Does pension tax relief & employer contribution really benefit me?

webangel

Hi, pensions-wise I have contributed approx. £20k to mine, with an additional £5k being added for tax relief, and £6k by my employer. Pot worth approx 40K in value apparently. My question is, don't I just get penalised anyway by them taxing the tax back off my saved amount? In my workings out, if I can only take out 25% of the value tax free (i.e. about £10K currently) and the rest is subject to tax if I wanted to withdraw it, then the remaining £30K I would have to pay £7,500 tax on (25%?), so am left with £22,500. Add the original £10K of tax free income then that only works out as £32,500. So, I could have just saved up my original £20k contribution in a savings account for 15 years and had full access to it whenever I wanted (not waited until the govt tell me I am allowed to have it)? Unless I have missed something!

lisyloo

You've missed your personal allowance.
So you currently get £12,570 annually on which you pay 0% tax (in addition to the 25% tax free lump sum).
So if you (for example) spread the £30K over 3 years then you'd pay no tax at all (if you had no other income).
If you are going to use your personal allowance for other income e.g. state pension or another job, then you can't use it twice.

Also are you paying by salary sacrifice? as you may have missed the fact that your aren't paying national insurance.

SVaz

Basic rate income tax is 20%.

You would have to have a spectacular savings rate to make up for the loss of employer conts and tax relief over the years,  you are literally refusing free money. 
If you can retire early you can get almost £17000 a year out before any tax is due.
Unless they hike income tax up to over 25%,  you will always be better off with a pension.

Aretnap

Other than the 25% tax-free portion, withdrawals are taxed at your marginal rate - which is 20% for basic rate taxpayers (ie most pensioners), not 25%. So you'd pay £6K of tax on £30K, not £7.5K. Possibly less if you'd stopped working and weren't using your full personal allowance.

That means your £20K of contributions net you at least £34K after tax when you withdraw it - an immediate uplift of 70%. You can't get that by putting it in the bank. 

True you would earn interest putting it in a bank account for 15 years, but you also earn interest, or rather investment returns in a pension, which in the long term are likely to beat the interest in a savings account by a significant margin. And unlike a savings account, the returns within a pension are not taxed.

It's true that you can't access money in a pension whenever you like - but that seems like a reasonable quid pro quo for the employer contributions and the generous tax treatment. You are going to need some money when you stop working, and a pension is by some distance the most efficient way to save for that particular purpose, particularly if your employer matches your contributions.

hugheskevi

For your contributions in excess of what is required to obtain the maximum employer contribution, you could instead invest them in a Stock and Shares ISA, investing in whatever the pension would be invested in. You could then move the funds into a pension later in life (assuming sufficient qualifying earnings available for tax relief).

That approach gives the same outcome assuming the same incentives are available both now and in the future, eg, salary sacrifice, marginal rate the same, etc. It also means you have access to the funds if you want them, but once in a pension they cannot be accessed.

LHW99

By the time you have calculated the 25% tax free, and tax on the 75%, it is worth the equivalent of ~6% interest on the amount that goes in. Then your original payment in grows tax-free, just like in an ISA (although not so easily accessible because of the age restriction), and you get the 25% of that growth tax-free in the end too (up to the allowed total of ~£268k)

webangel

Thanks for your replies everyone. I don't get to retire for about 20 years but I keep seeing the age pushed up and up and with the over 55 thing being increased to 57 etc.

I think what is really bothering me, as an underlying thought is the "will I ever get to access this money?" question. I've seen quite a few people die before they have even had a chance to retire (so they've just worked their whole lives) and it just seems like pie in the sky - saving money but never getting to enjoy it while you're fit & healthy and then getting taxed if you try to enjoy it too much! 

Marcon

webangel said:

Thanks for your replies everyone. I don't get to retire for about 20 years but I keep seeing the age pushed up and up and with the over 55 thing being increased to 57 etc.

I think what is really bothering me, as an underlying thought is the "will I ever get to access this money?" question. I've seen quite a few people die before they have even had a chance to retire (so they've just worked their whole lives) and it just seems like pie in the sky - saving money but never getting to enjoy it while you're fit & healthy and then getting taxed if you try to enjoy it too much! 

That's rather akin to saying that you won't bother to insure your home or its contents because you'll never be the victim of a fire, burglary, flood or whatever and will therefore have paid an insurance premium needlessly...

NoMore

Its all about balance, you shouldn't ignore pensions altogether to live for today, equally you shouldn't sacrifice too much for your future.

If you do get to pension age, and statistically your more likely to than not, Pensions are the most tax efficient way of saving for that time.

eastcorkram

@webangel

If you die before you access any of it, it's not going to bother you. 

jimjames

webangel said:

Unless I have missed something!

You've definitely missed something when you're getting free money from your employer!