Additional pension contibutions or savings account?

Pat38493

Nellienoonoo said:

Wow.  My mind is totally blown by the comments given.  I was never told to leave my work pension but maybe look at putting my additional money into a savings plan as I,m going to get taxed on my salary sacrife scheme

Maybe you misunderstood the advice or comments because this sounds like very strange advice to give.  Maybe if you post some more details e.g. your age and current income, you could get some more specific comments.  However as others have mentioned, usually it's better to pay more into the pension than to put into a savings account, unless you are going to need the money before you reach the age you can access your pension.

Saying that you should not put money into a pension because it will get taxed on the way out, is not a valid reason to not put money in the pension.  You will avoid paying tax on the way in, and less tax on the way out, so you will almost always be worse off putting it in savings (again as said above unless you need the money earlier).

The only edge cases here could be if you are on a very low salary and only working part time or something like that.

QrizB

Nellienoonoo said:

Wow.  My mind is totally blown by the comments given.  I was never told to leave my work pension but maybe look at putting my additional money into a savings plan as I,m going to get taxed on my salary sacrife scheme

For the following I'm going to assume you're a basic-rate taxpayer in England. I'm ignoring any growth/interest as it all evens out.

Imagine you have £1000 of earnings that you want to put aside for your retirement. You have two options:

• Salary sacrifice into your pension. All £1000 will go into the pension. When you come to withdraw it, you will get £250 tax-free and will pay 20% tax on £750 (that's £150 tax). You will end up with £850 in your pocket.
• Take it as salary and save it. You will pay 20% tax and 12% NI on £1000 (that's £200 tax and £120 NI) leaving you with £680.

By salary sacrificing the money into a pension, you're £170 better off.

Nellienoonoo

Thanks Pat. Thats all I needed,  for someone to tell me that paying in to a salary sacrife scheme (AVC) is better than a savings account, even if I do get taxed in the end.  This is so complicated to navigate. Thanks 
And thanks to everyone that has given advice 🙂

Dazed_and_C0nfused

One situation you do need to be careful about is where you are on a relatively low income and salary sacrifice contributions don't allow you to avoid paying tax and National Insurance on the amount sacrificed.

In that situation a pension is likely to still be the better option but making contributions using relief at source (RAS) would be better.

But if you are still a taxpayer at the moment after factoring in your salary sacrifice then sticking with the current situation should be fine.

Marcon

Nellienoonoo said:

Wow.  My mind is totally blown by the comments given.  I was never told to leave my work pension but maybe look at putting my additional money into a savings plan as I,m going to get taxed on my salary sacrife scheme

Thanks for clarifying - it wasn't obvious from your post.

The advice is still poor. Put it into a pension and you will get tax relief and also a reduction in NI as pay by salary sacrifice - and you can take some or all % of your AVC (depending on the structure of your particular scheme) tax free.

If you put your money into a savings plan, you won't get tax relief on it or any NI saving. 

Nellienoonoo

Hi All.  The advice I was given was through a friend of a friend and so I didn,t see a financial advisor personally, but it did make me wonder if I was doing the right thing.  I,m sticking with my current set up - carrying on paying extra towards my pension.  Cheers everyone, I feel alot better 🙂👍

Steve_666_

Nellienoonoo said:

Hi All.  The advice I was given was through a friend of a friend and so I didn,t see a financial advisor personally, but it did make me wonder if I was doing the right thing.  I,m sticking with my current set up - carrying on paying extra towards my pension.  Cheers everyone, I feel alot better 🙂👍

Chinese whispers?

Pipthecat

I have no idea if I'll get taxed on savings too?  

If you are saving into an ISA then you don't need to worry about tax. You also have a £500 to £1000 personal savings allowance on any interest outside of an ISA and similar allowance on dividends to play with.

I think most people are questioning the logic that you should save outside of your pension specifically to avoid tax.  Unless there is something unusual going on, your Pension will normally be the more tax efficient option.  You don't pay tax of funds going in to a pension but you do on withdrawal (less any tax free lump sum and personal allowance), where as with an ISA you have paid tax upfront but don't on withdrawal.  With other savings outside of an ISA, you could end up paying tax upfront and on your interest/dividends if they exceed your allowances. 

Nothing wrong with saving into an ISA alongside your pension.  

dancelikeamonkey

I just watched a YouTube video about that very question today which might be of interest (pardon the pun) https://youtu.be/y-4s1wqwQ7k