'Life savings' - do people still have them?

[Ginge R]

I haven't read the thread, so apologies if this is taking things off topic.

But you could be years away from retirement and if you've saved a fair amount in various pension wealth then although you might not be over the limit now, you could be. Someone 10 years from retirement with pension wealth of £700,000 will exceed the allowance if their fund grows at 7% pa (net of charges) even if they stop making contributions now. I just wrote that investments which might increase dramatically such as land within a SIPP, also stand to breach the limit even sooner or more dramatically.

Those who are further from retirement but doing well will also have to be very careful to factor in the growth of investments and extra contributions they make, especially if the Lib Dems have any say in the next government (they want to reduce the lifetime allowance even further). Yes, if an individual tips over the limit, there is a 55% tax charge on any lump sum you take from your pension or, if the pension is taken as income without a lump sum, an extra 25% charge on top of the income tax rate you pay. But the g'ment is looking at legislation at the moment to address that and reduce the impact.

[p1doc]

never mind annual allowance being decreased to £40,00 which you then get taxed on if you go over that limit!but 1 option is to pay out of your scheme causing permant reduction in pension when you take it-goverment bast***s

martin

[Ginge R]

Martin,

Don't forget - you can refer backwards and utilise any part of the previous 3 years unused allowances (if income/tax suitability applies).

[Kermit power]

Ari said:

RizzoTheRat said:

The other thing I find scary is just how little many people seem to understand about financial matters. For example an otherwise reasonably intelligent friend of mine was saving for her wedding in an account paying a pittance in interest, but had debts on a credit card at over 20% APR.

That's quite common I think. I had a mate almost fall out with me when I pointed out how daft he was to buy a £9K motorbike on finance with a fairly high APR when he had £10K sat in the bank. Apparently he couldn't touch his savings.

I asked him whether, if he had £1,000 in the bank, he'd borrow £9K and put it in the same bank account as 'savings'? I was being stupid apparently.

It was beyond him that taking on the same amount of debt whilst he already had that money was effectively the same thing.

You could take another view on this one.

At the moment, he's paying interest on the motorbike, whilst earning significantly less interest on the money in the bank, so, as you say, that doesn't make sense today.

What happens if he loses his job tomorrow though?

If it was me, I'd rather know I've got £10k to live on (including paying my motorbike payments!) whilst I find another job than find myself faced with having to sell the motorbike at a big discount because I desperately need some cash to live off.

Of course, option three would be to forego the bike until he's got £19k in the bank so that he doesn't drop below his arbitrary £10k, but leaving that aside, you could say that the interest payments on the bike are the cost of prudence on his part.

Whatever way you look at it, it's far more sensible than borrowing £9k to buy a shiny toy if you've got nothing in the bank to fall back on if you lose your job!

[p1doc]

Ginge R said:

Martin,

Don't forget - you can refer backwards and utilise any part of the previous 3 years unused allowances (if income/tax suitability applies).

already have but still owed money as pension growth varied so dramatically depite being in same job for 8 yrs!
martin

[GrizzlyBear]

Justin Cyder said:

Ari said:

No, its ok, the government have zeroed interest rates so those people will never have to suffer.

The savers suffer instead...

The tide is going out in the next few months & when the BoE get going in earnest, it'll be a different story. Easy credit is never that easy in the long run.

I think easy credit is just like playing "pass the hand grenade" it is going to blow up in someone's face.

The big problem with making savers suffer is they outnumber the borrowers, those reliable grey voters have a great deal of savings and not much borrowings, and they are currently watching their grandchildren having a lower standard of living because of kick-the-can down the road monetary policies.

[TwigtheWonderkid]

HenryJM said:

TwigtheWonderkid said:

I'm sure you're right. But people complain about the returns on their pension, forgetting that what they have in their pension pot is far more than they ever contributed in the first place.

Well, no, its just not been taxed on the way in, it is taxed on the way out though.

You can take 25% of it tax free on the way out. And on the way in, no it isn't taxed, and as you've already been taxed on the money you are paying in, you get the tax back. Hence, a 40% taxpayer only actually pays £6 when paying £10 in.

[CraigyMc]

TwigtheWonderkid said:

HenryJM said:

TwigtheWonderkid said:

I'm sure you're right. But people complain about the returns on their pension, forgetting that what they have in their pension pot is far more than they ever contributed in the first place.

Well, no, its just not been taxed on the way in, it is taxed on the way out though.

You can take 25% of it tax free on the way out. And on the way in, no it isn't taxed, and as you've already been taxed on the money you are paying in, you get the tax back. Hence, a 40% taxpayer only actually pays £6 when paying £10 in.

I dunno about yours, but my pension contribs go in via pre-tax earnings. They don't incur income tax at any point.

[HenryJM]

CraigyMc said:

TwigtheWonderkid said:

HenryJM said:

TwigtheWonderkid said:

I'm sure you're right. But people complain about the returns on their pension, forgetting that what they have in their pension pot is far more than they ever contributed in the first place.

Well, no, its just not been taxed on the way in, it is taxed on the way out though.

