What is the best choice?

wigglers

Hi not sure if this is the right place but I know you are very knowledgeable here, so I work for a company that offers a £1046 reward at the end of the year, kinda Christmas bonus/reward.
We can have it either as £1046 paid into my account, not sure how much I'd lose with tax and Nat insurance taken off? (I earn about 40k a year) or a £1046 pension payment paid into the workplace pension pot with royal London. Which is the best option? Thanks 😊 

horsewithnoname

you’d keep roughly 70% of it after tax & NIC
if paid into your pension you’d get tax relief so it would be worth about 120%. So unless you really need the money, I’d say pension is a no brainer. 

wigglers

horsewithnoname said:

you’d keep roughly 70% of it after tax & NIC
if paid into your pension you’d get tax relief so it would be worth about 120%. So unless you really need the money, I’d say pension is a no brainer. 

Yeah I was leaning more towards that option tbh 👍 

Albermarle

wigglers said:

horsewithnoname said:

you’d keep roughly 70% of it after tax & NIC
if paid into your pension you’d get tax relief so it would be worth about 120%. So unless you really need the money, I’d say pension is a no brainer. 

Yeah I was leaning more towards that option tbh 👍 

In fact if you have any other extra income that you do not really need today, then increasing pension contributions is often a good idea. To generate a decent pension income and/or be able to retire early, means you need to build up a pretty large pot. Bigger than most people imagine.

wigglers

I've currently got 9k saved for a deposit in a Lisa is it worth just this year having the 1k in my account so I can put it on the Lisa and get 25% on top to boost the deposit pot. Or... Basically how much will I lose potentially by doing that? We really want to be in a position in a year or 2 to get a mortgage. Thanks 

Gary1984

horsewithnoname said:

you’d keep roughly 70% of it after tax & NIC
if paid into your pension you’d get tax relief so it would be worth about 120%. So unless you really need the money, I’d say pension is a no brainer. 

If paid straight into your pension as an employer contribution it would be worth 100% of the £1046, not 120%. Keep in mind you also need to pay tax on it when it's withdrawn in retirement.

So assuming rules and tax rates don't change much by then and you're still a basic rate tax payer the main benefits of contributing to the pension are the NIC saving and the fact you can take 25% of it to tax free. 

Gary1984

wigglers said:

I've currently got 9k saved for a deposit in a Lisa is it worth just this year having the 1k in my account so I can put it on the Lisa and get 25% on top to boost the deposit pot. Or... Basically how much will I lose potentially by doing that? We really want to be in a position in a year or 2 to get a mortgage. Thanks 

Someone will come and tell me if I have my numbers wrong but the LISA wins I think.

LISA:
Income tax = 20% x 1046 = 209
NIC = 8% x 1046 = 84
Total after tax & NIC = 1046 - 209 - 84 = 753
Cash after bonus = 753 x 125% = 941

Pension:
Total in pension = 1046
Tax free lump sum = 25% x 1046 = 261
Tax on remaining pension = (1046 - 261) x 20% = 157
Total withdrawn from pension after tax = 1046 - 157 =889

EDIT: corrected tax rate - thank you to those below.

MallyGirl

Why 25% tax on the crystallised pension - 20% I would understand.
making tax on withdrawal (1046 - 261) x 20% = 157
withdrawal after tax 1046-157 = £889
this is assuming that 0% allowance all used up by other income.
LISA still wins but not by as much

NoMore

You have your numbers wrong but Lisa still wins for basic tax rate payers. You are charging 25% tax on withdrawal from the pension should be 20%. 

There’s a good thread on Reddit that goes through various comparison to show you what is best depending on your tax position at contribution and withdrawal. Unsurprisingly pensions win in most but not all scenarios. Basic rate tax payer in and out is one where Lisa wins

 https://www.reddit.com/r/UKPersonalFinance/s/zQefWevzes

wigglers

So not loosing much having it added on to the wages and depositing it into the Lisa for a deposit? Thanks