7% pa return over 30-40 years

jem16

planteria wrote: »

thanks guys.

i don't quite follow why it is deemed so desirable to utilise a personal allowance.

From 2014/15 you will have a personal tax-free of £10k. Pension income is taxable so if you got 20% tax relief and don't pay tax on the first £10k you have a added uplift of 20% on any pension contributions.

i can see the logic of getting the uplift on pension contributions, though...yes, 40% on way in & only paying 20% on the income it generates works nicely, but i wouldn't want to reign in performance to try to ensure it;)

I'm not sure why you would reign in performance? The exact same investments are available within an ISA, Investment Bond, PP and SIPP. The only difference is the tax wrapper that houses them. So you use these wrappers to their advantage.

planteria wrote: »

and why 3-5k atush?

The basic state pension is around £5k-£7k so there is another £3k-£5k to utilise which will be tax-free.

planteria

thanks jem.

jem16 wrote: »

From 2014/15 you will have a personal tax-free of £10k. Pension income is taxable so if you got 20% tax relief and don't pay tax on the first £10k you have a added uplift of 20% on any pension contributions.

ok, yes. so a further extension of the 'uplift on way in' and 'less tax on way out'.:)

jem16 wrote: »

I'm not sure why you would reign in performance? The exact same investments are available within an ISA, Investment Bond, PP and SIPP. The only difference is the tax wrapper that houses them. So you use these wrappers to their advantage.

that was what i was getting at. i guess we all want to be picking the right wrappers, with the right providers, and selecting the right investments, to grow as much as possible. the concept of having to pay tax on pension income (above the threshold) does guide people towards ISAs, i suppose.

jem16 wrote: »

The basic state pension is around £5k-£7k so there is another £3k-£5k to utilise which will be tax-free.

got you, yes. State Pension + Private Pension Income = Personal Allowance would be very efficient.

yatinsardana

Ok I feel like I'm being very stupid for not getting the link between using PP instead of ISA to make use of PA. As far as my understanding goes PA is the tax free income you can get (which I think is around 9.4k).
Can someone please explain in basic terms how that is related to your decision on whether you should use PP or ISA outside occupation pension scheme?
Sorry as it appears obvious for all other readers but my understanding here clearly isn't strong enough.

planteria

yatinsardana wrote: »

Ok I feel like I'm being very stupid for not getting the link between using PP instead of ISA to make use of PA. As far as my understanding goes PA is the tax free income you can get (which I think is around 9.4k).
Can someone please explain in basic terms how that is related to your decision on whether you should use PP or ISA outside occupation pension scheme?
Sorry as it appears obvious for all other readers but my understanding here clearly isn't strong enough.

it makes sense if someone does not have another pension.. but with your NHS Pension you will, presumably, along with the State Pension, more than cover your Personal Allowance. that is why i am inclined to think your 'ISA first' approach is the right one.

yatinsardana

Ok whilst I was typing, jem16 has written a response. Thanks jem16, planteria and atush. It's making much more sense to me. So many ways to avoid tax!! It's funny because you really have to think about these things in order to make full use of them - I bet a big proportion of people don't think about it.
My knowledge about these things is becoming more and more by the minute on hi his forum

jem16

yatinsardana wrote: »

As far as my understanding goes PA is the tax free income you can get (which I think is around 9.4k).

Yes for this tax year. Next year it's £10k.

Can someone please explain in basic terms how that is related to your decision on whether you should use PP or ISA outside occupation pension scheme?

The idea is to get as much benefit as possible via the tax relief on pensions. State pension is roughly £5k-£7k. That leaves £3k tax-free to use for other taxable income. Your NHS pension will more than cover that so most of your NHS pension will be taxable at 20% at least, possibly higher if you do really well.

So 20% tax relief on pension contributions and then 20% tax to pay in retirement means you haven't gained anything from using the pension tax wrapper, other than your tax-free lump sum which is limited to 25%.

However if you get 40% tax relief and then only pay 20% tax when retired you have made an instant 20% gain.

yatinsardana

planteria wrote: »

it makes sense if someone does not have another pension.. but with your NHS Pension you will, presumably, along with the State Pension, more than cover your Personal Allowance. that is why i am inclined to think your 'ISA first' approach is the right one.

Agreed.
Although it seems like it make sense from the PA point of view. With me saving 40% tax going in and paying 20% coming out, it could be an option considering.

Only thing weighing against that is the flexibility of accessing the money in a PP. I feel that I should also be careful not putting all my savings and money into a PP and end up with a staggering income at an old age and spend most of my life trying to save money with no accessibility to any of it!

A quick balance of options is pointing towards ISA and NHS scheme for me...

jem16

yatinsardana wrote: »

A quick balance of options is pointing towards ISA and NHS scheme for me...

I have a Teachers' Pension, an ISA, an Investment Bond, a SIPP and unwrapped investments all utilised to give the maximum tax advantages and still have flexibility.

ISA by the way is S&S ISA for long term planning as opposed to Cash ISA.

yatinsardana

jem16 wrote: »

I have a Teachers' Pension, an ISA, an Investment Bond, a SIPP and unwrapped investments all utilised to give the maximum tax advantages and still have flexibility.

ISA by the way is S&S ISA for long term planning as opposed to Cash ISA.

No no I meant s&s isa too.

I'd love to be in your position where you have all those things but currently all I have is a s&s isa. Next step will be NHS pension scheme when I start working. After that buying a house and from there on I will look at potentially opening up a SIPP. I don't think until then I will actually have enough funds to have that many avenues for investment.

jem16

yatinsardana wrote: »

No no I meant s&s isa too.

I'd love to be in your position where you have all those things but currently all I have is a s&s isa. Next step will be NHS pension scheme when I start working. After that buying a house and from there on I will look at potentially opening up a SIPP. I don't think until then I will actually have enough funds to have that many avenues for investment.

Which is exactly what I had at your age - although ISAs didn't exist then!

Now I'm about 2 years till retirement - the idea was to show you how to build it up.

Unless you are a higher rate taxpayer I wouldn't bother with a SIPP (or Personal Pension which is likely to be cheaper for just funds). I use it purely to avoid paying 40% tax.