Pension advice pls - company contributes

zagfles

jamesd wrote: »

Trouble is, the gross roll up does make a difference. With a flat rate state pension that's likely to be about £8,000 and a personal allowance of £10,500 that's £2,500 where the gain from the gross roll up is not taxed. Plus the portion that's in the tax free lump sum.

That was covered. The point is the only tax advantage of a pension over an ISA is getting tax relief at a different rate from the tax you eventually pay, whether it be from the TFLS, from the use of the PA, from using higher rate relief, from inheriting tax free before crystallisation etc.

Not from "gross roll up", which implies it's somehow better to have money growing before tax is applied rather than after. It isn't - that's basic GCSE maths.

Your_Hero

zagfles wrote: »

That was covered. The point is the only tax advantage of a pension over an ISA is getting tax relief at a different rate from the tax you eventually pay, whether it be from the TFLS, from the use of the PA, from using higher rate relief, from inheriting tax free before crystallisation etc.

Not from "gross roll up", which implies it's somehow better to have money growing before tax is applied rather than after. It isn't - that's basic GCSE maths.

Not sure why you are getting defensive about this. Gross roll up is the technical term for it.

It was "better" before tax is applied, that's how you end up with a pension pot of £297,713, rather than £238,170. So with the PA, you extract this extra amount out tax-efficiently, otherwise the tax relief is lost through 20% income tax and would be a pointless arrangement in the first place. As the PA increases year on year, this extra tax saving becomes even greater, so it is not necessarily just the PCLS that benefits the basic rate payer.


I do agree that without the PA and PCLS, the 20% tax negates the benefits received by tax-relief.

zagfles

Your_Hero wrote: »

Not sure why you are getting defensive about this. Gross roll up is the technical term for it.

When you're in a hole...

It was "better" before tax is applied, that's how you end up with a pension pot of £297,713, rather than £238,170. So with the PA, you extract this extra amount out tax-efficiently, otherwise the tax relief is lost through 20% income tax and would be a pointless arrangement in the first place. As the PA increases year on year, this extra tax saving becomes even greater, so it is not necessarily just the PCLS that benefits the basic rate payer.


I do agree that without the PA and PCLS, the 20% tax negates the benefits received by tax-relief.

So why did you post

Even with the basic tax relief it allows gross roll up. In a very crude way, it's almost like someone loaning you £20 for each of your £80 you invest, with no interest payable. You will end up better off even if you eventually have to pay 20% income tax at the end

Which is complete rubbish. But I'm glad you now concede we're correct.

kidmugsy

zagfles wrote: »

Not from "gross roll up", which implies it's somehow better to have money growing before tax is applied rather than after. It isn't - that's basic GCSE maths.

Are you sure?

Start with £1 and suppose you make 10% p.a. for 30 years and then pay tax of 20% on the accumulated interest. Your final sum is
[(1.1)^30 -1] x 0.8 + 1 = £14.2

But if instead you paid the tax at 20% as you rolled along your final sum is
(1.08)^30 = £10.1

Your_Hero

zagfles wrote: »

When you're in a hole...

So why did you post


Which is complete rubbish. But I'm glad you now concede we're correct.

I can understand how you would feel intimidated by the term "gross roll up" if it is a new concept for you. It happens.

I think you've completely missed the point though. As I said, you will end up better off because of this gross roll up element (difference between £297,713 and £238,170) is the GAIN and why you are BETTER OFF. This can be taken out tax-efficiently via the Personal allowance even if you have to pay 20% income tax at the end. It is this part that you seem to miss or even worse probably chose to ignore.

In the absence of a Personal allowance, then of course, it would probably be the same because the 20% tax would wipe out the tax relief. I did not challenge this? I said the gross roll up builds a bigger pension pot, which it clearly does in the example. But let's bring you back into the real world and "out of your hole". There is a PA and it increases every year, and this is where the pension's tax relief makes the difference in overall gains.

jamesd

jem16 wrote: »

I'm glad we're all agreed with that now. Gross roll up does not gain anything at all.

We're not agreed because gross roll up provides a real benefit.

zagfles wrote: »

Not from "gross roll up", which implies it's somehow better to have money growing before tax is applied rather than after. It isn't - that's basic GCSE maths.

It may be GCSE maths but you still got the wrong answer. It's better to pay tax later because you gain from compound growth on the tax you don't pay until later.

kidmugsy explained. If you pay tax as you go you don't get compound growth on the portion being taken as tax. This is an edge that is more often explained here to show why a taxable savings account that pays interest annually is going to be worth a little more than one that pays it monthly to a tax payer. Not much more, but still more. This benefit would be there even if there was no TFLS and it matters more over the pension duration than it does for the difference between annual and monthly interest.

The TFLS is also a significant factor but both effects are real.

jem16

kidmugsy wrote: »

Are you sure?

Start with £1 and suppose you make 10% p.a. for 30 years and then pay tax of 20% on the accumulated interest. Your final sum is
[(1.1)^30 -1] x 0.8 + 1 = £14.2

But if instead you paid the tax at 20% as you rolled along your final sum is
(1.08)^30 = £10.1

That's a totally different situation as with the 2nd example you have reduced the growth from 10% to 8% which is obviously going to make a difference.

jem16

jamesd wrote: »

We're not agreed because gross roll up provides a real benefit.

