Is a Pension a tax wrapper

alan14

Although I have paid into a pension for over 30 years I must admit my knowledge is lacking so have read through the pension guide on here and have a question as I think I am missing something from Martins excellent advise.
The guide states that a pension is "just a tax wrapper". However a pension to me just appears to be a tax wrapper for the 25% that can be taken as tax free.
No matter what other decision I make it appears to be just a delay on paying tax on the remaining 75% rather than a wrapper? So in short are we just delaying paying tax on the "other" 75% from the moment it is earned and simply paying the same tax when we need access to the money on retirement?
Comments appreciated ...

zagfles

Yes. But it's still a "tax wrapper", just like an ISA is even though you get no tax relief on inputs. Money inside grows tax free.

As well as the 25% tax free, the other 75% might be paid at a lower rate of tax, for instance if you're a higher rate taxpayer now but won't be in retirement, or if you're a basic rate payer now and will have spare personal allowance in retirement.

Loads of other potential benefits too - such as it reduces income for assessments of loads of other things such as child benefit, tax credits, student finance, some benefits, and if it's a work scheme using salary sacrifice it will save NI as well as tax (you don't pay NI on pensions on the way out),

jem16

To a certain extent it is just tax deferral on the other 75% but it all depends on specific circumstances.

1. You have your tax free personal allowance so may pay no tax at all.

2. You may have got higher rate tax relief on contributions but pay no tax or basic rate tax when taking it.

It's simply described as a tax wrapper as it has tax related advantages.

dunstonh

Is a Pension a tax wrapper

yes it is.

The guide states that a pension is "just a tax wrapper". However a pension to me just appears to be a tax wrapper for the 25% that can be taken as tax free.

Tax relief going in.
Tax free growth (no income tax on dividends and not capital gains tax on growth)
Not included in your estate and not subject to IHT
On withdrawal, the it is subject to your personal allowance and then income tax on 75% of the amount drawn but tax free on 25%.

If it wasn't a tax wrapper than none of those tax advantages would exist. You would have CGT, Income tax and IHT all coming into play.

No matter what other decision I make it appears to be just a delay on paying tax on the remaining 75% rather than a wrapper?

No. That is far too simplistic and ignores the CGT, income tax and IHT that are avoided. If you ignore those things, then yes, it can look the way you have described but it is still a tax wrapper.

AnotherJoe

Some of the funds in your pension, since they've been there over 30 years, would almost certainly have given you a huge CGT liability if you did not have them in a tax wrapper.

There's also the fact that the money has been locked away, out of temptation for all that time. For many, if that didnt happen, it wouldn't be there at all when they came to withdraw it.

sandsy

There's different types of tax wrappers - they don't all work in the same way. A pension wrapper works differently to an ISA wrapper.