Work pension vs saving accounts

Firefax

Hi,
After doing calculations it is much more profitable not to have workplace pension if you can save up those money on saving accounts and (not spend it) .
I runned calculations twice and searched for similar topics but found nothing so it makes me think if I missed something obvious or it is not a topic as many of the people would just spend the money if they would not be locked.

Lets assume that monthly contibution is 100 pounds for the period of 20 years,
If we will compare NEST that takes 1.8% from the each contribution and 0.3% annual management charge .
Each 12 months our account is supplied with 1178.4 pounds (1.8% allready deduced)
Than Nest takes 0.3% of totall amount each year - that after 20 years give us 22 839,53
Now when we will take the money 25 % of it ( 5 709.88) is tax free hoever 75% is taxed as previous tax relief (lets assume 20%) so we will get 13 703.71
Totall 19 413.6

If we would place it into any saving account with we start initially with 100 pounds a month minus tax that gives us 80 pounds.
That is an 960 per year , lets take here for example saving account of 1% calculated yearly after 20 years we will have 21,128.00

Pension 19 413 vs saving account 21 128

Of course there may be tax from an income on saving account depending on saving account hoever choosen exaple of saving account is also not close to many better that are easy to find.

NoMore

Your pension is invested and will grow significantly over a 20 year period, you have not accounted for that.

You are just saying you put x per year into a pension and get x times number of years minus charges back with no accounting for growth and then comparing putting the same into a savings account and allowing that to compound. Its a ridiculous comparison without accounting for the likely growth in the pension but allowing it in the savings account

ViolaLass

Plus employers contribution.

JoeCrystal

Also, did you take into account the employer's contribution and the fact you won't have tax relief if paying into the savings account?

Assuming 5% of the salary is £100 gross, then you have the employer contribution of £60. So that added up to £160 per month while if you use that £100, it would be only £80 after taxes into the savings account.

So it is quite a difference. Also, the pension fund is more than likely to see a better return than a saving account, which inevitably declines in value due to inflation. It is not often when the interests are better than the inflation.

Albermarle

You are just comparing like for like contributions , in which case a savings account will look better . No initial charge and no tax when you take the money .
However to add £100 to a savings account from your already taxed pay costs you £100 .
To add £100 to your pension will cost you a lot less, as the taxman and the employer will pay part of it, so you are already ahead of the game before you start.

atush

After doing calculations it is much more profitable not to have workplace pension if you can save up those money on saving accounts and (not spend it) .

I hope your work has nothing to do with calculations You are quite wrong.

Consider 100 into a pension costs you only 80 if you pay BRT, and 60 if HRT. So immediately you have 100 in a pension, or only 80 in a savings acct (as you paid 20 in tax). Then add in an employers contribution of 100, added to your 100. Now you have 200 in a pension, but only 80 in savings. This is all before any growth or interest, and growth over the long term will be higher.

So how is 80 more than 200? or even 100?

Go back to your calculations

AnotherJoe

Your calculations are obviously completely invalid since you haven't allowed for
Tax relief edit - done properly with allowance for possibly not paying any tax, high rate tax, NI relief for salary sacrifice
Employers contribution
Investment growth
Poor savings (rates less than inflation )

All of which will mean the pension will easily outperform saving by a factor of 3x or so.

squirrelpie

The OP's calculations are awry is some ways but not all those that have been suggested:
- tax relief on the way in IS allowed for since the calc's deal with gross payments.
- they omit the employer's contribution, which is a major problem.
- they treat the pension and the savings differently as regards investment growth, which is simply cheating and a major problem.


The calcs do emphasise the importance of minimising ongoing charges and maximising investment income/growth though so in that sense they are helpful.

AnotherJoe

Fair comment that tax is accounted for, I missed that.
Just to add, the OP also assumed that you would pay 15% (effective) tax rate. Eg 25% not taxed, 75% taxed at 20% however if you time it right you can pay as little as zero on it. Plus, if you ever paid tax at high rate then the additional 20% relief also destroys the case even without employers contributions.

kinger101

Employer contributions, and salary sacrifice aside, pensions are more cost effective for basic rate taxpayers for the simple reason that 25% of the money can be taken out tax free.

This comes with a major caveat that the tax regime doesn't change for the worse before you retire.

OP - you use the term "savings". Whatever you do, you will need to be in equities rather than interest bearing cash accounts, and you'll find ISAs charge similar fees to pension funds. It's a matter of picking the right wrapper, but if you don't understand what is meant by the "employer contribution" and "salary sacrifice" and are unable to determine whether you have these, I suggest you remain in your pension fund rather than relying in calculations on the back of an envelope. You're very likely missing something if you think savings are better than an employers scheme.

Marine_life

Firefax wrote: »

Hi,
After doing calculations it is much more profitable not to have workplace pension if you can save up those money on saving accounts and (not spend it) .
I runned calculations twice and searched for similar topics but found nothing so it makes me think if I missed something obvious or it is not a topic as many of the people would just spend the money if they would not be locked.

Lets assume that monthly contibution is 100 pounds for the period of 20 years,
If we will compare NEST that takes 1.8% from the each contribution and 0.3% annual management charge .
Each 12 months our account is supplied with 1178.4 pounds (1.8% allready deduced)
Than Nest takes 0.3% of totall amount each year - that after 20 years give us 22 839,53
Now when we will take the money 25 % of it ( 5 709.88) is tax free hoever 75% is taxed as previous tax relief (lets assume 20%) so we will get 13 703.71
Totall 19 413.6

If we would place it into any saving account with we start initially with 100 pounds a month minus tax that gives us 80 pounds.
That is an 960 per year , lets take here for example saving account of 1% calculated yearly after 20 years we will have 21,128.00

Pension 19 413 vs saving account 21 128

Of course there may be tax from an income on saving account depending on saving account hoever choosen exaple of saving account is also not close to many better that are easy to find.

I suspect this was originally drafted in crayon.