Are pensions worth it?

AnotherJoe

MatthewAinsworth wrote: »

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

The lifetime allowance will get you. You'd hit a million and that wouldn't allow you to get an income getting you to 40% tax , unless one of your small caps did a Google and was let's say a 100-bagger. Probably not gonna happen

p00hsticks

EdGasket wrote: »

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?

Marriage Allowance was introduced on 6/4/15. It allows a spouse who is a non-tax payer to transfer 10% of their personal tax allowance to their spouse providing that the spouse is a basic rate tax payer.

https://www.gov.uk/marriage-allowance/how-it-works

System

Joe - I dunno,
http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F0GBR06FNN

100% of sipp in something like that.
Hold for 37 years. Maybe lifestyle it near the end

TheTracker

westv wrote: »

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.

That's a common misperception. It is irrelevant which end the tax hits, you don't have any more wealth just because it grew inside the tax wrapper.

Outside a pension 8k, which has already had 20% tax applied, grows 100% and results in 16k

Inside a pension 10k, which has not had income tax applied, grows 100% and results in 20k. Then 20% tax is applied on the way out and results in 16k.

The same.

There are other reasons for using a pension, but this is not one of them.

Of course, the first 250k or so going into a pension is different as it's usually 0% on the way out if taken in annual amounts under the personal allowance threshold.

chucknorris

Pensions are well worth it IMO, I didn't really seriously start investing in my pension until I was 53, but I have been piling in for the last 6 years, and will continue to do so.

One advantage that has yet to be flagged up is that you could retire to a country that taxes pensions less than the UK. We are unlikely to do this, but the Isle of Man is a remote possibility.

MEM62

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?

A flawed argument in most respects as pointed out by others. It is extremely rare that anyone would be a 20% tax payer whilst working and fall into the 40% category when retired. And as for the inconvenience of having your money tied up for years - that's what it's for, retirement!!

Malthusian

MatthewAinsworth wrote:

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

Why would your small caps increasing massively in value turn you into a higher rate taxpayer? If you end up with a massive portfolio were you planning on switching the whole lot into high-yielding investments? It would probably be more tax-efficient to invest for growth and draw down from the portfolio, using your £11,000 capital gains allowance.

TheTracker wrote: »

Outside a pension 8k, which has already had 20% tax applied, grows 100% and results in 16k

Inside a pension 10k, which has not had income tax applied, grows 100% and results in 20k. Then 20% tax is applied on the way out and results in 16k.

Except of course that 25% is tax-free, so it results in £17k compared to £16k outside a pension. But I realise your point was aimed at the misconception that the "timing" of the tax hit makes a difference.

atush

TheTracker wrote: »

That's a common misperception. It is irrelevant which end the tax hits, you don't have any more wealth just because it grew inside the tax wrapper.

Outside a pension 8k, which has already had 20% tax applied, grows 100% and results in 16k

Inside a pension 10k, which has not had income tax applied, grows 100% and results in 20k. Then 20% tax is applied on the way out and results in 16k.

The same.

There are other reasons for using a pension, but this is not one of them.

Of course, the first 250k or so going into a pension is different as it's usually 0% on the way out if taken in annual amounts under the personal allowance threshold.

Not quite right. sure if 100% of you pension is taxed- but if you retr before SPA and have no income, then the pension isnt taxed up to your PA. which means you wont pay as much tax on that extra 4K in growth.

WillowCat

It's funny how life can take a strange turn but I for one am extremely happy that my £100k ish defined contribution pension scheme is ring fenced from the means test. I went from higher rate tax payer to living on carers allowance based on caring from my partner and as a couple we are on income based disability benefits.

If the cash had been in ISA's I'd have to spend the lot on daily living expenses (well down to £6k). As it stands when we reach state pension age I will again have a good income (also have defined benefit scheme).

Thrugelmir

EdGasket wrote: »

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

Any comments?

What's your alternative?

The only way to guarantee a good pension is to save. That's a personal choice. No one is going to bail you out if you decide to fritter your earnings away.