Savings and Tax

MX5huggy

A SIPP is a Self Invested Pension Plan. Like an ISA it’s a tax efficient wrapper that can hold a range of investments from cash to individual shares, but most people hold funds which again cover the full rage from very steady to high risk/volatility. Unlike an ISA your money is locked away until you draw the pension minimum age for this is rising from 55 to 58. Unlike an ISA any money you put in a SIPP has 25% added to it by the government being tax relief. If you pay 40% tax you can claim the additional over the 20% back as well. When you take money out of a SIPP 25% is tax free the rest you pay tax on if you pay 20% tax the net gain 6.25% (one off not per year) before any growth in value of the investment. 

If you put £2000 in it would have tax relief added of £500, you would then also have your tax bill on earnings reduced by £400. Your savings would not be taxed and if you have children and presuming your partner is not a higher rate tax payer you would remain eligible for full child benefit payments (Child benefits start being reduced at £50k,which is less than £50270 40% tax starts from). 

So instead of paying 40% on £350 of savings interest and 40% on £2000 earnings (£940) and loosing £365 pounds of child benefits (if you have 2), so £1045 in your pocket. You could have £2500 in the pension and £505 in your pocket. 

I’m sure the maths isn’t exactly right but you get the idea. 

Albermarle

 I'm very risk averse with my savings, they're all (approximately £85,000) in fixed rate savings accounts as opposed to investments.

By keeping all your spare cash in savings you are taking a risk with inflation eating away at them . In fact it is not just a risk , but a certainty .

Currently inflation is above 5% but probably it will settle down a bit lower ( hopefully ) . Lets say 3.5% . Typical fixed rate savings account is paying 1.5 % . So every year it is guaranteed that your savings will lose 2.0% per year in value . So after ten years your £85K will only be worth £72K in terms of what you could buy with them.

If you were to invest the £85K in a medium risk mainstream investment fund , the outcome is uncertain and it will for sure go up and down over the ten years. However historical statistics show that over a ten year period the chances of it being less than £85K is 5%. The chances of it not beating inflation are probably about 10 to 15% . Also a good chance it will grow significantly . £85K invested ten years ago in a medium risk fund would be worth over £150K today ( no guarantee that will happen in the next ten years and in fact is unlikely to be such a large rise) 

So a guaranteed loss in keeping it in cash savings , or a 85% chance of beating inflation if invested . 

If the investment is made in a SIPP/pension you get a head start due to the tax relief , so the investment figures look even better 

So which is actually the most risky ? Saving or investing .

Of course it does not have to be 100% one or the other , but can be a mix. 

xylophone

I have a public service pension and I'm pretty sure I can't make any additional contributions to it.

Examples

https://www.nhsbsa.nhs.uk/member-hub/increasing-your-pension

https://www.civilservicepensionscheme.org.uk/your-pension/managing-your-pension/increase-your-pension/

https://www.lgpsmember.org/arm/already-member-extra.php#:~:text=Additional Voluntary Contributions (AVCs)&text=You have your own personal,into an in-house AVC.

Google your own scheme if not one of above.

adamsteventon

Thank you all for your responses, lots for me to chew over. Very much appreciated.