Pensions are bad from a tax point of view.

dunstonh

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.

It doesnt matter if its income or ad-hoc lump sums as long as you remain a basic rate taxpayer in retirement.

Even if you go into the higher rate band it is still better than ISA (as long as you were higher rate when making the contributions).

The op is drawing £22,500 and remaining a basic rate taxpayer.

So, that £22,500 on the pension would equate to £13,500 if the money had originally gone into ISA.

The pension will pay tax of £3,375 (The op says £4500 but that is not correct unless they have already drawn the 25% tax-free out).

So, the pension would be £19,125 after tax.
The ISA would be £13,500 with no tax to pay.

So, it is very much still in favour of the pension.

Malthusian

dunstonh wrote: »

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

Maybe the issue is that some people hate paying tax so much that they would say the latter. Not because they have done the maths wrong but because that is genuinely how they feel.

Around a dozen people love paying tax so much that they pay voluntary tax to HMRC. Conversely there must be people who hate paying tax so much they will make themselves financially worse off if it results in a lower tax bill, and say that it's worth it to know they aren't contributing to dropping bombs on brown people.

Obviously the 99% of people who are not at either extreme of this bell curve of belief will react to this silly idea with incredulity, hence this thread.

That said, whether the OP's belief comes from an emotional bias against tax or bad maths, his thread stated "Pensions are bad from a tax point of view" which is objectively wrong.

It could of course also be trolling.

nrsql

I was in a situation where I didn't have to pay any UK tax but could pay a minimal amount elsewhere - above board at the time no dodgy dealing.
I chose to pay the higher UK tax because I thought it right to support the UK.
I still pay more than I need to - not as much as I could, just more than some others in a similar situation.

RickyB2000

I don't think it always means they hate paying tax and will make themselves worse off. It means they haven't done the calculation and all they see is a large pot of money that is 'theirs' but they will see a large amount vanish off as tax. The more they take, the more tax they pay. It becomes a psychological thing rather than a rational thing.

The point I was making about trying to withdraw a large lump sum is the OP sounded like this was what they were trying to do but were frustrated by the amount of tax they would pay. I don't think they said how much extra they earn above and beyond their pension (two or three years to withdraw so must be close to the HR band to not be able to draw out 22k in 1 or 2 years). Perhaps they have some urgent need to withdraw the money and are venting their anger here. Who knows. I fully agree, they are better off than they would have been in an ISA, but if you mistakenly make plans on a misunderstanding of how things work then you you may get angry. Good advert for an IFA.....

AnotherJoe

Malthusian wrote: »

Maybe the issue is that some people hate paying tax so much that they would say the latter.

Not so because in that case they would surely hate paying 40% more than 15% and so would invest via a pension.

chucknorris

AnotherJoe wrote: »

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.

Not only that, but if you routinely invest the max allowed into your ISA every year (which I do), then you are not allowed to invest more in your ISA. So for some, the ISA is not a valid alternative investment to a pension. I invest the max allowed in both pension and ISA every year, and since I dropped down to working one day per week, relevant income rather than the annual allowance, dictates the max pension investment (with tax relief) for me. I still value pensions, even though I will still be taxed 40% in retirement (but of course that is only 30% when the tax free lump sum is considered).

Malthusian

AnotherJoe wrote: »

Not so because in that case they would surely hate paying 40% more than 15% and so would invest via a pension.

The starting point of the thread is that the OP is thinking in pounds and pence terms instead of percentages, and is willing to make himself worse off in pounds and pence as long as the government is worse off too. A classic case of cutting your nose to spite your face.