A naive pension question

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.

Sorry to be 'thick' but how exactly does this £20 get into the private pension fund?

Is it through a higher tax coding?

Or has the Pension/Insurance Company the mechanics to collect it automatically from Government and allocate it to the individual pension pot, with the fund owner doing nothing?

Or does the Chancellor pop round on his bike each month with a £20 note?

I did say it was a naive question.

dunstonh

Sorry to be 'thick' but how exactly does this £20 get into the private pension fund?

The insurance company puts £100 in straight away and gets the £20 back from the Govt. The insurance company does all the work for non and basic rate taxpayers. Higher rate taxpayers have to declare it under self assessment to get higher rate relief.

The working/childrens tax credits enhancements are handled via the return you complete annually by giving them your income minus pension contributions.

nw_man

Quintain wrote: »

Sorry to be 'thick' but how exactly does this £20 get into the private pension fund?



has the Pension/Insurance Company the mechanics to collect it automatically from Government and allocate it to the individual pension pot, with the fund owner doing nothing?

Short answer to that is yes.

CLAPTON

there is some confusion here as there are two diffferent ways of paying into a pension

a. if you are an employee of most (and in particular largish ) companies your pension payment is made BEFORE tax is deducted so if you pay tax at 20% each £100 contribution to the pension fund only costs you £80 (i.e. if you didn't make the pension payment you would have paid 20 in tax);
similarly if you are a 40% payer then each £100 to the pension company only costs you £60 because if you hadn't made it then you would have paid £40 tax.
In this case there is nothing to claim back from the tax man as it all happens BECAUSE THE MONEY IS PAID BEFORE ITS TAXED.

and

b. the situation that dunstonh is referring to is quite different. Here you are making a payment to a personal type pension scheme out of TAXED income.
In this case if you contribute £80 to the scheme the pension provider will reclaim 20 from the HMRC. If you are 40% payer then you fill in a self assessment form and claim the extra £20 as a refund... so your £100 has only cost you £60



so the majority of people working for large companies fall in the first category and self employed, and people making the own pension provision fall in the second cataegory

Quintain_2

CLAPTON wrote: »

there is some confusion here as there are two diffferent ways of paying into a pension

a. if you are an employee of most (and in particular largish ) companies your pension payment is made BEFORE tax is deducted so if you pay tax at 20% each £100 contribution to the pension fund only costs you £80 (i.e. if you didn't make the pension payment you would have paid 20 in tax);
similarly if you are a 40% payer then each £100 to the pension company only costs you £60 because if you hadn't made it then you would have paid £40 tax.
In this case there is nothing to claim back from the tax man as it all happens BECAUSE THE MONEY IS PAID BEFORE ITS TAXED.

and

b. the situation that dunstonh is referring to is quite different. Here you are making a payment to a personal type pension scheme out of TAXED income.
In this case if you contribute £80 to the scheme the pension provider will reclaim 20 from the HMRC. If you are 40% payer then you fill in a self assessment form and claim the extra £20 as a refund... so your £100 has only cost you £60



so the majority of people working for large companies fall in the first category and self employed, and people making the own pension provision fall in the second cataegory

It's the second category that holds my interest. I fully understand how a Company Pension scheme works, having been a member for many years ... but I have no experience of a personal scheme.

Thanks to everyone who contributed .... I shall try and interest my son now.

An ISA will be no good for him. Money doesn't even get a chance to burn a hole in his pocket, it's gone long before that. And he's 38 years old!

dunstonh

And he's 38 years old!

oh dear. Get him on the pensions as soon as possible. Someone starting at 18 has 20 years of contributions over him so he has some catching up. Ideally, heading into your 40s you want to have a fund of at least £50,000.

Remind him that the basic state pension is little over £4700 a year and even if he gets benefits to help, that will only take him into the £6000 range.

EdInvestor

dunstonh wrote: »

Remind him that the basic state pension is little over £4700 a year and even if he gets benefits to help, that will only take him into the £6000 range.

Of course if he's never had a pension and has always worked, he will be contracted in to SERPS/S2P and may thus be likely to get more than double the basic as a state pension - 10k or more would be quite possible (and that would be tax free under the new age allowances scheduled to come in soon.) If he has a partner in a similar position they may be on target for a household retirement income of 20k tax free and index linked for inflation - perhaps a little better than expected?

Worth checking his forecast at https://www.thepensionservice.gov.uk though they will not be issuing precise figures until after the computers are updated for the new rules from October. But he could check how many years he has in the kitty.

You would need to save up a fund of around 150k to buy equivalent income to just the basic state pension (c4,700 pa) now , so expensive are annuities these days.

johng_uk

dunstonh wrote: »

oh dear. Get him on the pensions as soon as possible. Someone starting at 18 has 20 years of contributions over him so he has some catching up. Ideally, heading into your 40s you want to have a fund of at least £50,000.

Remind him that the basic state pension is little over £4700 a year and even if he gets benefits to help, that will only take him into the £6000 range.

dunstonh/All,

In a private pension, what is the maximum contribution an individual can make annually? Is it based on actual earnings or based on which pension band you are in?

dunstonh

100% of earned income. The old contribution bands of gone.

johng_uk

dunstonh wrote: »

100% of earned income. The old contribution bands of gone.

Many thanks!!