80 go up to 100. So for 80 invested out of your pocket, you get 200 into your pension. What property can do that (immediately not after 20 years). Add in salary Sacrifice (where the employer puts itinto your pension for you before NICS) and you save another 12% tax (and they save NICtax too) .
So yes, you are missing quite a bit really.0 -
A few advantages of pensions:
1) You pay into a pension with tax free cash. If your company pays into your pension you can save NI as well. Buying a property is from taxed income.
2) If you use a pension to buy an annuity the income is guaranteed. The income from a property may vary, and will possibly stop completely for a while.
3) A pension largely looks after itself. A property requires you to constantly manage and maintain it, or you pay someone else to do it. It could be an increasing chore in your very old age.
4) You can withdraw 25% tax free cash from a pension. You cant withdraw cash from a house unless you sell the whole thing.
5) You can probably get a higher net income from a pension.
6) Diversification: A pension can be invested in a wide range of assets and so is reasonably safe barring a global catastrophe A house is just in one asset type. Events could have a major impact on its long term value and income generating potential.
If you have sufficient money you could do both. Or with a pension, if you could arrange to have guaranteed income (including state pension) of £20K the rest could be put into flexible drawdown which would allow you to withdraw as much as you like, taxed as income.
Thank you for the points about property. I have edited my question because it gave the impression I was only considering property, "invest or buy property" should have read "invest [in shares] or buy property"
1. Yes
2. Yes, but I see this as a problem. A pension may have a guaranteed income (meaning fixed income) but it may be fixed at a level that which in later years fails to keep pace with future inflation. Income producing stocks or property rental incomes may be more likely to maintain returns closer to inflation. At least you have a choice or can sell and change investment. An annuity you are stuck with. Being tied to an annuity seems a risk not a comfort.
3. Whatever investment I choose I would want to maintain it.
4. No but at least if you want to sell, (property or other investments outside a pension) you can sell 100%. With the pension you can only sell 25% and 75% is locked in permanently.
5. Can this be demonstrated?
6. Yes. I have edited my question as I was not only considering property.
Thank you for your comments.0 -
Tax relief, employer's contributions and diversification. And income from it can be given to the younger generation along with some of the TFLS if you want.
For instance, as a basic rate taxpayer, say you put in 80, and it becomes 100 immediately with tax relief. What savings acct or property can do this? Then take employers contribs- say they match at 80. Both your 80 and their 80 go up to 100. So for 80 invested out of your pocket, you get 200 into your pension. What property can do that (immediately not after 20 years). Add in salary Sacrifice (where the employer puts itinto your pension for you before NICS) and you save another 12% tax (and they save NICtax too) .
So yes, you are missing quite a bit really.
I am not sure this applies to me. I am the owner/director of the business and take only dividends and a very small salary. As explained in my question, my advisor was suggesting the company could put up to £50,000 into my personal pension, and for the company this would be an allowable expense, so £50,000 less profits = £10,000 less corporation tax. It would not be me as an employee paying in and getting tax relief and an employer making 'employers contributions'. So the benefit is just the corporation tax saving.0 -
My pension advisor tells me that my company could pay up to £50,000 into a personal pension and that this is allowable for corporation tax - a saving of 20%. I am already fully ISA invested but am put off by pensions.
Not just that as a saving but it gets money out of the company with no NI too.I am already fully ISA invested but am put off by pensions.
Pensions and ISAs have the same investment options. The same charges and can be held on the same platforms if you want. So, what is the issue?By comparison you can invest in shares or buy property outside a pension and that can provide both an income in retirement and with proper inheritance tax planning nearly all can be passed on to family.
The pension is paid outside of the estate on death before commencement. no IHT and the full fund value is paid out tax free. After commencement and using drawdown (which you would based on what you say) the pension can be passed on if you die.2. Yes, but I see this as a problem. A pension may have a guaranteed income (meaning fixed income) but it may be fixed at a level that which in later years fails to keep pace with future inflation. Income producing stocks or property rental incomes may be more likely to maintain returns closer to inflation. At least you have a choice or can sell and change investment. An annuity you are stuck with. Being tied to an annuity seems a risk not a comfort.4. No but at least if you want to sell, (property or other investments outside a pension) you can sell 100%. With the pension you can only sell 25% and 75% is locked in permanently.
That 75% residual fund can still buy and sell assets as you see fit. It may be stuck in the pension but its tax free growth within it. Stack that up at 1% a year as a guide figure.5. Can this be demonstrated?
Yes. Many times on this board it has been shown. its in the pension vs ISA thread as well.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
Thank you for these points. I think what puts me off a pension is two things.
1. Outside a pension almost the full value of investments and assets can be passed on to your family and descendants, however you wish, and possibly free of IHT with planned gifting. I would not buy an annuity but would draw an income from the pot, but in this case I understand my beneficiaries could receive the cash value of the full pension pot - but would be hit with a massive tax charge (I have read 35% and that from age 75 all lump sum payments are taxed at 55%). Also some 'help' guides talk about leaving your pension to 'dependants' - which infers a catch (what if they are grown up and therefore not dependant?)
If you can point me in the direction of any website that gives clear information about what you can do with a SIPP to pass on the pot to your descendants that would be really useful.
2. Once your investments are in a pension, they are locked in and where the Government wants them - at their mercy for legislation, moving goal posts, and taxing. If you keep your assets outside a pension you have more options to move them, sell them, and pass them on. Pensions also seem to be for the benefit of the boys in the City. Even today's Telegraph carries a front page report on "Pensioners are being 'burgled' by insurers" This type of thing makes it very hard to trust pensions.0 -
but would be hit with a 35% tax charge.
Make that a 55% tax charge.Old dog but always delighted to learn new tricks!0 -
If you can point me in the direction of any website that gives clear information about what you can do with a SIPP to pass on the pot to your descendants that would be really useful.
http://www.hl.co.uk/pensions/income-drawdown/what-happens-when-i-dieOld dog but always delighted to learn new tricks!0 -
Another plus point is that a (approved) pension fund remains outside of a bankrupt's estate, something that can be very important if the worst happens.0
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