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Arguments for/against paying into a pension

Hi guys

For the past few years Ive been in the Higher rate tax bracket. I also get quite a good company pension.

Ive started to think about how best to shelter money from tax. I already max my S&S ISA each year. Im not married or have a family, so I cant take advantge of those tax breaks. 

So Im starting to think about shuffling money into a SIPP by way of a low fee, passive global index fund.

Im currently vacillating between whether its worth saving into a SIPP or not. One thought I had was - with any money I have left over after maxing my ISA and that is going to be taxed at 40% - to put into a SIPP.

Im curious to hear what others - more wise and experienced - opinions on this are. Is it a no-brainer? Or am I right to be cautious? I know it depends on each personal circumstance, but - for someone who owns their house outright, is not married/kids, has 15 years until they retire - and likely to be a higher rate tax payer for most of those years - is it a no-brainer to invest most of my excess money into a SIPP each year?

My friend says the best way to think about paying into a pension is that its immediately increased in value by 40% (ie: the tax relief). That is quite a compelling argument! Especially as my money is currently sat in cash with inflation eating away at it!

Thanks

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Comments

  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 18,126 Forumite
    10,000 Posts Fifth Anniversary Name Dropper
    Strictly it's only increased in value by 25% i.e. you contribute £1,000 and basic rate tax relief is added so you have a pension fund of £1,250.

    Any additional tax relief due will come back to you personally, it doesn't get added to the pension fund.
  • gm0
    gm0 Posts: 1,253 Forumite
    Seventh Anniversary 1,000 Posts Name Dropper
    Basically - yes - but two things to understand for your situation and plans for working life and retirement

    Pension savings with tax relief are limited to the lesser of £40,000 pa and pensionable earnings.  This can be contributed by payroll or in some circumstances salary sacrifice a different method which saves the employer on their NI).   This is called the annual allowance or AA. 

    The most that someone with no pensionable income can save is £2800 topped up to £3600.  or pensionable earnings.  There are additional taper rules at the top end of higher rate tax etc. Check these things out for your existing pension contributions via employment to see what is left for you to increase or top it up.

    Lifetime Allowance.  There is a tax cap to the size of fund.  If you hit it then the excess is treated differently when accessed with a 25% penalty paid (back) in additional charge pre-income tax and a nastier more vindictive penalty on any further growth of it during retirement - if this is not all extracted during retirement pre age 75. 

    The standard LTA is around £1m though there are variations that have cropped up since it was introduced.
    All your pension entitlements count towards it.  Basically 20x DBenefit amounts + sum of DCcontribution pots.



  • 400ixl
    400ixl Posts: 4,482 Forumite
    1,000 Posts Third Anniversary Name Dropper
    Does your company pension scheme allow you to make additional salary sacrifice payments? This may be the most tax efficient way of doing this rather than paying into a separate SIPP plan.

    It may also be better to do this ahead of paying post tax into a S&S ISA, depending on whether you want to lock away that money or your current / planned pension contributions would take you over the lifetime allowance before you plan to retire.
  • NoMore
    NoMore Posts: 1,675 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    There's very few genuine arguments against it providing you accept the age restriction for access.

    Most arguments against it are edge cases around large pensions reaching certain limits (LTA) or large contributions (AA). Basically if you can afford it and don't mind waiting to access it, its generally a no brainer.
  • penners324
    penners324 Posts: 3,550 Forumite
    Sixth Anniversary 1,000 Posts Name Dropper
    Paying into a SIPP is vastly superior than paying into a S&S ISA (max out the pension / SIPP first).


    The SIPP and ISA can be invested in the same thing as well if you want.
  • NedS
    NedS Posts: 4,822 Forumite
    Sixth Anniversary 1,000 Posts Photogenic Name Dropper

    Paying into a SIPP is vastly superior than paying into a S&S ISA (max out the pension / SIPP first).

    Assuming you get 40% tax relief on the way in and are a basic rate tax payer in retirement when you come to withdraw, and do not exceed the Annual Allowance (AA) or Lifetime Allowance (LTA). Assuming the above is true, then the tax benefits are compelling and superior to an ISA


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  • Simes122
    Simes122 Posts: 236 Forumite
    Fifth Anniversary 100 Posts Name Dropper
    NedS said:

    Paying into a SIPP is vastly superior than paying into a S&S ISA (max out the pension / SIPP first).

    Assuming you get 40% tax relief on the way in and are a basic rate tax payer in retirement when you come to withdraw, and do not exceed the Annual Allowance (AA) or Lifetime Allowance (LTA). Assuming the above is true, then the tax benefits are compelling and superior to an ISA


    That's a lot of caveats.   Why do you say assuming you get 40% relief on the way in, and BR when you come to withdraw?  Even if you pay HR tax in retirement, when you withdraw, 25% is TF when you withdraw - still a good deal or am I missing something?
  • NorthYorkie
    NorthYorkie Posts: 186 Forumite
    100 Posts Third Anniversary
    I was amused to see the OP refer to a family as a 'tax break' !
  • dunstonh
    dunstonh Posts: 120,201 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    Im currently vacillating between whether its worth saving into a SIPP or not. One thought I had was - with any money I have left over after maxing my ISA and that is going to be taxed at 40% - to put into a SIPP.

    You pay into an S&S ISA but the SIPP is more tax efficient.  

    is it a no-brainer to invest most of my excess money into a SIPP each year?

    Depending on your short term needs, the SIPP beats the ISA for money that will be accessed in your retirement years.  So, the question should be whether you should actually be paying into the ISA rather than the SIPP.

    Indeed, depending on your circumstances, transferring some of that ISA money to the pension may be viable.

    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • NedS
    NedS Posts: 4,822 Forumite
    Sixth Anniversary 1,000 Posts Photogenic Name Dropper
    edited 10 May 2022 at 10:09AM
    Simes122 said:
    NedS said:

    Paying into a SIPP is vastly superior than paying into a S&S ISA (max out the pension / SIPP first).

    Assuming you get 40% tax relief on the way in and are a basic rate tax payer in retirement when you come to withdraw, and do not exceed the Annual Allowance (AA) or Lifetime Allowance (LTA). Assuming the above is true, then the tax benefits are compelling and superior to an ISA


    That's a lot of caveats.   Why do you say assuming you get 40% relief on the way in, and BR when you come to withdraw?  Even if you pay HR tax in retirement, when you withdraw, 25% is TF when you withdraw - still a good deal or am I missing something?
    Yes, correct. I was more highlighting that a SIPP is essentially tax deferment so one needs to be aware of the tax relief received now versus the tax liability in retirement.

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