It only provides a benefit when there are other circumstances that makes it so. All else being equal it will provide no benefit.

It may be GCSE maths but you still got the wrong answer. It's better to pay tax later because you gain from compound growth on the tax you don't pay until later.

No it doesn't as I showed you in my earlier example.

kidmugsy explained. If you pay tax as you go you don't get compound growth on the portion being taken as tax. This is an edge that is more often explained here to show why a taxable savings account that pays interest annually is going to be worth a little more than one that pays it monthly to a tax payer. Not much more, but still more. This benefit would be there even if there was no TFLS and it matters more over the pension duration than it does for the difference between annual and monthly interest.

That is a completely different situation as paying tax as you go along changes the growth rate by 20% (or whatever tax rate you are using). One gets 10% growth, the other gets 8% growth - hardly equal growth.

Paying in a gross amount and then paying 20% tax at the end is exactly the same as paying in an amount minus 20% in the first place where growth is exactly the same in both cases as would happen in an ISA or pension scenario.

The TFLS is also a significant factor but both effects are real.

Of course it is. No-one is disputing that. It provides a 6.25% benefit.

jamesd

The GCSE maths was zagfles' incorrect assertion that it made no difference having the interest paid at the end instead of as you go along. Your earlier example didn't address this gain from deferring the taxation at all.

Take £1,000 and pay 5% on it. In case one pay it after one year and pay 20% tax on the gain then pay 5% on the balance for a year. Compare this to not paying tax in the middle and only at the end instead.

Year one, gain £50, deduct 20% tax, new balance £1,040. Year two, gain £52, deduct 20% tax, remainder £41.60. At the end the total interest received after tax is £81.60.

Now just pay tax at the end instead. Gain £50, new balance £1,050. Year two gain £52.50. Total taxable gain £102.50, deduct the 20% tax and the after tax gain is £82.

That extra money comes solely from rolling up the gains and only paying tax at the end and it's in addition to the benefit that the TFLS delivers. The interest rate and tax rates are identical. All that changes is when the tax is taken so you either do or do not get growth on the tax.

It's very significant in such things as comparing US and UK fund taxation where US people have to pay the tax for sales within an unwrapped fund along the way each year instead of only when the fund itself is sold as here.

jem16 wrote: »

Paying in a gross amount and then paying 20% tax at the end is exactly the same as paying in an amount minus 20% in the first place where growth is exactly the same in both cases as would happen in an ISA or pension scenario.

Both pension and ISA get the benefit in this situation. It's unwrapped investments that don't gain the benefit.

When it comes to pension vs ISA the gain of the pension is the TFLS, personal allowance and possibility of different tax rates. Your Hero was fundamentally correct to point out that in the current pension system here there is a benefit from gross roll up vs ISA.

But this leaves the question of why we're disagreeing. I assume that you also know that monthly payments of taxed interest pay less than one annual payment and we agree about the individual calculations so what's the point of disagreeing with Your Hero's assertion that there's a benefit from gross roll up? In the UK system there is one for a pension, from the delayed tax paying, the TFLS and potentially the personal allowance.

This is unfortunate, though. I thought I was more likely to be disagreeing with Your Hero overall than agreeing. Maybe we'll get back to normal service later.

jem16

jamesd wrote: »

Both pension and ISA get the benefit in this situation. It's unwrapped investments that don't gain the benefit.

Totally agree.

When it comes to pension vs ISA the gain of the pension is the TFLS, personal allowance and possibility of different tax rates.

Again I totally agree.

Your Hero was fundamentally correct to point out that in the current pension system here there is a benefit from gross roll up vs ISA.

This is where we'll have to agree to disagree. The gross roll up in a pension vs ISA is a red herring. It's the reasons you gave above that make the real difference.

But this leaves the question of why we're disagreeing. I assume that you also know that monthly payments of taxed interest pay less than one annual payment

Yes I do.

and we agree about the individual calculations so what's the point of disagreeing with Your Hero's assertion that there's a benefit from gross roll up?

Simply because there isn't (apart from the tax free lump sum as I've always maintained) in the OP's situation and surely that's what the whole thread is about?

In the UK system there is one for a pension, from the delayed tax paying, the TFLS and potentially the personal allowance.

As I said james, I don't think the OP will have any unused personal allowance. If you look back at my previous posts I was pointing out that in the OP's case using the pension, at this moment in time, may not be his best option.

This is unfortunate, though. I thought I was more likely to be disagreeing with Your Hero overall than agreeing. Maybe we'll get back to normal service later.

It is unfortunate because I'm not disagreeing just to disagree or to score points. There are times when the pension is the obvious choice and even more so with the new rules ahead. However this is just one case where I feel the OP might be better using an ISA if he is a basic rate taxpayer and not using salary sacrifice, and then using the proceeds to feed extra pension contributions if he becomes a higher rate taxpayer.