You can take 25% of it tax free on the way out. And on the way in, no it isn't taxed, and as you've already been taxed on the money you are paying in, you get the tax back. Hence, a 40% taxpayer only actually pays £6 when paying £10 in.

I dunno about yours, but my pension contribs go in via pre-tax earnings. They don't incur income tax at any point.

Not even when that are (barring the 25% tax free bit) paid out?

[CraigyMc]

HenryJM said:

CraigyMc said:

TwigtheWonderkid said:

HenryJM said:

TwigtheWonderkid said:

I'm sure you're right. But people complain about the returns on their pension, forgetting that what they have in their pension pot is far more than they ever contributed in the first place.

Well, no, its just not been taxed on the way in, it is taxed on the way out though.

You can take 25% of it tax free on the way out. And on the way in, no it isn't taxed, and as you've already been taxed on the money you are paying in, you get the tax back. Hence, a 40% taxpayer only actually pays £6 when paying £10 in.

I dunno about yours, but my pension contribs go in via pre-tax earnings. They don't incur income tax at any point.

Not even when that are (barring the 25% tax free bit) paid out?

Two different things.
Contribs are what the pension fund accrues over your years of work (in my case, probably about 30 of them). Those go into the pension tax free.

When you retire, you can optionally have 25% of the whole pension pot in one go, tax free. The remaining 75% (or 100% if you don't take the lump sum) goes to buy an annuity which provides income for the rest of your life.

That pension income is taxed just like PAYE earnings, so just like PAYE, you pay nothing on the first £10,000 a year, and the basic rate (20%) on the rest up to £31,865 a year.
You'd need a big pension pot to get into the 40% tax bracket on this income (you'd need the pension to be paying you £31,866 a year or more).
If you were uber wealthy with a mahoosive pension, and stupid enough not to work out a better way to deal with it, anything over £150K per year would be taxed at 45%.

[HenryJM]

CraigyMc said:

Two different things.
Contribs are what the pension fund accrues over your years of work (in my case, probably about 30 of them). Those go into the pension tax free.

When you retire, you can optionally have 25% of the whole pension pot in one go, tax free. The remaining 75% (or 100% if you don't take the lump sum) goes to buy an annuity which provides income for the rest of your life.

That pension income is taxed just like PAYE earnings, so just like PAYE, you pay nothing on the first £10,000 a year, and the basic rate (20%) on the rest up to £31,865 a year.
You'd need a big pension pot to get into the 40% tax bracket on this income (you'd need the pension to be paying you £31,866 a year or more).
If you were uber wealthy with a mahoosive pension, and stupid enough not to work out a better way to deal with it, anything over £150K per year would be taxed at 45%.

Yes, I know how it all works. As I said the advantage of a pension is that your contributions are pre tax on the way in, but most of it is taxed as income on the way out.

[Grandfondo]

HenryJM said:

Yes, I know how it all works. As I said the advantage of a pension is that your contributions are pre tax on the way in, but most of it is taxed as income on the way out.

If your pension was producing £10k a year and that was your only income then no tax would be due.

You would still need a pot of £250k to generate £10k though!

P.S. I am talking about a private pension not a tax payers funded public one.

Edited by Grandfondo on Saturday 16th August 07:25

[HenryJM]

Grandfondo said:

If your pension was producing £10k a year and that was your only income then no tax would be due.

You would still need a pot of £250k to generate £10k though!

P.S. I am talking about a private pension not a tax payers funded public one.

The state pension is taking up £6ish of the tax allowance so it is unlikely that more the £4k of the income from your own pension will be zero rated.

[TheCarFather]

I'm young and naive here so I don't understand the ins and outs of pensions so please tell me if this is a stupid question but why not invest in property or fixed interest accounts and have those as your pension when needed? Rather than letting the government decide when your allowed it etc? I know there is contribution to your pension on top of what you put in each month but how come the people near the limit where they will get taxed loads invest elsewhere rather than in the pension scheme instead?

[Ginge R]

Grandfondo is correct, but more than that, it's also important to really get under the rules and consider *how* you construct your pensions long before you draw on them. A couple of weeks ago, proposed changes to the Finance Act were published which confirmed what the Budget told us, namely that the age limit for taking trivial commutation and small pot lump sums from pensions would reduce from age 60 to the normal minimum personal pension age (currently 55, but going up).

Briefly, a 'trivial commutation lump sum' can currently be paid when the total value of your pensions under all registered pension schemes is less than the commutation limit. The trivial commutation lump sum is £30,000.

But you may now *also* have up to three small personal pension funds of £10,000 or less - which can be paid out as lump sums (there is no limit on the number of lump sums up to £10,000 that may be paid out of an occupational pension scheme). So, if you have small pension pots of £10,000 or less you can take up to three of these as a cash lump sum.

As you can do this even if your other total pension savings exceed £30,000, in terms of planning elegance what's the ideal, best bang per buck scenario? If you planned properly, if you took any small pots first and this reduced the value of your remaining pension benefits to £30,000 or less, you could then commute that amount completely as well. If these are uncrystallised rights, the first 25% is tax free and the rest is taxed at your marginal rate.

