Are pensions worth it?

System

I suppose pension credit might, if you are a low earner there is less gain, but still if you wanted a retirement pot there needs to be action.

Care home fees did put me off before too, at the time I was mortgage overpaying

MadMat

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.

but as most providers charge a fee based on a %age of the total pot, in this example the pension would pay 20% more in fees over the lifetime of the account and thus end up worse off

If you are an employee receiving an employers contribution then a pension is a no-brainer

For us self employed peeps the sums are a lot closer and things like the extra fees could make a big difference between an ISA or pension.

Mat

System

% charges shouldn't change the tax bias, like % growth wont

Thrugelmir

MadMat wrote: »

but as most providers charge a fee based on a %age of the total pot, in this example the pension would pay 20% more in fees over the lifetime of the account and thus end up worse off

Simple answer is to choose one that doesn't.

Malthusian

MadMat wrote: »

but as most providers charge a fee based on a %age of the total pot, in this example the pension would pay 20% more in fees over the lifetime of the account and thus end up worse off

Er, the fees are only higher because your pot is bigger. Are you really happy to be poorer if it makes other people poorer?

In terms of "timing" it is neutral in the same way as in TheTracker's post. To continue his example, ignoring the tax free lump sum and growth to keep the maths simple, say I invest £8k in a pension for five years, which is grossed up to £10k, the provider takes 1% a year, so after five years I have £9,510, the government then takes 20% and I have £7,608. Or I invest £8k outside a pension, invest in the same things, the provider takes 1% a year (there is no reason I would be charged less for a non-pension investment than a pension investment in the same funds), and after five years I have... £7,608. Exactly the same.

Obviously if you actually invest in a pension for five years and end up exactly where you started minus the fees then you've gone really wrong somewhere, but this is just to illustrate that the fact that the provider's percentage is higher in £ terms makes absolutely no difference to you in terms of the return you receive, which is all that matters.

Unless, as mentioned before, you have developed an obsession with fees and think that everything is a zero sum game, and if the provider is worse off then you must be better off. Which is utterly wrong. And a very dangerous delusion for an investor to be under. It is the sort of delusion that has caused a minority of people (as per an article in the financial press this morning) to cash in their entire pension fund and stick it in their bank account because they think the bank is looking after their money for free.

atush

MatthewAinsworth wrote: »

I suppose pension credit might, if you are a low earner there is less gain, but still if you wanted a retirement pot there needs to be action.

Care home fees did put me off before too, at the time I was mortgage overpaying

I thought Pension Credit was being abolished (once everyone is on the new SP)

rpc

EdGasket wrote: »

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

Except you have a £11k allowance so your suggestion of paying tax on £7,500 is wrong.

enthusiasticsaver

Too simplistic and assumes no growth which is unusual over a long period of time and no employer contributions.

I think pensions are one of the main savings vehicles for retirement both from a tax point of view and my OHs recent quote for retiring this October reinforces that. Final salary pension frozen in 2008 after 25 years service gives him 50% of his salary after payments of around 5-7.5% of his salary for that period. Since 2008 he has paid in 10% of his salary to the current DC scheme(obviously less after 40% tax) and employer has paid in between 12-20% over the 8 years (sweetener for removing final salary) and the DC pot is now worth around £200k (4.5 times his annual salary). 25% of his overall pot is tax free.

wotsthat

EdGasket wrote: »

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.

£500 'free' money - come in handy at retirement.

Also, you've been given plenty of examples to demonstrate that's probably the worst case scenario too.

In my case I've extended my mortgage to retirement and diverted the capital payments to a pension. When I'm 55, if I still feel like it, I could pay off the capital with tax free cash instead of post tax income. That'll feel good.

Muscle750

More to the point what happens if he gets to 12 months past retiring and keels over aimed at the OP