Are pensions worth it?

EdGasket

Much is made of the tax relief on pension contributions however 75% of what you eventually take out is taxable. A quick back of a fag packet example for a 20% basic rate taxpayer:

Pay in £8000
Gov. tops this up to £10,000

On retirement take out:
£2,500 tax free
£7,500 taxed at 20% = £6000 net

Total net money out = £8,500 so only £500 more than you paid in for all the hassle of having your money tied up for years.
(NOTE: I am ignoring investment returns because these can be got in or outside the pension)

If you are lucky (?) enough to be taxed at 40% in retirement then £7,500 taxed at 40% = £4,500 net. Total money out £7,000 and you just lost £1,000 !!! (this is worse case scenario of taxed at 20% on earnings but 40% on pension due to higher income at that stage of life)

The above is ignoring pension and admin fees and possible advisor fees.

Just doesn't seem like pensions are as good as we are led to believe.

Any comments?

westv

But the investment return is on £10k
Outside a pension it'd be on £8k
Over the accumulation stage of a pension that could make a huge difference.

atush

And you also forget employers contribution.


Why are you such a downer on pensions?

I am pretty sure you are a downer on investments as I recall ( but not exactly and will not go look it up now) you complaining about bad investments you made. single share? Commodities? Sold during a crash? I dont know or remember.

But it all depends on what you choose to invest in, and how long the investment goes. And if you cash in early due to sentiment.
Even a gain of 500 would be worth it.

But you are forgetting that there is a PA, and all pension income taken when not working, and before SPA, will be tax free up to your PA (11K or more going forwards).

Not to mention any PA transferred from a spouse.

JoeCrystal

And of course, it is good for Tax Credits as well. In the past, I was able to report lower income thus getting increased tax credits which help if on a low income. I don;t know if that is still a case.

coyrls

EdGasket wrote: »

Much is made of the tax relief on pension contributions however 75% of what you eventually take out is taxable. A quick back of a fag packet example for a 20% basic rate taxpayer:

Pay in £8000
Gov. tops this up to £10,000

On retirement take out:
£2,500 tax free
£7,500 taxed at 20% = £6000 net

Total net money out = £8,500 so only £500 more than you paid in for all the hassle of having your money tied up for years.
(NOTE: I am ignoring investment returns because these can be got in or outside the pension)

If you are lucky (?) enough to be taxed at 40% in retirement then £7,500 taxed at 40% = £4,500 net. Total money out £7,000 and you just lost £1,000 !!! (this is worse case scenario of taxed at 20% on earnings but 40% on pension due to higher income at that stage of life)

The above is ignoring pension and admin fees and possible advisor fees.

Just doesn't seem like pensions are as good as we are led to believe.

Any comments?

If you had no other source of income, the £7,500 would be tax free as well.

hugheskevi

(1) Employer contributions
(2) Salary sacrifice
(3) Unused Personal Allowance at any age after 55
(4) Higher means-tested benefits
(5) Assets out of reach of bankruptcy
(6) Higher/additional rate taxpayer

Using a simple example with none of the benefits of the above does demonstrate that without any of these 'extras' pensions are not great value.

For someone unfortunate enough not to benefit from any of the above (in addition to number 5 which everyone benefits from), they may well be better off putting the money in an ISA, and then contributing more to a pension at a later time in life when at least one of the above applies rather than putting the money into the pension immediately.

System

I'd echo the gain from investing your tax relief before it gets taxed on the way out, if you do it early enough with good yield that could outweigh potentially having to pay the higher rate as a pensioner (if you did), you'd have to be a borderline case to really lose out

Maybe if you're a 20% taxpayer paying into a millionaire pension pot and only a few years from drawdown you'd want to go isa instead at that point

And tax credits, definitely

AnotherJoe

EdGasket wrote: »

If you are lucky (?) enough to be taxed at 40% in retirement then £7,500 taxed at 40% = £4,500 net. Total money out £7,000 and you just lost £1,000 !!! (this is worse case scenario of taxed at 20% on earnings but 40% on pension due to higher income at that stage of life)
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It's very unlikely that someone would be on 20% when earning and 40% in retirement.
Much more likely is the scenario you didn't mention, possibly because it's so favourable to pensions, 40% when earning and 20% in retirement, when it's hugely favourable.

You also missed employer contribution which you wouldn't get with an ISA.

System

I'm hoping I will be one of those 20% working and 40% on pension, because I hope my small caps will pay off

But if I did I'd be quite happy with that performance
And I'm on tax credits so actually I'd be Quid's in

Not to mention my real intention is to leave it as an inheritance

Notfarfromtheborder

Employer NI contributions @ 13.8% refunded by adding to pension pot. At £2500 pcm sacrifice it adds up
40% tax relief
NI relief
Child benefit refunded
11% employers contribution


Feel like I'm playing with someone else's money.


What's not to like?

EdGasket

atush wrote: »

Not to mention any PA transferred from a spouse.

Can a spouse transfer a personal allowance?? Didn't think that one was possible. Do you mean the tax-free personal allowance? How is it transferred?