Pension Vs Savings
Discussion
I have a hypothetical question that I need far wiser people to assist with:
Say you are 53 and have a personal pension (not worth a great deal) as well as savings. As you can access that pension in 2 years would it be wise to put as much as you can from the savings into the pension in the next few years and enjoy the extra 40% that the Gov. puts in....especially if the savings are only earning 1% in ISA's etc.
Is it really as simple as that?
I do appreciate that there are limits to lump sums you can withdraw from the pension and of course you will pay tax when withdrawing against the balance but you are getting 40% free money????
The above is based on keeping the pension income, after taking your lump sum, below the 40% tax limit.
edit to add: I appreciate to obtain the 40% input from teh Gov you must be a 40% tax payer
Say you are 53 and have a personal pension (not worth a great deal) as well as savings. As you can access that pension in 2 years would it be wise to put as much as you can from the savings into the pension in the next few years and enjoy the extra 40% that the Gov. puts in....especially if the savings are only earning 1% in ISA's etc.
Is it really as simple as that?
I do appreciate that there are limits to lump sums you can withdraw from the pension and of course you will pay tax when withdrawing against the balance but you are getting 40% free money????
The above is based on keeping the pension income, after taking your lump sum, below the 40% tax limit.
edit to add: I appreciate to obtain the 40% input from teh Gov you must be a 40% tax payer
Red Leader said:
I have a hypothetical question that I need far wiser people to assist with:
Say you are 53 and have a personal pension (not worth a great deal) as well as savings. As you can access that pension in 2 years would it be wise to put as much as you can from the savings into the pension in the next few years and enjoy the extra 40% that the Gov. puts in....especially if the savings are only earning 1% in ISA's etc.
Is it really as simple as that?
I do appreciate that there are limits to lump sums you can withdraw from the pension and of course you will pay tax when withdrawing against the balance but you are getting 40% free money????
The above is based on keeping the pension income, after taking your lump sum, below the 40% tax limit.
edit to add: I appreciate to obtain the 40% input from teh Gov you must be a 40% tax payer
Very simplistically, yes.Say you are 53 and have a personal pension (not worth a great deal) as well as savings. As you can access that pension in 2 years would it be wise to put as much as you can from the savings into the pension in the next few years and enjoy the extra 40% that the Gov. puts in....especially if the savings are only earning 1% in ISA's etc.
Is it really as simple as that?
I do appreciate that there are limits to lump sums you can withdraw from the pension and of course you will pay tax when withdrawing against the balance but you are getting 40% free money????
The above is based on keeping the pension income, after taking your lump sum, below the 40% tax limit.
edit to add: I appreciate to obtain the 40% input from teh Gov you must be a 40% tax payer
More complex answer is, it depends on your plans.
I am pretty much doing exactly that, insofar as each year I sell investments from my ISA to cover the reduced income and then Salary Sacrifice down to the NMW so as to deposit the maximum in to my pension. The plan will be to withdraw a fair amount of this pot of money before other pensions come in to play (DB / SP) and therefore the majority will be withdrawn tax free.
Red Leader said:
I do appreciate that there are limits to lump sums you can withdraw from the pension and of course you will pay tax when withdrawing against the balance but you are getting 40% free money????
You might not have to pay any tax when withdrawing. You can take 25% tax free, and if you are no longer working, your annual personal allowance tax free. Personal allowance is going up for 21/22 tax year to £12570 so if you haven't taken your 25% tax free amount, you draw down £16760/year tax free (if you have no other income). Red Leader said:
I have a hypothetical question that I need far wiser people to assist with:
Say you are 53 and have a personal pension (not worth a great deal) as well as savings. As you can access that pension in 2 years would it be wise to put as much as you can from the savings into the pension in the next few years and enjoy the extra 40% that the Gov. puts in....especially if the savings are only earning 1% in ISA's etc.
Is it really as simple as that?
Remember that ISAs and pensions are wrappers - you can hold similar assets in either. Also that starting to draw from a pension may limit your ability to make further contributions due to anti recycling rules.Say you are 53 and have a personal pension (not worth a great deal) as well as savings. As you can access that pension in 2 years would it be wise to put as much as you can from the savings into the pension in the next few years and enjoy the extra 40% that the Gov. puts in....especially if the savings are only earning 1% in ISA's etc.
Is it really as simple as that?
Simpo Two said:
I've seen rumours that the 40% relief may be done away with. That's a problem with pensions - the goalposts move.
The goalposts move on loads of things, not just pensions. Even if the 40% relief is removed, I doubt they will be backdating it so the 40% relief claimed up to that point will be safe. I should state I am an IFA by trade and therefore what I say is 'generic guidance' and not 'advice' as not fully aware of your circumstances etc etc.
However yes effectively you are correct. If you are a higher rate taxpayer and your pension contributions are from income that stays within that band (i.e. higher rate assumed £50k+ and say you earn £60k then the first £10k gross you pay into a pension will attract higher rate relief and end up costing you £6k net (if a personal pension and a personal contribution you would usually write a cheque for £8k with the pension provider claiming £2k (20% basic rate relief) from HMRC for you and you 'get the other £2k/20% back' through a claim on your tax-return.
