OPT OUT/IN work pension

LC2

Hi

I'm hoping for some financial advise and help making decisions.. 

I'm 33 years old, no mortgage, I can't have children so it's just me and my lovely husband. I have no personal debts, student loans etc.. 

My wage is £25,701.98 per year currently and I work full time. I haven't paid in to my work pension for quite some time due to moving house etc, & never opted back in. I am waiting for an appointment with a financial advisor but hoping for more insight before I go there

One of the biggest reasons I haven't paid back in to a pot is because 1) i have minimal understanding of it all & 2) the fact of paying tax on my own pension pot when it comes to withdrawing makes me mad

As stated i earn £25,701.98, I have calculated this as if i were to retire by 60 for easiness.. 

My work place pays 3% only of my net wage in = £771.06 year x 27 years = £20,818.62

If i were to make the payment 5% of my net wage= £1285.09 year x 27 years= £34,697.43  ( I wouldn't plan on paying more than 5% of my wage in to a work place pension as this would increase the amount i'd be taken on in the end!!)

£55,516.05 in my pension pot

Which i understand 25% is tax free, so I would be able to withdraw £13879 tax free in one lump sum

That leaves £41,637.03 in there which I would pay a 20% tax is that correct? (i pay this now i believe) If so £41,637 - 20% tax = £8,327.40 to the tax man - leaving me with £33,310 in the pot. 

I know i'll get a lot of responses saying, the contribution by the company is free money which I totally understand but this is a personal decision, if i end up paying 8.3k in tax ! 

I know i currently pay more on tax from my wage as i don't pay in to my pension, but essentially income tax is just deferred if I paid in to my pension. You don't pay now, but you pay on withdrawal.

I save £800-1k a month in to bonds / savings accounts currently and will do so until i turn 60 (£259,000 roughly) on top of what I have already

What i was planning on doing rather than paying tax on a work pension was to open up an account and pay £200 each month x 12 = £2400 x 27 years = £64,800 which gives me more money back and i wouldn't be paying any tax on my own money!!
with the freedom of doing this I can invest/ move my money around to get a return and not having to wait until I’m 55.

As i've stated I have no knowledge of tax etc... Please let me know of any important info I need to be aware of

Another thing I will be looking in to when i see the financial advisor is where to invest my money etc, any advise or tips on where to invest / save money also would be appreciated x 

Dazed_and_C0nfused

LC2 said:

Hi

I'm hoping for some financial advise and help making decisions.. 

I'm 33 years old, no mortgage, I can't have children so it's just me and my lovely husband. I have no personal debts, student loans etc.. 

My wage is £25,701.98 per year currently and I work full time. I haven't paid in to my work pension for quite some time due to moving house etc, & never opted back in. I am waiting for an appointment with a financial advisor but hoping for more insight before I go there

One of the biggest reasons I haven't paid back in to a pot is because 1) i have minimal understanding of it all & 2) the fact of paying tax on my own pension pot when it comes to withdrawing makes me mad

As stated i earn £25,701.98, I have calculated this as if i were to retire by 60 for easiness.. 

My work place pays 3% only of my net wage in = £771.06 year x 27 years = £20,818.62

If i were to make the payment 5% of my net wage= £1285.09 year x 27 years= £34,697.43  ( I wouldn't plan on paying more than 5% of my wage in to a work place pension as this would increase the amount i'd be taken on in the end!!)

£55,516.05 in my pension pot

Which i understand 25% is tax free, so I would be able to withdraw £13879 tax free in one lump sum

That leaves £41,637.03 in there which I would pay a 20% tax is that correct? (i pay this now i believe) If so £41,637 - 20% tax = £8,327.40 to the tax man - leaving me with £33,310 in the pot. 

I know i'll get a lot of responses saying, the contribution by the company is free money which I totally understand but this is a personal decision, if i end up paying 8.3k in tax ! 

I know i currently pay more on tax from my wage as i don't pay in to my pension, but essentially income tax is just deferred if I paid in to my pension. You don't pay now, but you pay on withdrawal.

I save £800-1k a month in to bonds / savings accounts currently and will do so until i turn 60 (£259,000 roughly) on top of what I have already

What i was planning on doing rather than paying tax on a work pension was to open up an account and pay £200 each month x 12 = £2400 x 27 years = £64,800 which gives me more money back and i wouldn't be paying any tax on my own money!!
with the freedom of doing this I can invest/ move my money around to get a return and not having to wait until I’m 55.

