Is a Pension Worth Having?

Apodemus

One issue no-one has mentioned is political risk. Pensions are likely to be better protected against future taxation changes than other investments.

Having seen my grandmother’s invested life-savings classed as “unearned income” (and with the “investment income surcharge” taxed at eye-watering rates) I am wary of the risk that society returns to a similar view.

Against a back-drop of historically low savings rates, those of us on these boards with enough investments to be worth discussing are a very small proportion of the population. Certain sections of society see these stores of wealth as “fat cat” territory and fair game for taxation. There is probably a pecking order in which investments might get targeted for increased taxation - unwrapped investments first, then wrapped investments, then self-invested pension schemes, then money-purchase/employer pension schemes.

Even if this scenario is an outside risk, it is surely unwise not to diversify across the range of options to mitigate the risk?

Triumph13

So to sum up, if:

1. You only get basic rate tax relief; AND
2. You get virtually no employer's contribution; AND
3. You use your employer's scheme anyway; AND
4. That scheme has very high charges; AND
5. You stay with that employer for decades rather than transfer funds to a cheaper PP when you change jobs;

Then you may be better off if you had invested outside a pension. BUT you would still be doing even better if you had used a low cost private pension instead.

jamesmorgan

As can be seen by many of the replies so far, the benefits of a pension depend on your personal circumstances. If you are a HRT they are a bit of a no-brainer (especially if you expect not to be a HRT in retirement). For normal tax payers with limited or no employer contributions their advantages can be more marginal and depend on growth expectations.

Take this simplified example. Assume I have £100K (before tax) to invest. If I put it in a pension wrapper and leave it invested for a number of years it may grow to £500K in real terms. If I want access to all that money quickly once retired it is going to cost me quite a lot.

I can get £125K tax free. The remaining £375K would incur approx £150K charge in tax, so the total cash available is £350K.

Alternatively if the £100K had been accumulated at 20% tax rates, I could instead have invested the £80K net into an ISA. If this has grown at the same rate at the pension, I could have accessed a fund of £400K tax free.

Admittedly not many people want to access their entire pension fund in one go, and if you take the funds more gradually you could reduce the tax charge on your pension. The example is just meant to highlight it depends on your personal tax situation and what you are planning to do with the money.

In common with many people I have a range of pension funds but also have other tax efficient vehicles that I use for investment (from ISAs to spreadbetting accounts). You need to do careful tax planning and work out what is best for you.

The other thing that you can be reasonably confident about is that if a pension appears to be too advantageous for any particular group of people, the government will act quickly to close that advantage - so if you are in that group, fill your boots while you can.

BookerTee

lisyloo wrote: »

No I do not think there are NO downsides, I just dont think they are anywhere near negating the benefit of the 45.8% plus tax free lump sum.

You didnt read any of the previous posts did you...

BookerTee

Apodemus wrote: »

One issue no-one has mentioned is political risk. Pensions are likely to be better protected against future taxation changes than other investments.

Yeh its not like pensions havent been attacked in recent years!

http://www.express.co.uk/news/politics/781255/chancellor-exchequer-philip-hammond-tax-pensions-cut-international-aid-budget-blackhole

With your money trapped in a pension fund you are a sitting duck.

At least if your money is under your control you can mitigate as best you can.

ams25

A bizarre thread. Maybe the OP works for the anti pension alliance or some similar outfit. Seems unwilling or unable to acknowledge any postives of pensions (wrapper) despite some balanced replies.

I am grateful to have invested in pensions for many years and can now benefit from that. But I think for most there is an argument to invest within and outside a pension wrapper if able.

lisyloo

BookerTee wrote: »

You didnt read any of the previous posts did you...

Yes.
Please be specific and show me the workings (real simple example is fine) as to how I will be worse off getting 45.8% relief, 25% tax free lump sum and having a SIPP with LOW charges (not any higher than my ISA).

BookerTee

jamesmorgan wrote: »

As can be seen by many of the replies so far, the benefits of a pension depend on your personal circumstances. If you are a HRT they are a bit of a no-brainer (especially if you expect not to be a HRT in retirement). For normal tax payers with limited or no employer contributions their advantages can be more marginal and depend on growth expectations.

Take this simplified example. Assume I have £100K (before tax) to invest. If I put it in a pension wrapper and leave it invested for a number of years it may grow to £500K in real terms. If I want access to all that money quickly once retired it is going to cost me quite a lot.

I can get £125K tax free. The remaining £375K would incur approx £150K charge in tax, so the total cash available is £350K.

Alternatively if the £100K had been accumulated at 20% tax rates, I could instead have invested the £80K net into an ISA. If this has grown at the same rate at the pension, I could have accessed a fund of £400K tax free.

Admittedly not many people want to access their entire pension fund in one go, and if you take the funds more gradually you could reduce the tax charge on your pension. The example is just meant to highlight it depends on your personal tax situation and what you are planning to do with the money.

In common with many people I have a range of pension funds but also have other tax efficient vehicles that I use for investment (from ISAs to spreadbetting accounts). You need to do careful tax planning and work out what is best for you.

The other thing that you can be reasonably confident about is that if a pension appears to be too advantageous for any particular group of people, the government will act quickly to close that advantage - so if you are in that group, fill your boots while you can.

Ageed, its very difficult to put accurate figures on it as there are so many variables when considering the 2 options of inside or outside a pension fund. I will try and see how it looks.

You cant really fill your boots when your money is trapped inside a fund you have no control over, you have to just take the hit.

BookerTee

Triumph13 wrote: »

So to sum up, if:

1. You only get basic rate tax relief; AND
2. You get virtually no employer's contribution; AND
3. You use your employer's scheme anyway; AND
4. That scheme has very high charges; AND
5. You stay with that employer for decades rather than transfer funds to a cheaper PP when you change jobs;

Then you may be better off if you had invested outside a pension. BUT you would still be doing even better if you had used a low cost private pension instead.

1. The majority (which is what we are talking about)
2. They largely come out of your pocket anyway so little advantage.
3. The vast majority dont get any choice.
4. ALL schemes have very high charges, you just dont see them.
5. Unlikely to make any difference unless you manage your own fund and dont invest in share/bonds etc.

Everyone 'thinks' their pension is low cost, They look at the headline rate and think thats it. In reality no one knows what the actual costs are because the fund managers are allowed to hide them.

lisyloo

You cant really fill your boots when your money is trapped inside a fund you have no control over, you have to just take the hit.

It's not trapped. You can drawdown what you wish, although many of us will obviously consider the income tax thresholds.
What hit are you talking about? income tax?
That will be lower than the alternative due the tax free lump sum and annual personal allowance.