Reply to: Pensions...

[XLMonkey]

I'd take *some* issue with that. for *most* people it is largely deferred taxation.

It does depend on circumstances, I agree. I guess when I say most, I really mean me! I'm assuming that the average contractor is turning over enough to take dividends up to the higher rate threshold, but choosing not to take dividends that slip them over the limit.

That attached link http://boards.fool.co.uk/Message.asp...whole#10360922 is very useful on pensions, as it gives a much longer explanation of the pros and cons of self invested pension vs. ISA for different circumstances.

[glashIFA@Paramount]

Been reading this thread with interest, as I've been doing a lot of research into this recently.

Some information I got in a prospectus from Fidelity showed the difference between investing in an ISA and in a pension. At retirement time, the pension pot was bigger due to the reclaimed tax - but you then have to pay the tax on this when you take it out (and also be more or less forced to take an annuity which may or may not be good value for money).

To cut a long story short, I'm in favour of putting most of my money into an ISA (stocks and shares), and anything over the £7k annual allowance, I'll stick into my SIPP which I recently took out. I feel this gives me more control over my money, as I've paid all my tax on it (in the ISA anyway), and any future grabs by the IR on pensions won't have the same effect.

Just my two pence worth ... I think the main point is to actually do some saving !!

Ideal situation is to have a "foot in both camps". The underlying investments are the same as is the tax treatment of the investment. ISA-no tax relief going in, tax free coming out. Pension-tax relief going in, taxed coming out.

The rule changes to psns last April means there is no requirement to take an annuity any more, lots more flexibility now about how you take the benefits from the psn - USP, unsecured pension which is effectively the new name for income drawdown, and ASP, alternatively secured pension from age 75 onwards - gives you control over the level of income you want as opposed to the old traditional lifetime income from an annuity.

[xoggoth]

You should look at the charges on that old pension, some are very high. May be worth transferring to a modern scheme.

[Hogan]

Been reading this thread with interest, as I've been doing a lot of research into this recently.

Some information I got in a prospectus from Fidelity showed the difference between investing in an ISA and in a pension. At retirement time, the pension pot was bigger due to the reclaimed tax - but you then have to pay the tax on this when you take it out (and also be more or less forced to take an annuity which may or may not be good value for money).

To cut a long story short, I'm in favour of putting most of my money into an ISA (stocks and shares), and anything over the £7k annual allowance, I'll stick into my SIPP which I recently took out. I feel this gives me more control over my money, as I've paid all my tax on it (in the ISA anyway), and any future grabs by the IR on pensions won't have the same effect.

Just my two pence worth ... I think the main point is to actually do some saving !!

[ASB]

Because,
2. Although you are taxed when you take income from a pension, you are not taxed on income you invest - so for any given investment made with post-tax income you will be between 23 and 40 % better off at the start. The joys of compound interest over long periods of time mean that your eventual gain will be much bigger from a pension than an equivalent investment with taxed income.

I'd take *some* issue with that. for *most* people it is largely deferred taxation.

If you stick a hundred quid into something and then compound it and the fund is taxable the result is exactly the same as if you had invested the net amount - in a tax free individual wrapper - compound it and then suffer the tax.

However, it ain't of course that simple. The 25% tax free lump from a pension will yield a useful bonus - at a cost of flexibility.

There are also cases where the tax situation can work against you - e.g. normal rate taxpayer in work higher rate payer in retirement. The inverse works very much for you.

But most people fall into the basic rate/basic rate scenario the savings end up being much smaller (buit nevertheless useful).

[XLMonkey]

Why are they wrong?

Surely having something that continues to appreciate in value (property) is far better than something Gordo can dig in to when ever he pleases (pension)?

Mailman

Because,
1. Gordo can dig into your property assets just as easily as he can dig into your pension (and, in fact, already does through things like capital gains tax and the the restrictions on allowable expenses to defray against rental income). One class of asset is no safer from the taxman than another.
2. Although you are taxed when you take income from a pension, you are not taxed on income you invest - so for any given investment made with post-tax income you will be between 23 and 40 % better off at the start. The joys of compound interest over long periods of time mean that your eventual gain will be much bigger from a pension than an equivalent investment with taxed income.
3. Although most financial organisations are, in essence, out to shaft you, a managed fund is more likely to cost less and deliver more for a given class of asset (particularly shares) than a personally managed investment in the same asset class. Its just that most people don't place a specific value on their own time, so they don't include the cost of e.g., spending 4 hours a week surfing the investment boards to spot opportunities, in the overall cost of managing their share portfolio.

Now, that's not to say that property investment is a bad idea per se. Lots of people have gotten rich and retired happy on them. Its just that on average, ignoring the tax and other advantages of a pension is likely to make you poorer in your old age.

[Mailman]

There are many who think that you shouldn't bother with a pension and should invest in BTL or other such stuff and rely on that to pay for your care home. I have done economics. They are wrong.

Why are they wrong?

Surely having something that continues to appreciate in value (property) is far better than something Gordo can dig in to when ever he pleases (pension)?

