20% tax payer - pension or S&S ISA?
Discussion
I've been paying 100% of my salary into my pension for the last couple of years. However, I can't help but feeling that in the future tax rates will increase significantly and that could be even worse if National Insurance (NI) is replaced with additional income tax.
With this in mind, and based on the fact that I am a 20% tax payer, it is currently worth 6.25% for me to pay into my pension instead of using my net pay to invest in mine and my missus' S&S ISAs. If, as I suspect, tax rates increase significantly over the coming years, I think that the 6.25% gain could easily be eroded and even become negative. 94% of my pension contributions are AVCs that are not salary sacrificed, so don't save on NI.
Does anyone else think that it in my position it could be worthwhile changing from pension contributions to S&S ISAs? Obviously it makes sense for 40% tax payers to continue with pension contributions but it wouldn't surprise me if that benefit is removed in the future leaving more people to consider the same options that I am thinking about.
With this in mind, and based on the fact that I am a 20% tax payer, it is currently worth 6.25% for me to pay into my pension instead of using my net pay to invest in mine and my missus' S&S ISAs. If, as I suspect, tax rates increase significantly over the coming years, I think that the 6.25% gain could easily be eroded and even become negative. 94% of my pension contributions are AVCs that are not salary sacrificed, so don't save on NI.
Does anyone else think that it in my position it could be worthwhile changing from pension contributions to S&S ISAs? Obviously it makes sense for 40% tax payers to continue with pension contributions but it wouldn't surprise me if that benefit is removed in the future leaving more people to consider the same options that I am thinking about.
You make a good point, it’s the iirc it’s the tories who are talking about scrapping NI, but they'll be out soon for a few years.
If your not saving NI I’ll go for ISA as you can access it when you want, I don’t trust the gov to move the goalposts, especially around the age you can access it.
Maybe if for IHT pension could be better.
If your not saving NI I’ll go for ISA as you can access it when you want, I don’t trust the gov to move the goalposts, especially around the age you can access it.
Maybe if for IHT pension could be better.
As you say, I doubt that the Tories will be in power for much longer. However, I think that it is inevitable that taxes will increase significantly. I also think that it isn't out of the question that Labour will continue phasing out NI as a means of getting them off the hook for State Pensions, which are a ticking time bomb. My rationale behind that is that if we were to continue with the current system I'd expect the number of qualifying years and percentage rate of NI to increase. I think that the latest changes indicate the likely direction of travel and that is why I am thinking about changing tact.
The IHT benefits of pension is something that I've considered, but it wouldn't surprise me if the goalposts change there too. At the moment I've got a decent chunk in my pension, but only have £40k in our ISAs, so feel that I should take more advantage of them to spread the risk a bit.
The IHT benefits of pension is something that I've considered, but it wouldn't surprise me if the goalposts change there too. At the moment I've got a decent chunk in my pension, but only have £40k in our ISAs, so feel that I should take more advantage of them to spread the risk a bit.
Looking ahead into 'what if's ' is a can of worms, as there's no telling what could happen with pensions, taxes or even treatment of ISA's or SIPPS.
And without crunching the numbers for your own circumstances, nigh on impossible to know what's best; Gut reactions will tend to be that pension contributions come first, as you have the benefit of the tax relief on monies going in, which the ISA would have to make up ground on.
Personally i think that's a generalization that comes down to the indiviuals circs, including status of wifes pension pot etc, and whether you can guesstimate the level of drawdowns from your pension - and how affected by tax your annual drawings will be.
for me ( wish i'd known/foreseen these type of things - and a whole lot more!).
my pot will be 50% more than Mrs, so there'll always be a burden on my pot to get to an annual amount for us to live on ( should have added more £ to her pot to try to get them closer aligned).
And without crunching the numbers for your own circumstances, nigh on impossible to know what's best; Gut reactions will tend to be that pension contributions come first, as you have the benefit of the tax relief on monies going in, which the ISA would have to make up ground on.
Personally i think that's a generalization that comes down to the indiviuals circs, including status of wifes pension pot etc, and whether you can guesstimate the level of drawdowns from your pension - and how affected by tax your annual drawings will be.
for me ( wish i'd known/foreseen these type of things - and a whole lot more!).
my pot will be 50% more than Mrs, so there'll always be a burden on my pot to get to an annual amount for us to live on ( should have added more £ to her pot to try to get them closer aligned).
I have other sources of income so don't need any if my PAYE income and can play tunes with income shared between my missus and I to be as tax efficient as possible.
I appreciate that I get tax relief in the way in, but I think the benefit is pretty marginal versus just paying it into an ISA (6.25% as it currently stands). It is guess work but, based on the state of the country's finance, I think that it is pretty much a one way bet with regards to tax rates. They could of course change the rules around ISAs, but I'd like to think that money that is already in that type of tax umbrella could be safeguarded from future changes (wishful thinking perhaps). Either way I don't think it does any harm to h she my bets and put more into ISAs.
