Does interest need to be above 20% to make pension worthwhile?

ddi

If I have a pension the first 25% is tax free but after that I’m taxed at 20% therefore any capital growth / interest needs to be above 20%. Quite a bit more really. Is that right? Or am I missing something? 

molerat

You are forgetting the tax free status of the money going in.

Dazed_and_C0nfused

Yes, you are missing something.

Say you pay £4,000 into a "relief at source" pension such as a SIPP or personal pension.

The pension company will add £1,000 basic rate tax relief giving you a pension fund of £5,000.

Ignoring investment return/loss you then take the £5,000 out of your pension.

£1,250 is TFLS and £3,750 is taxable income.

If no tax is due on the £3,750 then you have received £5,000 despite only contributing £4,000.

If basic rate tax is due then you will receive £4,250.  £1,250 TFLS + £3,000 taxable income (£3,750 less 20% tax).

£4,250 is a 6.25% return on your original contribution of £4,000.

GeordieGeorge

ddi said:

If I have a pension the first 25% is tax free but after that I’m taxed at 20% therefore any capital growth / interest needs to be above 20%. Quite a bit more really. Is that right? Or am I missing something? 

Yes, you’re missing the whole point of a pension.

MX5huggy

Then there are numerous other ways the pot can get bigger (be better value).

Employer Contributions (free money).
Growth in investment.
Compound interest.
Salary Sacrifice, save the NI and Tax
Be in a lower tax band when you take the pension.
IHT is not due on pensions.

TVAS

The other contributors have answered your question beautifully. 

The question you did not mention is what were you thinking of doing INSTEAD of a pension? 

What income will you rely on in retirement if you do not join a pension.

kuratowski

These two threads have to be read in conjunction
https://forums.moneysavingexpert.com/discussion/6262734/non-earner-able-to-add-more-than-2880-into-a-pension

For earners, a pension is a good tool to convert a 20% tax rate to a 15% tax rate.  The gain can be even better in the right circumstances (e.g. salary sacrifice, higher rate taxpayer, unused personal allowance in retirement).

However, without any earned income, it makes zero sense to contribute more than the 2880 limit, because that is taking money outside the scope of income tax and moving it inside the scope, i.e. it is equivalent to converting a 0% tax rate to a 15% tax rate, making you worse off.

MEM62

ddi said:

Or am I missing something? 

You are missing much.  You understanding of how pensions work is way off base.  Do some reading on the subject, it is not overly complex, and you will see the reality is very different from your assumption.