Percentage of savings into my pension and isa

jamesd

semiplural said:

The pension is slightly more tax efficient as you can take 25% tax free and only pay basic rate tax on the rest. 

The pension delivers 57% tax free and 14.4% more income than the ISA at the 21k net income point which is roughly where Twix70 is looking.

The pension is also tax free within the unused income tax personal allowance. 25% is the headline which gives the pension an initial 6.25% gain over the ISA (basic rate in and out) but this part keeps on delivering.

The 1666 instead of 1166 error in the next paragraph means that the pension benefit is overstated. I'll update later.

Lets say the state pension is 9k leaving 3.5k unused personal allowance. Take that 3.5k taxable from the pension and its 1666 tax free part and the result is 14166 after tax income, no tax and 5166 tax free out of the pension.

For higher incomes each 1k from the pension delivers 250 tax free, 600 after tax with 150 in tax. Here's the tax free pension percentage for the first few extra 1k increments:

net 14166 pension 5166 tax 0 tax % 0 tax free 100%
net 15016 pension 6166 tax 120 tax % 1.95 after tax 98.05%
net 15866 pension 7166 tax 240 tax % 3.35 after tax 96.65%
net 16716 pension 8166 tax 360 tax % 4.41 after tax 95.59%
...
net 20966 pension 13166 tax 960 tax % 7.29 after tax 92.71%

If the ISA had been used the 13166 needs to be divided by 1.25 for the lost tax relief, reducing it to 10532, a drop of 2634 that cuts the net from 20966 to 18332. That gives the pension 14.4% higher income than the ISA for the same initial cost. Way more than the obvious 6.25%, it's equivalent to a 57% tax free lump sum.

57% taken out tax free at 21k net income is a very good deal.

ffacoffipawb

jamesd said:

semiplural said:

The pension is slightly more tax efficient as you can take 25% tax free and only pay basic rate tax on the rest. 

The pension delivers 57% tax free and 14.4% more income than the ISA at the 21k net income point which is roughly where Twix70 is looking.

The pension is also tax free within the unused income tax personal allowance. 25% is the headline which gives the pension an initial 6.25% gain over the ISA (basic rate in and out) but this part keeps on delivering.

Lets say the state pension is 9k leaving 3.5k unused personal allowance. Take that 3.5k taxable from the pension and its 1666 tax free part and the result is 14166 after tax income, no tax and 5166 tax free out of the pension.

For £3,500 taxable, the tax free element is £1,166 and not £1,666? This gives £4,566 tax free from the pension and not £5,166.

I think?

semiplural

jamesd said:

The pension is also tax free within the unused income tax personal allowance.

But based on also having c. £10k property rental income as well as state pension, there would not be any unused personal allowance, so the differential is smaller.

jamesd

ffacoffipawb said:For £3,500 taxable, the tax free element is £1,166 and not £1,666? This gives £4,566 tax free from the pension and not £5,166.

Thanks, you're right. I'll add a note now and correct fully later.

jamesd

semiplural said:

jamesd said:

The pension is also tax free within the unused income tax personal allowance.

But based on also having c. £10k property rental income as well as state pension, there would not be any unused personal allowance, so the differential is smaller.

Yes, that might well use the remining PA, perhaps not depending on how it's owned. If personally owned the whole rent counts. If in a limited company up to the value of the property can be withdrawn from the company tax free. A company could use a mortgage to facilitate this and deduct the interest as an expense.