If you end up paying £6k net for £10k in the fund then when you come to draw the fund you can take 25% tax free (£2.5k + any growth in this example) and the other £7.5k + any growth is taxed as income when drawn although you can of course just take drip amounts out each tax-year as many now do through 'Flexi Access Drawdown' (FAD).
I'm 46 and my SIPP (pension) is the tax-wrapper I save the most into exactly because of the tax-relief benefits on the basis that I should be able to limit my taxable drawings to the basic rate income tax band after I retire (by using ISA savings for additional drawings) so effectively keep the extra 'free' tax relief.
As another poster has already said, a pension is just a 'tax wrapper' and you can generally speaking hold the same underlying holdings across differing wrappers (i.e. an Equity ISA) so the investment choice should be based on your attitude to risk and investment timescale before looking to access and the wrapper choice should be based on the personal tax benefit and/or access conditions that suit you for that tranche of your savings.
I have higher risk holdings in my SIPP (pension) than my Equity ISA as it's further away in time that I would look to access my SIPP whereas the ISA is for medium term rather than longer term savings. For most people a combination of short/medium/long term savings wrappers will make sense for differing reasons. We should all maintain some short term/ready access money for emergencies or short term planned expenditure (i.e. car changes etc) and for these I use Premium Bonds as the alternative of ordinary cash accounts pay pretty much no interest these days and hence I like the 'fun' of the extra potential of PB's if I get lucky whilst also maintaining full security of initial capital.
As you get nearer to retirement then pensions move from longer term to medium to shorter term options so tend to become more of a focus, but again as another poster has said when you start to draw from them that then restricts your ability to pay as much in so really pension money should be seen as 'for retirement' rather than 'from age 55' unless you are actually planning on stopping work from age 55.
I hope that helps. As I always say to clients, nobody has ever said after retirement 'my pension funds are so massive I wish I had spent more when I was younger' so as long as what you are paying in is affordable to you now then the more the better in most cases.
Cheers
However yes effectively you are correct. If you are a higher rate taxpayer and your pension contributions are from income that stays within that band (i.e. higher rate assumed £50k+ and say you earn £60k then the first £10k gross you pay into a pension will attract higher rate relief and end up costing you £6k net (if a personal pension and a personal contribution you would usually write a cheque for £8k with the pension provider claiming £2k (20% basic rate relief) from HMRC for you and you 'get the other £2k/20% back' through a claim on your tax-return.
If you end up paying £6k net for £10k in the fund then when you come to draw the fund you can take 25% tax free (£2.5k + any growth in this example) and the other £7.5k + any growth is taxed as income when drawn although you can of course just take drip amounts out each tax-year as many now do through 'Flexi Access Drawdown' (FAD).
I'm 46 and my SIPP (pension) is the tax-wrapper I save the most into exactly because of the tax-relief benefits on the basis that I should be able to limit my taxable drawings to the basic rate income tax band after I retire (by using ISA savings for additional drawings) so effectively keep the extra 'free' tax relief.
As another poster has already said, a pension is just a 'tax wrapper' and you can generally speaking hold the same underlying holdings across differing wrappers (i.e. an Equity ISA) so the investment choice should be based on your attitude to risk and investment timescale before looking to access and the wrapper choice should be based on the personal tax benefit and/or access conditions that suit you for that tranche of your savings.
I have higher risk holdings in my SIPP (pension) than my Equity ISA as it's further away in time that I would look to access my SIPP whereas the ISA is for medium term rather than longer term savings. For most people a combination of short/medium/long term savings wrappers will make sense for differing reasons. We should all maintain some short term/ready access money for emergencies or short term planned expenditure (i.e. car changes etc) and for these I use Premium Bonds as the alternative of ordinary cash accounts pay pretty much no interest these days and hence I like the 'fun' of the extra potential of PB's if I get lucky whilst also maintaining full security of initial capital.
As you get nearer to retirement then pensions move from longer term to medium to shorter term options so tend to become more of a focus, but again as another poster has said when you start to draw from them that then restricts your ability to pay as much in so really pension money should be seen as 'for retirement' rather than 'from age 55' unless you are actually planning on stopping work from age 55.
I hope that helps. As I always say to clients, nobody has ever said after retirement 'my pension funds are so massive I wish I had spent more when I was younger' so as long as what you are paying in is affordable to you now then the more the better in most cases.
Cheers
Jules Sunley said:
As I always say to clients, nobody has ever said after retirement 'my pension funds are so massive I wish I had spent more when I was younger'
Stealing this for future use. A phrase I use (I am not an IFA) to people who say there's no point in bothering with a pension because they've left it too late:
The best time to start paying in to your pension was 30 years ago. But the second best time is today.
This applies to those with smaller pension pots who are thinking about throwing bigger contributions in now. Unless personal circumstances are unusual, in most cases, just do it. Especially as a 40% tax payer.
