Pension advice pls - company contributes

waterwatereverywhere

Hello everyone

Just a quick message to say a huge thanks for all of the further very detailed replies and example calculations.

Yes, I believe the scheme I am enrolled on is salary sacrifice because the accounts office have told me I am making both NI and tax savings presently.

I think given all the advice in the posts here it makes great sense to increase my contributions now and maximise the savings I am making on NI and tax as it means I can contribute more to my pension whilst it costs me less.

I have taken on board all the advice about past performance of investments like these over cash investments and know this makes sense - I've just always been super cautious, but as has been said this is/has been at the expense of my future income, so I think the time has come to change that approach.

Many thanks for clarifying what, to me at least, is a complex area.

jamesd

The complexity gets easier over time, try not to worry too much about not understanding it all immediately. I just happen to have started learning back in 2005 so it's relatively easy for me now. You'll get there yourself in time.

zagfles

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

We were comparing an ISA with a pension. In the ISA the interest grows tax free!

The comparison was between taxed money in/tax free money out, or pre-tax money in/taxed on the way out. In both cases interest/dividends during accumulation have the same tax treatment.

zagfles

jamesd wrote: »

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

What? I expected better from you.

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 comparion is between a pension and an ISA. You understand that the tax treatment of the interest/dividends once they're invested is the same, right? Kidmgsy's post assumed the interest was taxed inside the ISA!

You gain nothing from "compound growth on the tax you don't pay till later" because you are taxed on a bigger amount! Surely you understand that?

zagfles

jamesd wrote: »

The complexity gets easier over time, try not to worry too much about not understanding it all immediately.

Yes, lots of the regulars here don't

jem16

waterwatereverywhere wrote: »

Yes, I believe the scheme I am enrolled on is salary sacrifice because the accounts office have told me I am making both NI and tax savings presently.

If that's the case then the pension is the best way forward for you with the NI saving. Is your employer giving up any of its NI saving to you?

Easiest way to check if you're definitely saving NI is to calculate your NI yourself.

zagfles

jamesd wrote: »

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.

This seems to be a misunderstanding about what we're comparing.

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.

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.

The benefit has nothing to do with "gross roll up". You get "gross roll up" in an ISA, if you mean you don't pay tax on interest etc. The benefit is to do with different tax rates on the way in and out.

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?

Why are you comparing different tax treatments of interest? Obviously if interest is taxed differently the outcome is different. Inside a penion and ISA interest/dividends are taxed the same.

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.

Yes! Maybe we can agree what we're comparing - I thought it was ISAs and pensions not unwrapped and pensions.

jem16

zagfles wrote: »

Maybe we can agree what we're comparing - I thought it was ISAs and pensions not unwrapped and pensions.

So did I....

kidmugsy

jem16 wrote: »

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.

My comparison is the only useful one for illustrating the advantage of gross roll-up. "Gross roll-up" is no use in comparing a pension and an ISA since both exhibit it.

jem16

kidmugsy wrote: »

My comparison is the only useful one for illustrating the advantage of gross roll-up. "Gross roll-up" is no use in comparing a pension and an ISA since both exhibit it.

Exactly and why I disagreed with Your Hero's assertion that gross roll up in a pension made a difference over an ISA.

Of course we could be totally pedantic and say that the pension and ISA don't technically use gross roll up either but then we might get into another argument over whether the 10% tax credit is really a tax or not.

Only true use of gross roll up is in an Offshore Bond.