As i've stated I have no knowledge of tax etc... Please let me know of any important info I need to be aware of

Another thing I will be looking in to when i see the financial advisor is where to invest my money etc, any advise or tips on where to invest / save money also would be appreciated x 

You are completely overlooking the tax relief on the pension

A lot of pension contributions have 25% added, so £100 from you becomes £125 in the pension.

When you take that £125 out 25% is tax free and 75% is taxable income.  The tax payable will depend on what other taxable income you have in the tax year you take money out.  Could be £0 tax.

Your £100 often ends up as £106.25.  

If you do the matches you will how much better off you are with a pension.

Marcon

LC2 said:

Hi

I'm hoping for some financial advise and help making decisions.. 

I'm 33 years old, no mortgage, I can't have children so it's just me and my lovely husband. I have no personal debts, student loans etc.. 

My wage is £25,701.98 per year currently and I work full time. I haven't paid in to my work pension for quite some time due to moving house etc, & never opted back in. I am waiting for an appointment with a financial advisor but hoping for more insight before I go there

One of the biggest reasons I haven't paid back in to a pot is because 1) i have minimal understanding of it all & 2) the fact of paying tax on my own pension pot when it comes to withdrawing makes me mad

As stated i earn £25,701.98, I have calculated this as if i were to retire by 60 for easiness.. 

My work place pays 3% only of my net wage in = £771.06 year x 27 years = £20,818.62

If i were to make the payment 5% of my net wage= £1285.09 year x 27 years= £34,697.43  ( I wouldn't plan on paying more than 5% of my wage in to a work place pension as this would increase the amount i'd be taken on in the end!!)

£55,516.05 in my pension pot

Which i understand 25% is tax free, so I would be able to withdraw £13879 tax free in one lump sum

That leaves £41,637.03 in there which I would pay a 20% tax is that correct? (i pay this now i believe) If so £41,637 - 20% tax = £8,327.40 to the tax man - leaving me with £33,310 in the pot. 

I know i'll get a lot of responses saying, the contribution by the company is free money which I totally understand but this is a personal decision, if i end up paying 8.3k in tax ! 

I know i currently pay more on tax from my wage as i don't pay in to my pension, but essentially income tax is just deferred if I paid in to my pension. You don't pay now, but you pay on withdrawal.

I save £800-1k a month in to bonds / savings accounts currently and will do so until i turn 60 (£259,000 roughly) on top of what I have already

What i was planning on doing rather than paying tax on a work pension was to open up an account and pay £200 each month x 12 = £2400 x 27 years = £64,800 which gives me more money back and i wouldn't be paying any tax on my own money!!
with the freedom of doing this I can invest/ move my money around to get a return and not having to wait until I’m 55.

As i've stated I have no knowledge of tax etc... Please let me know of any important info I need to be aware of

Another thing I will be looking in to when i see the financial advisor is where to invest my money etc, any advise or tips on where to invest / save money also would be appreciated x 

If you don't join your employer's scheme you are giving up 'free money' (the employer's contribution - which is related to gross salary, not net) and forgoing tax relief on your own contributions - the provider adds a tax relief top up at basic rate, direct to your 'pot' - and you'd get an NI saving if you are able to pay by salary sacrifice. When you withdraw the loot from your pension, 25% is tax free.

That beats any savings account you open yourself by a country mile.

You have completely ignored the investment growth you'd get on your pension pot, and if you start with a bigger number (ie including tax relief and employer contributions) you get bigger growth.

Not sure why you think you need financial advice. Some basic reading eg https://www.moneyhelper.org.uk/en/pensions-and-retirement would make your much better informed, and therefore much more confident, to take the sensible step of joining your employer's pension scheme forthwith...

molerat

Say your contribution is £100 at 5%.  Your employer will pay in another £60 (the free money you are turning down) making £160 in your pot at a cost to you of £80.  On the way out you will get £40 tax free and pay £24 tax on the remainder receiving £136 in your pocket for that £80 initial outlay.  Put £100 into an ISA or other investment vehicle at a cost of £100 and get £100 out tax free.  So which is higher £136 or £100 ?  This of course ignores any investment gains which can be exactly the same on either platform but you start off with 60% more in the pension.

