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Arguments for/against paying into a pension

dllive
Posts: 1,335 Forumite



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
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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.0 -
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.
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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.0 -
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.0 -
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.0 -
penners324 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
Our green credentials: 12kW Samsung ASHP for heating, 7.2kWp Solar (South facing), Tesla Powerwall 3 (13.5kWh), Net exporter0 -
NedS said:penners324 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 ISA0
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I was amused to see the OP refer to a family as a 'tax break' !4
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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.0 -
Simes122 said:NedS said:penners324 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
Our green credentials: 12kW Samsung ASHP for heating, 7.2kWp Solar (South facing), Tesla Powerwall 3 (13.5kWh), Net exporter0
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