A naive pension question

Quintain_2

Having only ever been in Company pension schemes, I've been asked a question by my son (who at last is thinking about the future), that I cannot answer.

I know that contributing into a pension scheme is tax advantageous ..... but how, mechanically, does the tax saving take place?

dunstonh

but how, mechanically, does the tax saving take place?

You get tax relief on contributions going in. (i.e. £100pm contribution costs you £80 on the direct debit with the Govt adding £20. Higher rate taxpayer can get a further £20 tax relief).
You get growth free of income tax and capital gains tax.
There is no inheritance tax to pay on death as the fund value is paid outside of the estate to the beneficiary.
There is also the potential to increase working/childrens tax credits as the income used for that allows deductions for pension contributions.

The tax advantages are not what they once were as stocks and share ISAs offer some similar advantages (although not all the same). Indeed, in some cases, ISAs can be better than pensions but that subject is already covered with a sticky at the top of this forum.

CLAPTON

the mechanism for a company scheme is as follows:

say tou earn 2000 per month and pay say 100 per month into your pension
then the tax you are charged is based on 1900 rather than 2000 so you save £20 in tax. So the 100 in your pension only costs you 80 as you have paid 20 less tax.
also of course asssuming your pension fund is opted out of the state second pension your NI contribution are reduced from 11% to 9.4% but you do of course loss the state 2nd pension.

Quintain_2

dunstonh wrote: »

You get tax relief on contributions going in. (i.e. £100pm contribution costs you £80 on the direct debit with the Govt adding £20.

So the tax relief is shown as a higher tax coding?

When? A year in arrears?

CLAPTON

If your pension contribution are taken at source and you are a higher rate payer then the 40% happens automatically as I explained above i.e. the payment is deducted from your salary before tax is worked out.

If you want to give specific figures (i.e fross income, pension payment etc ) i will show you how it happens.

Dick_here

CLAPTON wrote: »

asssuming your pension fund is opted out of the state second pension your NI contribution are reduced from 11% to 9.4% but you do of course loss the state 2nd pension.

So what do you gain by the company scheme being opted out, apart from slightly lower NI ?

EdInvestor

Do bear in mind that you have to pay the tax relief back when you receive the pension in retirement, as it counts as taxable income.Only the 25% lump sum is actually tax free.


Pensions are quite a good deal for higher rate taxpayers as they pocket the additional 20% tax relief.

Unless they have an employer contribution, basic rate taxpayers would be better with a tax free ISA where they maintain access to the money..

CLAPTON

!!!!!!_here wrote: »

So what do you gain by the company scheme being opted out, apart from slightly lower NI ?

As I said, you 'gain' 1.6 % lower NI but lose the second state pension... thats how it is.

Dez-Titute

CLAPTON wrote: »

As I said, you 'gain' 1.6 % lower NI but lose the second state pension... thats how it is.

The company scheme if contracted out guaranteesto pay a pension equal to or better than the SS2 pension.

Dick_here

Dez-Titute wrote: »

The company scheme if contracted out guaranteesto pay a pension equal to or better than the SS2 pension.

As part of the Final Salary scheme, or in addition to it ?

CLAPTON

!!!!!!_here wrote: »

As part of the Final Salary scheme, or in addition to it ?

its included in the scheme and NOT and an additional payment.