YellowCarBlueCar

You also need to take account of your annual allowance when withdrawing your pension.

So with your figures - you have around £55K in your pot at 60.  It will be a lot more as pointed out above with investment growth, but ignoring that...

At 60, you'd be able to withdraw 25% tax free (not always the best idea unless you need it immediately) - which would be £13,750, leaving £41,250 in the pot.
When you withdraw that it will be at your marginal tax rate.  Unless you have other income between age 60 and your state pension age, then you'll have £12,750 tax free allowance every year - so could withdraw that amount each year before paying any tax on it.

Whatever reasons you may have not to pay into a pension (e.g. affordability), tax efficiency definitely isn't a reason not to pay in.

QrizB

As well as everything that's already been said:

I save £800-1k a month in to bonds / savings accounts currently and will do so until i turn 60 (£259,000 roughly) on top of what I have already

Ifsome or all of these savings are earmarked for your retirement, you'd probably be better off saving (ideally investing) them inside a pension rather than a normal savings account. You'll get the same 6.25% uplift that's been described above , plus any interest/growth will be sheltered from taxes.

dunstonh

One of the biggest reasons I haven't paid back in to a pot is because 1) i have minimal understanding of it all & 2) the fact of paying tax on my own pension pot when it comes to withdrawing makes me mad

Flawed thinking.
By opting out you are paying NI, paying income tax at 20% and throwing away the free money the employer puts in.
The taxation on pensions when you draw them suffer no NI and you pay an effective rate of 15% income tax (25% tax free, 75% at basic rate).  

So, you are effectively getting mad at the pension having less tax than your employed income and have decided to pay more tax now.   

Pensions are also free of dividend tax, tax on interest and capital gains tax in the growth stage.

Another thing I will be looking in to when i see the financial advisor is where to invest my money etc, any advise or tips on where to invest / save money also would be appreciated x

As you have opted out of the occupational pension, the financial adviser will not be able to give you advice unless they have pension opt out permissions (about 1 in 10 only have that).    All of them will tell you to opt in as no alternative will beat the workplace pension due to the free money.

I save £800-1k a month in to bonds / savings accounts currently and will do so until i turn 60 (£259,000 roughly) on top of what I have already

All of these will give you less money than the pension.   So, why are you doing them?

DRS1

I have to admit I really dislike the "free money" mantra for employer contributions.  It is not free money; you are working for it.  It is part of your pay packet (just paid into a pension instead of your current account).  So why are you saying to your employer "Oh no I am quite happy for you to keep that bit"?  

HappyHarry

DRS1 said:

I have to admit I really dislike the "free money" mantra for employer contributions.  It is not free money; you are working for it.  It is part of your pay packet (just paid into a pension instead of your current account).  So why are you saying to your employer "Oh no I am quite happy for you to keep that bit"?  

Good approach! 

Marcon

DRS1 said:

I have to admit I really dislike the "free money" mantra for employer contributions.  It is not free money; you are working for it.  It is part of your pay packet (just paid into a pension instead of your current account).  So why are you saying to your employer "Oh no I am quite happy for you to keep that bit"?  

Good thinking! So...OP, why are you donating part of your pay package to your employer?

LC2

I’m not saying I’m happy for them to keep their bit, hence my forum asking for advise. As I’ve stated I have no idea when it comes to pensions, tax free allowance etc…

but reading all of your replies it all makes more sense now.

So I’d be better paying £200 in to my pension (just for instance as a figure for now) each month & my employer paying the 3% in too. 

I do aim to retire at 60 & won’t withdraw any of the pension until then. I didn’t realise that this pot would gain interest.. ‘You'll get the same 6.25% uplift that's been described above’ is this what this means? 

on another website I had a reply of as I’d be retiring below the state pension wage I’d be able to withdraw some money from my work pension each year but withdraw below the tax free allowance so isn't being taxed - that I’ll have £12,750 tax free allowance every year - so could withdraw that amount each year is that right? 

So that would make my pension pot 
£200x12x27 =£64,800.00 

work place pays 3% only of my net wage in = £771.06 year x 27 years = £20,818.62

So by 60 that would make my pot £85,618. - how much interest would this roughly earn? Or am I miss understanding?

Thank you for all of your replies it’s been helpful x