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Top up your pension...

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    #41
    Originally posted by SimonMac View Post
    They already are, from 2028 the lower age will be 57
    .... counts on fingers...

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      #42
      Originally posted by d000hg View Post
      That's why I think the performance of your investment IS relevant to the sums. The better your shares perform, the more tax you pay in a pension scenario. So ironically if you make a killing, an ISA could work out better... though you'd probably be happy anyway if that happened!
      Yes, you are right, if you make a real killing then the ISA is better. However you have to make enough of a killing to outweigh the killing already built into the pension option:
      1. 25% withdrawal tax-free
      2. Putative drop from 40% tax now to 20% tax on retirement
      3. Avoidance of NICs for those paying them.

      Personally I reckoned that someone old enough to start drawdown soon would have a short horizon so that was unlikely. But indeed YMMV.

      Comment


        #43
        Originally posted by d000hg View Post
        I think I covered that in my question.

        a)your company puts 10k in to a pension each year
        b)your company pays out 10k (after you already reached your personal allowance) and you put what is left after personal tax into an ISA.

        Clearly less goes into the ISA each year but then in 30 years it is tax-free to take it out... so what is a proper calculation, taking into account company tax liability, personal tax, tax relief, etc, etc.
        In the above scenario you would be better paying the £10k as a personal contribution (assuming <= 100% salary). Tax relief means your personal allowance increases by £12,500, and company can pay an additional dividend of £11,250 before high rate tax is reached. See - there's an extra £1,250 in pocket for you at basic rate.

        As for the question ISA vs. SIPP, I think purely on the maths and based on current rules the SIPP easily wins out in most cases. However there are intangibles - access to capital, future changes to pension rules. For me currently this means maxing out the ISA annual subscription before considering SIPP contributions.

        Comment


          #44
          Some good advice here, as ever depends on individual circs, attitude etc.
          For me:
          Furiously stashing money so when I've had enough and I have enough I can sack this sh*t and play golf.
          Which means:
          Max out ISA using monthly for PCA and to take decision out of my hands/remove timing the market into global tracker.
          PLUS - use SIPP to suck cash out of the company again invested into low cost trackers (ish)
          It's working so far and as the snowball rolls down hill it's starting to feed itself, compound interest style - in short work is pretty much optional now - that's what I call a plan B.

          Comment


            #45
            Originally posted by expat View Post
            Yes, you are right, if you make a real killing then the ISA is better. However you have to make enough of a killing to outweigh the killing already built into the pension option:
            1. 25% withdrawal tax-free
            2. Putative drop from 40% tax now to 20% tax on retirement
            3. Avoidance of NICs for those paying them.

            Personally I reckoned that someone old enough to start drawdown soon would have a short horizon so that was unlikely. But indeed YMMV.
            I take that back, I was right first time: the return on investment is 6 and half-a-dozen as far as choosing pension or ISA is concerned.

            Practical example, assuming basic rate tax:
            A) You have £100 in your company. You take it out and pay £20 tax. You invest the £80 wisely and it soon doubles. You now have £160 and no more tax to pay.
            B) I have £100 in my company. I put it all straight into a SIPP, in the same investment as your ISA. It soon doubles and I have £200 in my SIPP. When I take it out I have to pay £40 tax, leaving me with £160 in my pocket, same as you.

            Comment


              #46
              Originally posted by expat View Post
              I take that back, I was right first time: the return on investment is 6 and half-a-dozen as far as choosing pension or ISA is concerned.

              Practical example, assuming basic rate tax:
              A) You have £100 in your company. You take it out and pay £20 tax. You invest the £80 wisely and it soon doubles. You now have £160 and no more tax to pay.
              B) I have £100 in my company. I put it all straight into a SIPP, in the same investment as your ISA. It soon doubles and I have £200 in my SIPP. When I take it out I have to pay £40 tax, leaving me with £160 in my pocket, same as you.
              Is the advantage in that you're probably a higher rate tax payer now, but when you retire won't be.

              Comment


                #47
                Originally posted by expat View Post
                I take that back, I was right first time: the return on investment is 6 and half-a-dozen as far as choosing pension or ISA is concerned.

                Practical example, assuming basic rate tax:
                A) You have £100 in your company. You take it out and pay £20 tax. You invest the £80 wisely and it soon doubles. You now have £160 and no more tax to pay.
                B) I have £100 in my company. I put it all straight into a SIPP, in the same investment as your ISA. It soon doubles and I have £200 in my SIPP. When I take it out I have to pay £40 tax, leaving me with £160 in my pocket, same as you.
                That assumes that you'll pay the same tax percentage now as in the future - you may be on a higher or lower rate when the pension comes out, whereas you know what it is going to be by taking it out now.

                But where the difference comes is in the reduction in corporation tax that you get by having the company contribute to your pension:

                A) You have £100 in your company. Company pays 20% corporation tax, so you take out £80 and pay £16 tax. You invest the £64 wisely and it soon doubles. You now have £128 and no more tax to pay.

                B) I have £100 in my company. I put it all straight into a SIPP, but pay no corporation tax, so I'm already 20% up on the ISA. It soon doubles and I have £200 in my SIPP. When I take it out I have to pay £40 tax, leaving me with £160 in my pocket, 25% more than the ISA.
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                Comment


                  #48
                  Originally posted by TheFaQQer View Post
                  A) You have £100 in your company. Company pays 20% corporation tax, so you take out £80 and pay £16 tax. You invest the £64 wisely and it soon doubles. You now have £128 and no more tax to pay.

                  B) I have £100 in my company. I put it all straight into a SIPP, but pay no corporation tax, so I'm already 20% up on the ISA. It soon doubles and I have £200 in my SIPP. When I take it out I have to pay £40 tax, leaving me with £160 in my pocket, 25% more than the ISA.
                  What is this £16 tax that you speak of?

                  Comment


                    #49
                    Originally posted by Contreras View Post
                    What is this £16 tax that you speak of?
                    Income tax.

                    A more realistic example would be to be a higher rate tax payer now and a basic rate in the future on your pension, but in the same way that expat assumed the same rates of tax, so did I.
                    Last edited by TheFaQQer; 22 April 2015, 16:21.
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                      #50
                      Originally posted by TheFaQQer View Post
                      Income tax.

                      A more realistic example would be to be a higher rate tax payer now and a basic rate in the future on your pension, but in the same way that expat assumed the same rates of tax, so did I.
                      What is this income tax that you speak of?

                      Seriously though, I agree that SIPP can be more efficient vs. ISA, just not for the reason stated. For one thing there's the tax-free lump sum.

                      expat has it right in the most simplistic terms, which is why pensions are often described as being "tax deferred" rather than "tax efficient". But it's not that simple once you try to factor in everything even just on the numbers, and then there's various intangibles: access to capital, pension rule changes, IR35, ...

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