Pension figures

bowlhead99

berbatov10 wrote: »

Xylophone thanks for the calculators. Kidmugsy excuse my ignorance but enough to avoid 40% from that I take it you mean around £8,000 or just over(The portion I will pay 40% on£42-50k??). I have been left some money and I would like to make it as efficient as I can.

If your gross for the year is £50k and the threshold for higher tax is £42k, then the goal is to have the last £8k of your salary diverted into a pension pot so that what you are getting taxed on this year is £42k or less.

The way you achieve this in practice:
For example if you put £6400 of cash from your own bank account into a pension, the pension provider is allowed to assume that you have paid basic rate 20% tax on your income that resulted in the cash, and that the £6400 really represents £8000 of gross income. They go claim £1600 from the taxman and add it into your pot for you so you have £8000 available for investments.

Then at the end of the year in a self assessment tax return you say to HMRC, hey, as you could confirm from my pension provider, I've added £8000 to my pension this year, so given I was earning £50000 and paying 40% tax it ought to have only cost me £4800. It actually cost me £6400 so you guys owe me £1600.

So effectively one of the £1600s is auto-claimed for you by the pension guy and the other £1600 you get through a manual HMRC claim. Net result is it's cost you £4800 to get £8000 of pension assets.

If you tried to extend the logic for another £8000 once you'd already got down to taxable income of £42000 it wouldn't work as effectively - you could do the same thing and put a second £6400 into the pension, and pension guy would turn it into a second £8000, but then you couldn't go to HMRC and say you need more relief because you've already had all you're entitled to.

AlanP_2

If you have spare funds this tax year and don't need to access them until you are in your late fifties then contribute as per the examples above to reduce any earned income down to the 20% level.

The Chancellor MAY change the rules in the Budget on 18th March 2015 so probably best to get the payment in ahead of that just in case he makes any changes "with immediate effect" (personally I wouldn't expect any such changes to come into effect until at least the start of next tax year but if you don't need to why risk it).

In the next / 2015-16 tax year then you could estimate your likely income for the year and pay in the correct amount to get you below the 40% threshold again.

I realise that the estimate could be a bit out as there is an overtime element and maybe a job change in the offing but you can only go with what you have.

If it was me any other cash that I was thinking of putting into the pension I would wait until after the Election & Budget changes to see what the best option was, maybe an opportunity to put the rest of the spare cash in whilst paying 20% income tax and get the talked about 30/33% tax rebate.

TH1878

Berbatov, as we are near the end of the tax year, what Kidmugsy says is probably quite sensible.

I personally don't think they will change the tax relief available on pension contributions but if they do, you will benefit. If they don't, you can pay £32,000 after April and get 40% relief on the bit in the higher rate tax band.

Or you can just continue to pay in ~£8,000 per annum for 5 years and stick it in ISAs in the interim.

berbatov10

To all above who have contribributed many thaks for your invaluable advice . I think I shall invest £8000 intially and if the rate changes to a unifrom 30% for all I am benefitting if not as pointed out nothing lost. Now the next question, do I put it in an HL SIPP using their helpful site which judges your aversion or not to risk? do I put it into an old pension I have not contributed into for many years which is a pot of around £9K or indeed go with a stakeholder pension? Would I be expecting too much for 4/5% per annum at a low to medioum risk fund?

jamesd

berbatov10 wrote: »

do I put it in an HL SIPP using their helpful site which judges your aversion or not to risk?

Best not t use the hL tools for fund picking, they are too likely to use HL's own-brand funds.

berbatov10 wrote: »

do I put it into an old pension I have not contributed into for many years which is a pot of around £9K or indeed go with a stakeholder pension?

Whichever is the cheaper way of holding the investments you want, while giving reasonable customer service levels. That may mean transferring from the old one.

berbatov10 wrote: »

Would I be expecting too much for 4/5% per annum at a low to medioum risk fund?

Yes. Long term UK stock market return before fees has been about 5% plus inflation. Allow around 0.5% or more for fees and that's down to 4.5% for pure equities, which would be around 8 out of 10 on risk scales. If you were to use a substantial bond component that would drop to 2.5-3.5% depending on how much went into bonds.

