Pensions are bad from a tax point of view.

Brynsam

dunstonh wrote: »

Wrong.

In very simple terms focusing on the differences, you got 40% tax relief going in and are paying tax at 20% on 75% of the draw.

To allow like for like comparison, I have assumed the full tax relief is invested in the pension (which some people do) rather than spent in the years in question as the ISA has no such relief.

£100 into the pension cost you £60. So, that would mean £60 in the ISA.
Both get the same returns and the same charges. So, no difference there.

Let's say your contributions continue and the funds grow and you are now at retirement.
Pension is worth £100,000
ISA is worth £60,000

Let's say you draw 5% annually and your state pension uses up all your personal allowance making you a basic rate taxpayer.
Pension: 5% annually is £5,000. 25% of that is tax-free which leaves £3750 subject to 20% giving you £3000 after tax plus £1250 tax-free = £4250
ISA@ 5% annually is £3,000. it is all tax-free.

Would you rather £4250 AFTER £750 of tax
or £3,000 with no tax to pay?

Couldn't have put it better myself.....:T:T:T

atush

ProDave wrote: »

That is a startling conclusion I have drawn.

I have one small DC pension (my others are DB) I paid into this during a 5 year period of employment and paid in a total of £7K. At the time I was a 40% tax payer, so on the way in, that contribution would have saved me £2800 in tax.

Fast forward to now. That pension is in drawdiwn now. It actually more than quadrupled in value in the time it was left invested so reached £30K I have already taken the 25% tax free leaving £22.5K and would like to draw some more. But anything I draw now will be taxed as income. I am now only a basic rate tax payer.

So if I draw that £22.5K and pay 20% tax on it, it will cost me £4500 in tax to get what is left of my money. I could not even draw it in one lump and remain a basic rate tax payer, so to even achieve that it would need to be drawn over 2 or 3 years.

This leaves me to the startling conclusion, had I know at the time, I would have been much better NOT investing it in a pension, but rather paying the tax so it was "all nine" and investing it instead in something like an ISA. Assuming I could have got the same growrh, the net result would have been more of my money free to spend as I like with no tax liability. And I would not have had to wait until I was 55 to get access to it.

As a HRtaxpayer did you claim your HRT relief from HMRC thru a phone call or a self assesment?

There is no way on gods green earth there is a reality where getting 100 into a pension for the cost of 60 to you is better than a BR option of 100 for 80. Or pretty much anything else.

Spidernick

So you got 40% tax relief paying in and now only have to pay 20% tax on 75% of the total value after it has increased in value tax-free, yet somehow this is a bad deal? Words fail me! :wall:

nrsql

It doesn't matter whether you consider the tax before or after growth as it is a percentage so we can just consider the starting position and the tax liability so I think it is:
Pension
100 -> (25 tax free): 25 + (75 - 20% tax): 60 = 85
ISA
100 -> (100 - 40% tax) = 60

Those are the amounts available to you that would be growing equally over the term.
The downside of the pension is that is locked until you are 55 and at the mercy of rule changes until then. At that point you may end up having to take it all out and pay 40% tax but would still be better off due to tje tax free amount. Only real issue would be if it was decided to impose an annual tax or some other levy.

Hussel

The original post is a wind-up, surely?

kidmugsy

Hussel wrote: »

The original post is a wind-up, surely?

You may very well be right. But it's not quite certain.

nrsql

Maybe not. I've seen MPs use similar calculations in debates and to justify policy.

Plan 1 costs x% of this amount
Plan 2 costs y% of this unrelated but much smaller amount
y>x so Plan 1 must be cheaper.

AnotherJoe

Using your numbers ;
£7,000 in pension. Quadruples to £28,000
£7k tax free, take out rest over couple of years @20% tax leaves £16,800.
Total out £23,800


Or £4,200 in ISA.
Quadruples to £16,800
Total out £16,800


£7,000 better off with pension.

RickyB2000

Perhaps the actual issue here is the OP wants to withdraw a sizable lump sum in one go for reasons unknown. This reduces the pension benefit although unless it is a very sizable amount the pension should still win but needlessly paying extra tax.

AnotherJoe

RickyB2000 wrote: »

Perhaps the actual issue here is the OP wants to withdraw a sizable lump sum in one go for reasons unknown. This reduces the pension benefit although unless it is a very sizable amount the pension should still win but needlessly paying extra tax.

We know the actual amount, the OP quoted it in their first post ! It was, invest £7,000 and pay 15% tax later or £4,200 and pay none.

Even if the OP needed it all in one lump it would still be cheaper and provide more money than an ISA, to take it out over 2 or 3 years and get a 1-2 year loan to bridge the gap.

Bottom line is the OP stuffed up with their calculation and worse, instead of asking "where have i gone wrong as this doesn't make sense?", came up with a ridiculous pronouncement as to why it was better to pay 40% tax than 15%.