OPT OUT/IN work pension

Smudgeismydog

I’ll tackle one part of your message first;

If you retire age 60, then you could access sufficient income from your pension to utilise your personal allowance, until you receive your State Pension. So although, as you noted earlier, after your 25% tax free element has been taken, pension income is regarded as taxable, however, any that falls within your personal allowance would not be taxed.
In practice this looks like this;

£16,760 withdrawal
25% of this is tax free (£4,190)
75% of this is taxable, (£12,570), but if you have no other taxable income, then this utilises your personal allowance so no tax is due

(I should of course say that these figures are current, and I’m sure we all hope the personal allowance will be increased in future years)

Smudgeismydog

At your age, a pension has a very long timeframe, so it would be advisable to invest the money. So instead of earning interest like your current cash savings do, the pension pot would grow over time through the value of the underlying investments increasing. Typically, for someone in their early thirties, you would expect the money to be invested quite heavily in equities. 

Cobbler_tone

This forum is great for people like this.
Unless you are on the absolute bread line and need every single £ to survive, getting your employer contributions is a no brainer, along with the tax/NI savings. Even if you do a few years here and there you might have a pleasant surprise when you really want/need it in later life. The same goes for many company share schemes.

LC2

Smudgeismydog said:

I’ll tackle one part of your message first;

If you retire age 60, then you could access sufficient income from your pension to utilise your personal allowance, until you receive your State Pension. So although, as you noted earlier, after your 25% tax free element has been taken, pension income is regarded as taxable, however, any that falls within your personal allowance would not be taxed.
In practice this looks like this;

£16,760 withdrawal
25% of this is tax free (£4,190)
75% of this is taxable, (£12,570), but if you have no other taxable income, then this utilises your personal allowance so no tax is due

(I should of course say that these figures are current, and I’m sure we all hope the personal allowance will be increased in future years)

This is so helpful thank you. Knowing this now this is definitely the route I’d take withdrawing part tax free each year as I won’t have any other income. Thank you for your help ☺️

QrizB

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

Assuming we're not living in some sort of Mad Max hell world by 2055, and that you choose a middle-of-the-road investment, I'd guess (and it's only a guess) your pot to have increased by somewhere between 50% and 100% by then. So your £64k plus your employer's £21k would be worth between £125k and £170k in current terms.

It could be worth a lot more, or a bit less. We wont know until we get there.

LC2

Thank you this is all clear. 

Just one last question please can someone explain to me ‘You'll get the same 6.25% uplift that's been described above’ what does this mean?

QrizB

LC2 said:

Thank you this is all clear. 

Just one last question please can someone explain to me ‘You'll get the same 6.25% uplift that's been described above’ what does this mean?

That was my comment so I guess I should explaIn!

In the very first reply, it was shown how (even allowing for tax) £100 paid into a pension generally means you get £106.25 out - a 6.25% increase (uplift) for doing nothing else differently.

This isn't unique to employer pensions. If you chose to open a standalone personal pension (in addition to the employer one) you'd still get this 6.25% increase.

LC2

QrizB said:

LC2 said:

Thank you this is all clear. 

Just one last question please can someone explain to me ‘You'll get the same 6.25% uplift that's been described above’ what does this mean?

That was my comment so I guess I should explaIn!

In the very first reply, it was shown how (even allowing for tax) £100 paid into a pension generally means you get £106.25 out - a 6.25% increase (uplift) for doing nothing else differently.

This isn't unique to employer pensions. If you chose to open a standalone personal pension (in addition to the employer one) you'd still get this 6.25% increase.

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

if I paid £200 per month in to my work place pension x 12 months x 27 Years = £64,800

So if the total pot was £85,618, I retire at 60 and for understanding sake (for me) I retired now (pretend I’m 60) how much would be in the pot with the interest rate in this current climate? So sorry I’m just Trying to understand 😂 is this meaning I would have a 6.25% increase on 85k due to interest ? Or am I completely off 

Roger175

LC2 said:

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

LC2

Try to forget everything you previously thought you knew about pensions and start again. You have completely misunderstood how they work. Saving into a pension is far more beneficial to you than almost any other method and to be opting out of a work based pension is almost lunacy (please bear with me, I'm trying to help!)

Firstly, to clarify the bit in bold above, you have mis-understood this. The 6.25% being referred to comes about as a result of this basic calculation:-  For every £80 you pay into your pension, the government will add £20 in tax relief, so you now have £100 in the pension. When you come to draw it, you get 25% tax free and pay tax on the remaining £75, so you will end up with £85 in your pocket for an outlay of £80. That's 6.25% more.

That's before you add in the free 3% which your Employer is going to add, which he's not going to give you otherwise, so it's a total loss to you if you don't opt into the pension.

In addition to the above, the money in your pension will then be invested and over the 27 year timeframe that you are talking about, this will significantly increase the amount concerned, you should have multiple times more at retirement - as an example, £200 per month at say 6% over 27 years will compound to about £160,000 and that's assuming you don't increase that contribution over the years (unlikely) - open a compound interest calculator on-line and have a play.

Furthermore, as others have already said, if you are looking to retire before state pension age, you will be able to withdraw a significant amount without paying tax. I'm early retired and currently taking £16,760 per year from my pension without paying a penny in tax.

Please, please try to get a better understanding of things and opt back into that work based pension ASAP, your future self will thank you for it.

QrizB

LC2 said:

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

if I paid £200 per month in to my work place pension x 12 months x 27 Years = £64,800

Let's treat this as though it was a savings account that pays out "inflation plus 2%" which isn't an unreasonable planning assumption.

You're paying in £200 a month (which would be woryh £160 if you took it now and had to pay tax on it) and your employer is paying in £64 a month.

Using the calculator here:

https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator

... after 30 years you'll have about £130k. Of that, £32.5k will be tax-free and £97.5k will be taxable. At £20% tax, £19.5k in tax and £78k for you.

So you're getting £32.5k + £78k = £110.5k back.

If you'd invested that £160 a month at 2% for 30 years, the same calculator says you'd have about £64k.

Using the pension and getting the employer contributions has made 60-year-old you £46.5k better off.

Compound interest, the eighth wonder of the world.

https://quoteinvestigator.com/2019/09/09/interest/