Mailman

[ASB]

Be careful about the level of salary you pay yourself as it could cost you your S2P (Second State Pension - used to be SERPS).

An excellent point. As somebody who traiditionaly paid very small salaries and loads of divis my current accrued S2P after 23 years freelance is 900 quid p.a. Oops.

Having gone back to permiedom last year joining the company pension was a no brainer (they contribute 10%, me 5%). Hopefully this will redress the balance. Of course what I can never know is whether I would have been better paying a higher level of salary and suffering the NI hit. Somehow I doubt it, but have absolutely no idea how to figure it out.

[glashIFA@Paramount]

i assume you are employed by your own company.

If you make a personal contribution you pay the net amount. In other words, £100 per month into a pension will see £78 disappear out of your bank account. Halifax claim the other £22 on your behalf. So, depending on your level of salary, you may have paid tax and NI to get the money into your own bank account as salary. Be careful about the level of salary you pay yourself as it could cost you your S2P (Second State Pension - used to be SERPS).

If the company make the contribution on your behalf then they pay the gross amount, £100 per month, and declare less profit as the contribution comes off the top line, effectively saving 19% Corp Tax. You don't get Corp Tax relief and Income Tax relief on a company contribution.

[Bluebird]

I read the 2 threads and they started off to make sense then seemed to get into more personal situations.

I guess there is not a huge deal difference between the 2, but as you say the simpler of the processes may be the one most worthwhile even if you lose a few quid

[ASB]

yes but most of my money is from dividend.

Therefore isn't it a bit simpler ?

I pay 19% tax on any amount before it goes to pension, then the Gvt pay 22% back as relief.

.

Depends if you are a higher rate taxpayer or not. But in a number of circumstnace (though possibly not yours) you can gain about 4% by making contributions personally where the money came from dividends compared with the company making a gross contribution of the equivalnet amount required to yield the net payment in your hand.

The situation differs when you are a higher rate taxpayer (and possibly a basic rate taxpayer in some circumstances). You have to ensure that you have approrpiate income on which to get the relief. I can't remember all the details because it was a while since I looked at it and I beleive they arte now a bit out of date - so beware.

If you have not reviewed the two threads I posted (which will be very tedious ) you may find it beneficial.

One of the issues is that everybodys "best" position is differentiated by whjere the incom comes from, their tax band and also their attitudes.

[Bluebird]

yes but most of my money is from dividend.

Therefore isn't it a bit simpler ?

I pay 19% tax on any amount before it goes to pension, then the Gvt pay 22% back as relief.

.

[ASB]

Thanks, The FS pension is with a BIG utility, I check fairly regular and it looks ok to me.

My Stakeholder Pension is £100 pcm - how does the relief work ? As I've already paid tax & NI before I make the payment how does that get back to me, or do the Gvt just add it into the fund ?

Can't help but thinking that paying straight out of the Co bank a/c is better for me.

By the way, I pay myself min wage + divies

If you personally put 78 quid net into the pension then the pension get 22 quid back from the government. If you are a higher rate payer then you get the extra relief from you tax return. [Little trick: you automatically get relief on upto 3600 a year even if you don't pay income tax].

Can't be bothered with the exact figures but in order for you to be in this position the numbers are something like:-

Company pays you:-

132 quid of salary
15 quid Er's NI
13 er's
25 paye

100 quid goes in the pension. (your 78 + the 22 relief obtained)

With company contribution:

[Edit: deleted last bit - it was total rubbish]

[Bluebird]

Thanks, The FS pension is with a BIG utility, I check fairly regular and it looks ok to me.

My Stakeholder Pension is £100 pcm - how does the relief work ? As I've already paid tax & NI before I make the payment how does that get back to me, or do the Gvt just add it into the fund ?

Can't help but thinking that paying straight out of the Co bank a/c is better for me.

By the way, I pay myself min wage + divies

[glashIFA@Paramount]

Few things to point out. XLM did his look at psns a couple of yrs ago. Lot of rule changes since then, mainly April '06 which have changed the psns arena substantially.

With regard to company or personal it is all down to the level of salary you pay yourself. ASB is correct, if it doesn't suffer NI (because salary below NI level) then personal contrib gets relief at 22% and you don't have to bother with the paper trail for salary sacrifice. This relief is given at source so you don't have to claim through self assessment. If higher rate tax payer then the potential for an additional 18% relief through returns.

Company contrib is paid gross and will recieve relief against Corp Tax at either 19% or 30% - does not attract NI on emp'er or emp'ee and is not a benefit in kind. Additionally, there is now potentially more scope for the level of contrib an emp'er can make and is not restricted to 100% of salary as long as the contrib is wholly and exclusively for the purpose of the trade (check with local inspector of taxes if in doubt).

Type of psn? Stakeholder an option but a stakeholder is just a personal psn that has the charges capped by legislation (good thing). Stakeholder psn have a restricted range of investments (bad thing). Plenty of other options including a company psn if you want one.

Don't forget to check on the solvency and funding levels of your Final Salary psn - what you want from retirement will determine if it's in the best place.