Pensions or savings?

[expat]

Saving for retirement:
If I save in a pension, 75% of it can only be taken as an annuity. These are financial products sold by insurance companies to a captive market, and priced accordingly; i.e. a good deal for the broker rather than the paying customer.
If I save in ISAs instead, the tax advantage comes later; with the obvious possibility that the Chancellor might remove that advantage before I get to it. At least with a pension you have already taken the tax break.
Which is better? Or is there a better plan? (Please do not hijack thread to discuss housing market).

[xoggoth]

Currently a pension pays about 6% on £100k. That is likely to go up a bit as interest rates rise, but increasing longevity also drives it down. 6% may sound crap, but could you get a better return in something completely safe elsewhere? The downside is that when you snuff it (although a 10 year guarantee costs very little) they pocket the lot. First thing to ask then is do you want to provide for family afterwards?

[rootsnall]

Saving for retirement:
If I save in a pension, 75% of it can only be taken as an annuity. These are financial products sold by insurance companies to a captive market, and priced accordingly; i.e. a good deal for the broker rather than the paying customer.
If I save in ISAs instead, the tax advantage comes later; with the obvious possibility that the Chancellor might remove that advantage before I get to it. At least with a pension you have already taken the tax break.
Which is better? Or is there a better plan? (Please do not hijack thread to discuss housing market).

A possible plus for penisons is the new A Day pension rules in theory mean you aren't forced to take out an annuity and can 'drawdown' an agreed percentage of your pension pot from age 55. Its a bit complicated but I think the drawdown is currently in the 5-7% range per year which will be as good or better than the annuity rate. You would still own the pot and on snuffing it pay 35% tax before it passes to your dependents. However the taxman is backtracking somewhat at the moment and saying you may be forced to take an annuity at 75 as in the pre A Day regime. You do know you still have to pay tax on anything you receive via an annuity !? Obviously the theory is it will be at a lower tax rate than when you make the contributions.

As with PEPS and ISAs the taxman can change the rules on you at any time and if the press is to be believed they will be getting more desperate as we have more and more oldies and a good chunk of them relying on the state in old age.

[Swiss Tony]

Pensions due to Tax Relief

Hi expat,

I work as a Financial Consultant and while I do not want this post to be taken as spam, from my clients perspective pensions are still very attractive for a number of reasons, the main reason in my mind being:

The government will give you a large amount of tax relief. If you are a high rate tax payer, as I assume most IT contractors will fall into this bracket, the Government will put in 40% of what you do, hence a payment of £60 into your pension will result in the Gvt paying £40 and so forth.

Obviously this does differ between person to person depending on their tax status but the relief is always there.

ISA’s are of course an excellent way of maintaining short to medium term savings, though pensions still come out on top unless you have hit an age where it is a toss up between them. (the closer you are to retirement the more one needs to put into a pension etc, sometimes its not worth the effort)

With regards to the broker you will need someone who keeps their finger on the pulse. 5 years ago out of the top 200 pension funds, only 4 are in the top 200 today. Hence you will need a flexible pension provider who is able to review funds and change them accordingly.

You can get a Self Invested Pension, though it is really only viable to do this once your pension pot reaches above £30,000. Since April this year there have been a number of changes hence the ability to put some different investments into a pension.

Also with regards to taxation, you do still have a tax band (which does change yearly) that you will have to pay if your pot does reach a certain size, though it is well above the 1 million mark currently.

Didn’t want to get into heavy detail of the issue, but I hope this helps.

[expat]

You do know you still have to pay tax on anything you receive via an annuity !? Obviously the theory is it will be at a lower tax rate than when you make the contributions.

As with PEPS and ISAs the taxman can change the rules on you at any time and if the press is to be believed they will be getting more desperate as we have more and more oldies and a good chunk of them relying on the state in old age.

Yes: expected lower tax rate in the future is a major attraction of a pension: otherwise, it's
ISAs are tax-free now, taxed later;
pensions are tax-free now, taxed later. Swings and roundabouts.

Except that if you put money in ISAs, you pay tax now, but you are assured that gain and dividends or interest will not be taxed later, i.e. you are depending on future governments keeping past governments' promises.

Indded I expect future Gordos to get more and more desperate, as more and more wrinklies with no savings sell their votes to those who will find money for them.

[expat]

Hi expat,

I work as a Financial Consultant and while I do not want this post to be taken as spam, from my clients perspective pensions are still very attractive for a number of reasons, the main reason in my mind being:

The government will give you a large amount of tax relief. If you are a high rate tax payer, as I assume most IT contractors will fall into this bracket, the Government will put in 40% of what you do, hence a payment of £60 into your pension will result in the Gvt paying £40 and so forth.

Obviously this does differ between person to person depending on their tax status but the relief is always there.

ISA’s are of course an excellent way of maintaining short to medium term savings, though pensions still come out on top unless you have hit an age where it is a toss up between them. (the closer you are to retirement the more one needs to put into a pension etc, sometimes its not worth the effort)

Hello,

1. Don't worry, it's not Spam if you don't even tell me how I can pay you money
2. There are indeed 2 normal tax positions to think of:
a) expected lower tax band when retired than when working.
b) expected same tax band when retired as when working.
But there is another aspect to a contractor's pension:
c) the possibility of one's Ltd Co paying the pension contributions.