I appreciate that I get tax relief in the way in, but I think the benefit is pretty marginal versus just paying it into an ISA (6.25% as it currently stands). It is guess work but, based on the state of the country's finance, I think that it is pretty much a one way bet with regards to tax rates. They could of course change the rules around ISAs, but I'd like to think that money that is already in that type of tax umbrella could be safeguarded from future changes (wishful thinking perhaps). Either way I don't think it does any harm to h she my bets and put more into ISAs.
greengreenwood7 said:
Gut reactions will tend to be that pension contributions come first, as you have the benefit of the tax relief on monies going in,
Exactly. You get compound growth on money you've never put in! i.e. the tax relief.If in doubt, do both, splitting your investments 50:50 between ISA and SIPP.
As Plenty has said, with pension it's compound growth on money you've never put in that swings the balance.
On the pension front the dream ticket would be to get 40% tax relief going in and only pay 20% tax coming out. Bingo! And that's after you've already taken 25% tax free (under cyurrent rules).
Nonetheless the delayed access to pension can put some people and this is where a 50:50 split with ISA can tick all the boxes at the same time. Obviously it doesn't have to be 50:50 but the concept is clear.
On the pension front the dream ticket would be to get 40% tax relief going in and only pay 20% tax coming out. Bingo! And that's after you've already taken 25% tax free (under cyurrent rules).
Nonetheless the delayed access to pension can put some people and this is where a 50:50 split with ISA can tick all the boxes at the same time. Obviously it doesn't have to be 50:50 but the concept is clear.
Puzzles said:
If you lose gain 20% on the way in and lose 20% on the way out does it make a difference?
If you're a basic rate taxpayer going in and out I understand there's a 6% benefit to a SIPPISA - you've paid tax on the money going in, it's tax free when withdrawing
SIPP - tax relief on money going in, going out only the first 25% is tax free.
That's my understanding, happy to be corrected
plenty said:
Lets say OP has £50k of gross earned income and puts it all into a pension fund. £50k goes into that fund.
If OP chooses to put that money into a stocks and shares ISA instead, he will only be able to invest £40k after income tax is applied.
That's added gains from an extra £10k invested per year. Thanks to compounding, that extra £10k in year 1 alone is now worth £26,658 after 25 years, assuming 4% annual growth.
Trying to keep it simple my point was. If OP chooses to put that money into a stocks and shares ISA instead, he will only be able to invest £40k after income tax is applied.
That's added gains from an extra £10k invested per year. Thanks to compounding, that extra £10k in year 1 alone is now worth £26,658 after 25 years, assuming 4% annual growth.
Say he has 10k before tax to invest.
He puts the gross 10k into his pension via AVC, he gets 5% compounded for 10 years before he can draw it down.
The 10k is now 16k, he withdraws it and pays 20% on it, so had 13k in his pocket.
Now if he had put it in the isa, he’d start with 8k as he’s paid 20% tax on the 10k.
The 8k compounded at 5% over 10 years amounts to 13k.
I know it’s simplified but it shows there isn’t such a big benefit, of course there is NI, tax free, different rates in and out, future changes etc to consider.
In a purely mathematical sense - assuming equal tax rates and removing complications like employer contributions, tax free lump sum and personal allowance - it makes no difference when the tax relief is applied, as you end up with the same amount either way.
Obviously in reality those complications exist and may make the pension advantageous at first glance. But a younger person especially needs to weigh them against the length of time they're locking the money away for (vs when they actually might want or need to stop working), and the strong possibility that future governments decide to dick around or remove them entirely between now and then.
Obviously in reality those complications exist and may make the pension advantageous at first glance. But a younger person especially needs to weigh them against the length of time they're locking the money away for (vs when they actually might want or need to stop working), and the strong possibility that future governments decide to dick around or remove them entirely between now and then.
Panamax said:
On the pension front the dream ticket would be to get 40% tax relief going in and only pay 20% tax coming out. Bingo! And that's after you've already taken 25% tax free (under cyurrent rules).
You're not trying hard enough. Salary sacrifice on the way in so 42%. Retire early and run it down within the annual allowance so 0%.TwigtheWonderkid said:
funinhounslow said:
SIPP - tax relief on money going in, going out only the first 25% is tax free.
Plus your annual allowance, currently £12570. That's coming out of your 75% that's not tax free, and it's tax free. 
@ the OP...
sounds good if you can absolutely max out Mrs Sipp, to get them as balanced as poss. Beyond that, certainly for my case, ISA was then the way forward;
ie/ i want to draw out of both sipps with as little tax as poss and have isa's that are big enough to draw the same amount tax free.....
sounds good if you can absolutely max out Mrs Sipp, to get them as balanced as poss. Beyond that, certainly for my case, ISA was then the way forward;
ie/ i want to draw out of both sipps with as little tax as poss and have isa's that are big enough to draw the same amount tax free.....
Thanks for the input so far. I've thought about paying more into the missus' SIPP but don't think it matters much for us due to the way that I can throttle back her PAYE earnings from my Ltd. Company and also my own. She retired at 50 years old on the fruits of our efforts and her tax code is fully utilised so we are fully optimised and I ensure that our household budget isn't much more than 2 x tax allowances.
TwigtheWonderkid said:
funinhounslow said:
SIPP - tax relief on money going in, going out only the first 25% is tax free.
Plus your annual allowance, currently £12570. That's coming out of your 75% that's not tax free, and it's tax free. Gassing Station | Finance | Top of Page | What's New | My Stuff