Am I missing something?

ChequeBookGerry

I see many posts mentioning topping up your private pension for tax benefits, but when I look at pension annuity calculators the amount I'd get back is so far off the amount invested, it makes it uneconomic.  Sure these companies have to make a profit but even with tax relief it still does not seem worth it.  Surely far better to put the cash into ISAs for the missus and I?  Am I missing something?

Marcon

ChequeBookGerry said:

I see many posts mentioning topping up your private pension for tax benefits, but when I look at pension annuity calculators the amount I'd get back is so far off the amount invested, it makes it uneconomic.  Sure these companies have to make a profit but even with tax relief it still does not seem worth it.  Surely far better to put the cash into ISAs for the missus and I?  Am I missing something?

Yes - the possibility of taking your benefits by a means other than an annuity i.e. drawdown, or the whole lot in cash (75% subject to tax at your marginal rate, 25% tax free).

tacpot12

I don't intent to take an annuity ever for exactly that reason. 

barnstar2077

While rates are so low most people would be better off going into drawdown instead.  It just means that you remove cash in chunks from the pension yourself, without buying an annuity.  It does mean a bit of management though, unless you wish to incur the added expense of an IFA.

Edit:  Not all DC pensions are capable of this, so sometimes it is necessary to move your pension to a newer product first. 

Croeso69

tacpot12 said:

I don't intent to take an annuity ever for exactly that reason. 

Annuity rates at 75 seem reaonable, over 4% index linked, so i wouldn't say never myself. Unless you wish to leave a legacy of course.

Steve182

Only a minority of those people entering retirement now purchase an annuity, mainly for the reason you have highlighted, ie too expensive. The numbers have been falling every year. https://www.fca.org.uk/data/retirement-income-market-data

There are also other reasons why I would not buy one, they offer no flexibility in the way you draw your money and they die with you (or your partner if they are included as a beneficiary) so there is no possibility of passing on any unused pension pot in your will.

ChequeBookGerry

So the nays would seem to have it.  The 25% tax free lump plus a 20% tax saving on the rest is interesting, but even then I'm not seeing the returns to justify it.

Dazed_and_C0nfused

For a basic rate taxpayer (now and in retirement) it is a 6.25% return with no investment risk.

If you can get the money out without paying any tax i.e. use it as a bridge between stopping work and getting say a DB pension it can be a 25% return.

People would be interested to know where you are getting similar returns from?

Albermarle

ChequeBookGerry said:

So the nays would seem to have it.  The 25% tax free lump plus a 20% tax saving on the rest is interesting, but even then I'm not seeing the returns to justify it.

In very simple terms you could look at it this way 
Cash savings -  Typically most of the time interest rates are below inflation , so most years your money loses value/buying power.
Stocks and shares investments - Historically have offered growth rates above inflation in the long run , sometimes significantly so . In this case your money grows at a faster rate than inflation , and increases in value /buying power.
Stocks and shares investments within a pension - as above but plus a minimum 6.25% tax benefit ( can be more in certain circumstances . Often also + employer contributions .
The only disadvantage of a pension is that the money is not accessible until your mid to late fifties. 

gm0

The other tax benefit nobody has mentioned is that the pension savings are outside the tax net for 40% IHT - i.e. ignored. ISA is inside your estate.  This only matters if your property and other assets approach or exceed the limit.  If they do. 40% benefit in passing the same stocks and shares to your heirs over the ISA after you have finished with them as a pension in drawdown.