It's also worth knowing that risk in typical investment usage doesn't mean risk. It means volatility, the up and down movement of prices. Something with a steady loss would have low "risk" because there's little up and down movement even though it's consistently losing money. The reason is that the ups and downs could be a loss if you were to sell at the lower points. I mention this because bonds are at such high prices now that over the medium term it's likely that they will suffer capital value losses while simultaneously reducing "risk". You may not agree that consistently losing money is actually reducing your risk of loss.

TH1878 wrote: »

You say that your total earnings (presumably including bonus etc) will be £50k in this tax year....is this correct?

If so, James's calculations are incorrect.

Right, I put into the calculator the base pay of 42k, ot total earnings of £50k. For £50k the net pension contribution for £40k into the pension would be £30,373 after all tax relief, with £32,000 the initial payment into the pension and £1,627 the higher rate tax relief portion.

jem16 wrote: »

The OP would need to pay in £32k, not £31,973 to get £40k in the pension.

I gave the net value of the contribution, not the amount to pay in, since the picture and text on the linked HL page made it very clear that 32k is the amount to pay into the pension.

berbatov10

Out of interest I just put into HL site that I would be looking for a low medium risk investment. It came back with Woodford, Artemis and Newton funds.

bowlhead99

berbatov10 wrote: »

Out of interest I just put into HL site that I would be looking for a low medium risk investment. It came back with Woodford, Artemis and Newton funds.

Artemis and Newton have lots of different funds across the spectrum.

Still, now it's told your the answers, if you trust them, there is now no need to sign up to HL's SIPP service which costs 0.45% a year just for the platform before the fund management fees, when you could get that platform service at 0.2 or 0.25% elsewhere and still buy the same investments. It's like getting the friendly advice what drill to buy at B&Q - you might feel morally obligated to buy it from them but some of the sales push is just marketing spin and the same Black and Decker product is available at Homebase or Argos or Amazon.

And to your earlier comment, if you only want something basic and you are not investing a huge amount of money then a stakeholder can be fine. You can find them starting at a bit over half a percent all in, which is certainly cheaper than going to HL and spending nearly half a percent on the platform plus a quarter to one and a quarter percent on the management fees.

Once your pot approaches £50k or so rather than £10k or so, a regular Personal Pension beats a stakeholder as the percentage costs come down and the fund options are wider. Generally you never need a SIPP (like HL offer) at all, if you are not going to pick specialist investments and hold individual stocks, however some people will swear by a low fee platform combined a set of low fee funds. Or they would shun personal pensions in pursuit of ultra specialist funds in pursuit of the highest range of returns, if they think that manager is worth following (e.g. Woodford's funds wouldn't be available in a 0.55% stakeholder).

sham63

If you want to consider a Stakeholder, you could have a look at Aviva who charge 0.55% (available via Cavendish)


The Aviva Fund Centre is pretty good for info on all the funds they have available.

jem16

jamesd wrote: »

I gave the net value of the contribution, not the amount to pay in, since the picture and text on the linked HL page made it very clear that 32k is the amount to pay into the pension.

I see you have now amended your post to make it clearer that that was what you meant but I'm sure you'll agree that your original post was ambiguous as you did actually say the amount you should pay in.

jamesd wrote: »

For your particular income to get £40k into the pension you'd pay in £31,973.

jamesd

berbatov10 wrote: »

Out of interest I just put into HL site that I would be looking for a low medium risk investment. It came back with Woodford, Artemis and Newton funds.

Those were probably their equity income funds. Medium-high risk (volatility) with drop potential in a bad year of 40-45% once or twice a decade or 20% two or three times a decade. This doesn't make them bad choices, they are actually pretty good choices for anyone with a long term view. Aside from whether you can deal with the drop potential my main reservation would be lack of global cover so I suggest substituting about 50% into a global equity tracker fund or ETF. If you want to lower the up and down movement of the mixture, I suggest substituting a commercial property fund for some of the equities.

One of the problems that you have at the moment is that the graphs don't show you the last biggish drops that happened in 2008, so you get an unduly pretty picture when you look at them.