Tax in and out of pensions

MK62

climbatron wrote: »

Thanks for the clarification. What I was after, and has been confirmed, is that the majority of publications (including MSE) highlight the 20% tax relief on the way in and don't mention that you get taxed again on the way out.

It still works in your favour though......remember that up to 25% is tax free on the way out.

Malthusian

climbatron wrote: »

Thanks for the clarification. What I was after, and has been confirmed, is that the majority of publications (including MSE) highlight the 20% tax relief on the way in and don't mention that you get taxed again on the way out.

If you do nothing and don't pay pension contributions it gets taxed anyway, so it would be misleading to suggest that paying tax is a consequence of making pension contributions.

bearshare

MK62 wrote: »

It still works in your favour though......remember that up to 25% is tax free on the way out.

I am not so sure. It is often forgotten than ALL gains in pension investments are taxed as income. So 20% (basic rate, and after TFLS). Outside of a pension, a lot of the profit will be Capital Gains, So you get the Capital Gains allowance (at 0%) and the rest at only 10% tax.(up to higher rate level).

If you use the the Capital Gains allowance each year, that this would greatly reduce the benefit of pension saving, in many cases.

p00hsticks

climbatron wrote: »

Thanks for the clarification. What I was after, and has been confirmed, is that the majority of publications (including MSE) highlight the 20% tax relief on the way in and don't mention that you get taxed again on the way out.

But what many have pointed out is that you don't necessarily get taxed again on the way out. It all depends on what other income you have and how much you take out of your pension yearly. Personally I've been using a DC pension to tide me over (along with savings) from my chosen early retirement date to the point where my DB pension and state pension will kick in.

Consequently I've benefitted from the 20% tax relief going in but, by only taking out up to my tax allowance yearly, paid no tax on the way out. I won't be the only one by any means doing this.

Paul_Herring

bigadaj wrote: »

Isas are of course tax free for example.

Only because they're generally funded from income that's already been taxed.

So not, strictly, tax free.

zagfles

bearshare wrote: »

I am not so sure. It is often forgotten than ALL gains in pension investments are taxed as income. So 20% (basic rate, and after TFLS).

It is often forgotten that multipication is commutative. The gain is bigger as the investment is bigger because of tax relief.

Outside of a pension, a lot of the profit will be Capital Gains, So you get the Capital Gains allowance (at 0%) and the rest at only 10% tax.(up to higher rate level).

If you use the the Capital Gains allowance each year, that this would greatly reduce the benefit of pension saving, in many cases.

The pension is still much more benefical, until you start exceeding allowances (tax relief limit, AA, LTA), or in the unlikely event your marginal tax rate is higher in retirement (eg you're earning more and so in a higher band, or the govt raises tax rates).

For those who can't see how obvious this is from simple mathematical principles, model it in a spreadsheet.