Savings / ISA / Pension

Mimi_Arc_en_ciel

What happens when I reach state pension age. Will I get that, as well as my company/personal pension? What about tax?


The reason I ask is my mothers friend put away for her pension and gets taxed on it. She's worse off now than she would have been had she not saved

bowlhead99

Mimi_Arc_en_ciel wrote: »

At the moment I earn less than £200 above the tax rate so pay very little tax which is why I'm trying to build it up before I pop it into an ISA. Obviously if I go full time then I need to review what I am doing.

You might not be aware but the govt is so keen for people to contribute to pensions that even if you don't pay any tax at all therm let you contribute and get a full gross up of your contributions for tax relief (up to a certain limit).

So for example if the personal allowance is £10600 and you only earn £10800 you are only paying tax on the last £200 which is about £40. However if you contribute £100 a month to a pension (£1200 a year) they will still gross all of it up for basic rate tax and turn it into £1600 ready to be invested in investments. Free money!

I'm trying to figure out whether to add to a pension, or add to an ISA. Still undecided (And reading martins blogs)

No harm in reading and researching and deciding on your own good time rather than rushing in. Makes sense to act before April if pension is the route you settle on.

Works Pension - The company they use charge me monthly for using the service if I contribute, which I think is pointless.

All investment managers and pension companies charge for using the service. That is the reason they exist, commercially- to make money. They're not a charity. The charge is probably under a percent a year on the money invested. *edit - you have now confirmed it's 0.85%* The investment returns are hopefully 3-5% on top of inflation compounded every year for decades - on your money plus the employer money plus the free tax relief money. So to say you won't do something because it costs a bit of money so it must be pointless, comes across as a bit naive.

"I wanted to get a job but if I get a salary i have to pay tax so that's pointless"

"I wanted to join a gym to get healthy but it costs money so that's pointless"

"I wanted some euros to spend on holiday in France but if I ask Thomas Cook for some, they want to take my pounds so it's pointless".

If you look at it in a bit of detail, you'll probably find it is well worth becoming an investor, even if a company (employer scheme or private scheme) charges you money for the service of putting your money to work.

dunstonh

Forget fees. Pensions are charged explicitly. This means you get the full return minus the charge. Savings accounts have charges. They are charged implicitly. i.e. you dont see the charge. You just see the bottom line. Savings charges are known as the net interest margin and tends to float around the 1.5% p.a. mark (lower during low interest rates, higher during high interest rates).

The reason I ask is my mothers friend put away for her pension and gets taxed on it. She's worse off now than she would have been had she not saved

If it is tax only then that is not possible. You can earn £11k a year tax free. Everything above that is taxed at 20%. So, even if you are taxpayer in retirement, you are still taking home 80% of the income. So, its impossible to be worse off than having not contributed to retirement.

If its in respect of benefits then that is also not technically possible. So, she is either mistaken or you are getting the information third party and its lost some of the accuracy in the process. Or the person that told you doesnt have clue and is making assumptions (which is very commmon)

There are some means tested benefits for low earners (many of which are being abolished with the new single tier state pension that you will be on). However, they allow income or savings up to a certain amount and then get reduced gradually when above that. There are no benefits that are reduced on a £1 for £1 basis at this time. There used to be in the 90s but they were replaced.

jimjames

Mimi_Arc_en_ciel wrote: »

It says:
"Your yearly charge 0.85%"

Where does the bit about "The company they use charge me monthly for using the service if I contribute"? Is that the annual fee? If so then that's not really a reason not to contribute as any investment involves a cost.

bowlhead99

Mimi_Arc_en_ciel wrote: »

What happens when I reach state pension age. Will I get that, as well as my company/personal pension?

State pension is not a "means tested" benefit so it doesn't get taken away just because you have some pensions or private investments. You get paid a state pension based on the number of years that you paid national insurance contributions (plus some other years they count, like if you were not working because you were raising kids with child benefit or you were being a carer).

The total state pension is less than the annual personal allowance which means that there will be some "space" for you to receive some personal pension income on top before you actually need to start paying any income tax. Also a private pension can be taken before a state pension.

The reason I ask is my mothers friend put away for her pension and gets taxed on it. She's worse off now than she would have been had she not saved

That is your mother's friend probably not understanding it. If she invested in a personal pension then she didn't pay income tax when she earned the money that went into the pension pot.

For example when she had a choice to get £100 in her hand as bet salary, or £125 in the pension pot, she went for the £125. Let's say over twenty years it quadruples in value. She now has £500 in the pension pot. If she instead took her net salary and invested the £100 in an investment ISA it would have quadrupled to only £400.

So, she gets taxed on the £500 when she takes it out. However, when she starts taking it out she gets a quarter of out completely tax free ("pension commencement lump sum "). Then some of the pension that is not tax free will fit into her annual personal allowance. So in the end maybe £300 or less, not £500, is actually subject to tax. 20% tax on £300 is only £60, so out of the £500 she will keep £440 for herself.

So, the idea that " she's worse off now than if she hadn't saved " is, probably a load of rubbish. Compared to investing in an ISA and getting the same growth that way, the £440 she gets is better than the £400 would have been. Compared to not making any investment at all, and just keeping the £100 net salary in a savings account where it loses value to inflation, the £440 is a lot lot better.

So, paying tax on pension income is not some terrible conspiracy that means she shouldn't have done it.

Probably best to take advice from people educated on tax and financial matters rather than from mother's friends who don't like paying tax and don't understand that £440 is better than £400 or £100.

atush

Your employer pays in 2%. Will they pay in more if you do as well?

Even if not, I have to say 2% wont give you uch of a pension. So i'd be looking to pay in more.

You could always split your spare cash and pay half into each, pension And Isa.

atush

I read it as the OP is making the most of the accounts that pay the most interest so I can't see a benefit of consolidation. Adding additional 5% accounts would make sense rather than consolidating at a lower rate.

I read it that some of the money (not all) wasn't earning interest.

Eco_Miser

I understand why you're using account 2, but unless the average balance is very low, you should really be using a 5% account - TSB also pay cashback on contactless debit card payments.
You should also try to minimise the balance in account 1, since you get the fiver whether the balance is £1 or £10,000.

I would be moving some of the money over to a TSB Monthly saver, also 5%, and instant access - just so there's room in the other accounts.

Like the other posters have said, use a pension to save for retirement - the money goes in tax-free, and has a effective tax rate of less than 15% when in payment - instead of the 20% you pay before putting money in an ISA.

Mimi_Arc_en_ciel

Sorry for the delay in replying and thanks for your comments. Do appreciate them.

I've asked for the paperwork about works pension but I know all of my colleagues have refused to contribute because there's another charge, as well as the 2%. Work will increase their rate to 5% in 2018. Doesn't say anything that I can see that says they will match my contribution.

Re: banks. I'll try and explain (briefly) - me and my ex had joint finances and he dealt with everything. He would tell me to sign and stupidly I would. Towards end of relationship we had baliffs. Turns out we had £35k worth of debt. I'm terrified of getting back in that situation and I'm scared if I mix my accounts I'll mess them up and end up with charges/debts etc. I DO have a budget sheet but it is basic.

It has all my bills and their costs then it's like a calendar. There's an income/outgoing and balance coloum

Can you move pensions around? Or is it stuck with whomever I pick?

At the moment I can only put around £100 a month into a pension, that will change when I've stopped saving for a car etc and I can add that money.

How do I work put how much I "need" to put away? Do I count the (current rate) of the state pension and work out what's left?!

Mimi_Arc_en_ciel

My current account (main) averages around £400 after everything's come out.Not talking loads