So three personal pension pots of no more than £10,000 could be taken, plus remaining rights of up to £30,000 giving a total value of rights that could be commuted to £60,000. Out of that final £30,000, £7,500 will be tax free and the balance taxed at your marginal rate. Play it carefully, and it could be that you earn nothing in the year you take benefits. So, there'a a tax liability of 20% on £12,500 which is just £2,500. If you got 40 or 45% tax relief going into the pension, then paying £2500 on the resultant £60,000 isn't bad. Is it?

The moral of the story is: think about not just how big a pension pot you can grow, but think about *how* you structure your pensions - ask your adviser, if you have one. Plan ahead, consider your exit strategy, not just why Fund ABC is better than Fund 123 because it made 0.75% more than the other one in the past year. That's important, it's vital, but it's ALSO vital. Think big picture, and *then* condense down to the tactics which stand the best chance of getting you there.

As ever, and as a caveat that the regulators constantly remind me to mention when engaging in discussion on social media, I'm just a bloke on the internet. So, as everyone's situations are different, take personal and qualified advice that applies to you, that you trust is suitably professional for your needs and that you are happy with.

Talking of happy, I just got a NI rebate of £800 or so. This weekend will be a good 'un.

[Don]

Kermit power said:

You could take another view on this one.

At the moment, he's paying interest on the motorbike, whilst earning significantly less interest on the money in the bank, so, as you say, that doesn't make sense today.

What happens if he loses his job tomorrow though?

If it was me, I'd rather know I've got £10k to live on (including paying my motorbike payments!) whilst I find another job than find myself faced with having to sell the motorbike at a big discount because I desperately need some cash to live off.

Of course, option three would be to forego the bike until he's got £19k in the bank so that he doesn't drop below his arbitrary £10k, but leaving that aside, you could say that the interest payments on the bike are the cost of prudence on his part.

Whatever way you look at it, it's far more sensible than borrowing £9k to buy a shiny toy if you've got nothing in the bank to fall back on if you lose your job!

There is a balance between flexibility and paying the least amount possible in interest.

The trick would be to save up £20K, buy the bike for cash, and still have £10K savings.

This, of course, means doing without the bike for however long.

You pays your money, you takes your choice.

[Ginge R]

I get that. But if you can draw on a pension to help you, these days 55 is nothing. My life won't grind to a halt at 55 and I want to spend more time enjoying myself with fewer clients, rather than work with my nose to the grindstone until I'm 70. If you don't do anything to save for the future, however you do it, then your older years.. years when these days you are still active and fit, are going to be pretty bleak if you are going to rely on the state.

Unless you're going to inherit a decent wedge of course, in which case..

[UpTheIron]

Ginge R said:

Briefly, a 'trivial commutation lump sum' can currently be paid when the total value of your pensions under all registered pension schemes is less than the commutation limit. The trivial commutation lump sum is £30,000.

But you may now *also* have up to three small personal pension funds of £10,000 or less - which can be paid out as lump sums (there is no limit on the number of lump sums up to £10,000 that may be paid out of an occupational pension scheme). So, if you have small pension pots of £10,000 or less you can take up to three of these as a cash lump sum.

Interesting - not something I was aware of. I'm still 17 years or so aware from getting at my pension, but if I read that right then a sensible setup currently (which is more than likely to change in the next 17 years!) would be to have [at least] 4 pension funds, 3 of which MUST be less than £10k, and one of any size. Assuming the latter is greater than £120k, I could then take close to £60k (£10k x 3 + 25$ of £120k) out and simply pay income tax at whatever rate my other income dictates...?

[Ari]

Kermit power said:

You could take another view on this one.

At the moment, he's paying interest on the motorbike, whilst earning significantly less interest on the money in the bank, so, as you say, that doesn't make sense today.

What happens if he loses his job tomorrow though?

If it was me, I'd rather know I've got £10k to live on (including paying my motorbike payments!) whilst I find another job than find myself faced with having to sell the motorbike at a big discount because I desperately need some cash to live off.

Of course, option three would be to forego the bike until he's got £19k in the bank so that he doesn't drop below his arbitrary £10k, but leaving that aside, you could say that the interest payments on the bike are the cost of prudence on his part.

Whatever way you look at it, it's far more sensible than borrowing £9k to buy a shiny toy if you've got nothing in the bank to fall back on if you lose your job!

Then I'd ask you the same question I asked him.

If you had £1,000 in the bank, would you take out a loan for £9,000 'just in case'? And call the interest payments 'prudence on your part'?

Because that is exactly what you are advocating.

[Ari]

Don said:

There is a balance between flexibility and paying the least amount possible in interest.

The trick would be to save up £20K, buy the bike for cash, and still have £10K savings.

This, of course, means doing without the bike for however long.

You pays your money, you takes your choice.

My suggestion, if he wanted the bike that badly and it was that good a deal, was to pay for the bike outright, and then put the finance payments he would have been making back into his savings account.

That way he's no worse off day to day, his savings pot is quickly being restored, he's got his bike and he's saving himself the cost of the finance interest.