Is this correct?

Pobby

Say you have savings of £100,000 at age 64 is it correct,assuming you are a basic rate tax payer,you can place that amount in a pension fund and the government will then top it up by a further 20%.Come age 65,you take the 25 % tax free(£30k) and still have £90k to buy an annuity with?

dunstonh

If you have the income to support a 100k pension investment then yes.

Your £100k contribution net is gross up to 125k. You get 25% back next year (lets ignore growth) which is £31,250k.

The remaining £93,750 can then be used for income drawdown or annuity purchase. However that £93,750 that is there has only cost you £68,750.

This is why pensions are better than ISAs as for as income provision is concerned.

£68,750 @ 5% in an ISA tax free = £3437.50 a year
£93,750 @ 5% in drawdown = £4687 a year (if you pay tax on the whole amount then its £3750 a year)
£93750 @ 7% annuity = £6562.50 a year (if taxed fully then £5250 a year).

EdInvestor

dunstonh wrote: »

This is why pensions are better than ISAs as for as income provision is concerned.

Only just and the downside is very considerable.

£68,750 @ 5% in an ISA tax free = £3437.50 a year

....tax free income and you keep control of the 68k which is also tax free

£93,750 @ 5% in drawdown = £4687 a year (if you pay tax on the whole amount then its £3750 a year)

313 p.a. more income, but kiss goodbye forever to the 93k unless you die before age 75 in which case your spouse will get 60,938 back after tax - less than what's in the ISA.

£93750 @ 7% annuity = £6562.50 a year (if taxed fully then £5250 a year).

All the capital has gone in total forever in return for extra income of 1,813pa. But this is fixed for life at that level - there is no growth possible.Very likely the other two methods will outpace this extra income within a few years.

This is now the major problem with the standard annuity given people's much improved lifespan. After 20 years of inflation the purchasing power of the money will be worth only half the starting level.

What's now needed is a product that offers a rising income, not a fixed income.Level annuities don;t guarantee safety in old age - the rather offer guaranteed poverty to all those who don't die young.

dunstonh

....tax free income and you keep control of the 68k which is also tax free

You dont have much control over it. Yes you can spend but then you lose your income.

Also, the pension income may be tax free in part or full depending on other income. I have assumed full tax but for many people it will be part tax.

313 p.a. more income, but kiss goodbye forever to the 93k unless you die before age 75 in which case your spouse will get 60,938 back after tax - less than what's in the ISA.

The annuity is nearly £2000 a year more. You cant take it with you when you die. Some people would prefer to have £2k a more a year. Some need that £2k more a year. Obviously if your priority is to pass money to your children rather than provide the highest income to yourself then pension is less attractive. However, the purpose of a pension is to provide an income in retirement. It fits that purpose.

What's now needed is a product that offers a rising income, not a fixed income.

You mean like an increasing annuity like the ones which are currently available?

meester

dunstonh wrote: »

If you have the income to support a 100k pension investment then yes.

The OP referred to being a basic rate tax payer. You cannot contribute more than 100% of your salary, or £3,600 if your salary is below £3,600.

A basic rate tax payer would earn no more than about £40k/year (allowance of approx £5.5k + basic rate allowance of £35k), so it would NOT be possible for a basic rate tax payer to place £100k in a pension fund and get 20% added to it.

So if you get to 64, NO, you cannot move all your savings into a pension.

The only way to get any more tax relief than you have paid income tax IN THAT TAX YEAR is the aforementioned £3,600, which in the event that your taxable income is very low, you can still get tax relief.

But it won't make a dent in £100k.

meester

dunstonh wrote: »

The annuity is nearly £2000 a year more. You cant take it with you when you die. Some people would prefer to have £2k a more a year. Some need that £2k more a year. Obviously if your priority is to pass money to your children rather than provide the highest income to yourself then pension is less attractive. However, the purpose of a pension is to provide an income in retirement. It fits that purpose.

Who knows what your purpose in retirement will be?

Perhaps you will want to retire to a villa in Bali. You won't need much income, but you will need the capital. You won't be able to do that if your money is all tied up in a pension 'worth' hundreds of thousands of pounds. You would if you had put the money in an ISA.

My main motivation for pension savings is that I resent paying taxes. I don't see it as a particularly attractive or flexible vehicle otherwise.

meester

dunstonh wrote: »

If you have the income to support a 100k pension investment then yes.

Your £100k contribution net is gross up to 125k. You get 25% back next year (lets ignore growth) which is £31,250k.

The remaining £93,750 can then be used for income drawdown or annuity purchase. However that £93,750 that is there has only cost you £68,750.

This is why pensions are better than ISAs as for as income provision is concerned.

£68,750 @ 5% in an ISA tax free = £3437.50 a year
£93,750 @ 5% in drawdown = £4687 a year (if you pay tax on the whole amount then its £3750 a year)
£93750 @ 7% annuity = £6562.50 a year (if taxed fully then £5250 a year).

You're fiddling the figures

£100k in ISA tax-free @ 5% gross = £5k
VS.
£93.75k in drawdown @ 4% net = £3750
£31.25k in cash @ 4% net = £1250

which is the same

the income of a net investment that has been grossed-up on contribution compared with a gross one that has not been, is of course identical.

dunstonh

You're fiddling the figures

£100k in ISA tax-free @ 5% gross = £5k
VS.
£93.75k in drawdown @ 4% net = £3750
£31.25k in cash @ 4% net = £1250

which is the same

the income of a net investment that has been grossed-up on contribution compared with a gross one that has not been, is of course identical.

Its not fiddling at all. it is comparing the net cost to be the same.

The pension money lost for income is £68,750. So, you use the same figure for the ISA.