The attraction of not now paying employer's or employee's NICs and not paying 40% tax, in return for later paying 22% tax, is a substantial one.

I am not sure, however, that the choice between Pension and ISAs ever changes with age: yes, "the closer you are to retirement the more one needs to put into a pension" but equally the more one needs to put into any savings vehicle. As for a SIPP not being worthwhile until you have 30k or so, the same goes for retirement savings as a whole.

The real choice IMHO depends on:
- returns
- taxation
- flexibility/choice/control
- risk (including risk of tax-rule change)

Pensions seem to win on taxation, and on risk (less tax risk, you take the tax break today).
ISAs and other vehicles seem to win on choice (you don't have to buy an annuity; more generally, you haven't made a deal with the Govt that this is your pension) and on returns (more choice of investments, and crucially lower charges if you do it right).

I hate giving up control to the Chancellor.

[ASB]

The government will give you a large amount of tax relief. If you are a high rate tax payer, as I assume most IT contractors will fall into this bracket, the Government will put in 40% of what you do, hence a payment of £60 into your pension will result in the Gvt paying £40 and so forth.

Perhaps you can clear something up for me re tax relief??

Place 60 p after tax in something yielding say 5% for 40 years. Pop it in a freindly tax wrapper and the pot is tax free. [Use this pot to buy a voluntary annuity and this would give a better yield than a compulsory purchase one too due to the taxation treatment of the capital return].

Place 100 before tax in the same then pay 40% on the pot.

I rather think these yield the same results. Thus tax tax relief is a bit of a red herring in a number of ways.

However I will happily concede that the advantages are not by definition illusory if:-

- You are likely to be 40% tax payer during work and base rate in retimement (god help you in the unlikely event it goes the other way).
- The 25% cash sum clouds it
- You can make company rather than personal contributions so the NI releif also kicks in

For most people making thier own contributions out of net incomes a pension only really amounts to tax deferment.

I am not advocating don't do pensions because of this, only that the apparent tax advantages are not necessarily a good reason to do it.

[IR35 Avoider]

Very off the cuff answer:-

I think I get something like 48% tax relief on the first few tens of thousands of pounds my company puts into a pension each year.

As long as I keep my pension pot below (very approximately) £1 million, tax on the way out will be 75%*22% = 16.5%.

It's quite a big difference.

(£1 million yields £250K tax free lump sum plus 750K into an annuity paying 5% per year yields £37K per year income.)

[ASB]

Very off the cuff answer:-

I think I get something like 48% tax relief on the first few tens of thousands of pounds my company puts into a pension each year.

As long as I keep my pension pot below (very approximately) £1 million, tax on the way out will be 75%*22% = 16.5%.

It's quite a big difference.

(£1 million yields £250K tax free lump sum plus 750K into an annuity paying 5% per year yields £37K per year income.)

Agree, but that wasn't the point. This was:-

Normal person. One off payment of 6k into an ISA wrapper:-

6,000 @ 1.05 ^^ 20 = 15999

Normal Person. Same payment into pension including relief

10,000 @ 1.05 ^^ 20 = 26532

Now I can't find annuity rate but the 15999 is all tax free. Or it could be used to buy an annuity at approx 6% of which only a little would be taxed, giving a bteer net return. Equally it could be put into an immediate vesting arrangement to get relief + 25% tax free cash plus tax relief on the contribution.

But, lets just buy a volunatry annuity yielding 6% of which only the income is taxed. This yields 960 - less very little tax because most of the return is the initial capital.

With the 26532 about the only thing you can do (conveniently ignoring the 25%) is to buy a compulsory annuity. This will yield approx 5%. But it's all taxable and nil rate band is used by the state pension. This 1326.50 - but then suffers tax on it all, so we get a net yied of just over 1000.

If you were a basic rate taxpayer then the fund would have been smaller and you would be behind the game.

Pensions are often sold on the tax benefits. But for most people these are largely neutral (unless the qualified guy can adequate refute my possibly incorrect analysis).

From a point of view of your average contractor strategic use of company income to make gross contributions into a pension can yield substantial savings - even allowing for the fact that the output is taxed.

Edit: I am perfectly prepared to accept this may be wrong. However I have never had anybody able to refute it. Using the alleged tax savings to sell a pension to individuals making contributions out of their net incomes is a disgrace. Unfortunalte all discussions I have had with people who should really know just cause this topic to be studiously avoided. This make me suspect I am not wrong.

There are lots of reasons for planning round a formal pension vehicle, especially if reasonably high contribution levels are required - but for most poeple I do not believe tax treatment is one of them.

[bobhope]

One point to take into consideration re: pension vs. ISAs, is the range of allowed investments.

You can put pretty much anything into pensions including short term bonds, AIM stocks, near cash equivalent instruments, etc.

All of which are restricted in ISAs.