Jules Sunley said:
I have higher risk holdings in my SIPP (pension) than my Equity ISA as it's further away in time that I would look to access my SIPP whereas the ISA is for medium term rather than longer term savings.
Quoted for a truth that some people find difficult to appreciate. You not infrequently hear "I want the safe stuff in my pension".Jules Sunley said:
as another poster has said when you start to draw from them that then restricts your ability to pay as much in so really pension money should be seen as 'for retirement' rather than 'from age 55' unless you are actually planning on stopping work from age 55.
can you expand on this? for example if I were paying 20% of my salary into my SIPP and at 55/57 I withdrew the 25% lump to say pay off my mortgage (or help to buy equity loan etc), would I not be able to continue paying 20% of my salary into my SIPP?i've been paying extra into my pension to take advantage of the 40% tax relief, rather than overpaying my mortgage, with the intension (hopefully) of paying off the remaining mortgage at 57 using my lump sum...
Nano2nd said:
Jules Sunley said:
as another poster has said when you start to draw from them that then restricts your ability to pay as much in so really pension money should be seen as 'for retirement' rather than 'from age 55' unless you are actually planning on stopping work from age 55.
can you expand on this? for example if I were paying 20% of my salary into my SIPP and at 55/57 I withdrew the 25% lump to say pay off my mortgage (or help to buy equity loan etc), would I not be able to continue paying 20% of my salary into my SIPP?i've been paying extra into my pension to take advantage of the 40% tax relief, rather than overpaying my mortgage, with the intension (hopefully) of paying off the remaining mortgage at 57 using my lump sum...
My understanding is the same as yours. You can take the 25% tax free portion out without affecting your annual contribution allowance. If you were to start drawing down your pension i.e. taking withdrawals with 25% tax free plus taxable portion then you limit your allowance to 4k per year.
But like I said, I'm no expert so get that confirmed.
Jules Sunley said:
As I always say to clients, nobody has ever said after retirement 'my pension funds are so massive I wish I had spent more when I was younger' so as long as what you are paying in is affordable to you now then the more the better in most cases
I guess dead people can't speak😝Basically pensions are deferred tax products, and as tax generally only goes up, that's not necessarily a good idea.
All my spare cash is going into ISAs which seems much more flexible
Link here to explain when the MPAA is triggered (which then limits amount you can pay into a pension)
https://www-moneyadviceservice-org-uk.cdn.ampproje...
Yes you could just take out tax-free cash only and not trigger this, BUT you will be deemed to have 'crystallised' the other 75 percent of your fund so future growth on the residual fund would not create any more tax-free cash and all be taxable as income when drawn.
For many a more tax efficient way to use 'drawdown' when looking to pension funds as a way to give 'income' in retirement is to take chunks that comprise of 25 percent tax free cash and 75 percent taxable income each tax year after retirement.
If you have been saving into your pension to repay a mortgage then clearly this isn't an option as you will need the big tax-free cash lump sooner, but for those that don't need a big lump in one go then not taking all tax-free cash up front generally works better.
I don't want to stray into advice here and must say this level of planning means it would be worth speaking to a friendly local IFA, ideally one you know existing clients of ie friends that can vouch for them and refer you.
Happy to quote my personal plans if that helps - I have a silly low rate lifetime tracker interest only mortgage and intend to use my ISA savings to clear this off in the future when both the amount in the ISAs are sufficient AND interest rates increased to the point I'm not making enough more in the ISA to continue with the risk. I then intend at retirement to draw my pension fund in stages under flexi access drawdown taking some tax free cash and some taxable income each year, with tax brackets in mind, drawing additional income wanted from either ISA or direct unit trust encampments each year (use my CGT allowance too).
Hopefully enough info here that if this triggers questions you know it's time to take some regulated advice.
Another useful phrase I quote that many like (although this one isn't one I came up with but that I pinched from an accountant contact) is that when considering your income position 'it isn't what you earn, but what you keep' that is relevant - i.e. using tax-efficient saving options like pensions can result in a much better financial position than if you ignore them compared with someone else on the same salary or earnings.
https://www-moneyadviceservice-org-uk.cdn.ampproje...
Yes you could just take out tax-free cash only and not trigger this, BUT you will be deemed to have 'crystallised' the other 75 percent of your fund so future growth on the residual fund would not create any more tax-free cash and all be taxable as income when drawn.
For many a more tax efficient way to use 'drawdown' when looking to pension funds as a way to give 'income' in retirement is to take chunks that comprise of 25 percent tax free cash and 75 percent taxable income each tax year after retirement.
If you have been saving into your pension to repay a mortgage then clearly this isn't an option as you will need the big tax-free cash lump sooner, but for those that don't need a big lump in one go then not taking all tax-free cash up front generally works better.
I don't want to stray into advice here and must say this level of planning means it would be worth speaking to a friendly local IFA, ideally one you know existing clients of ie friends that can vouch for them and refer you.
Happy to quote my personal plans if that helps - I have a silly low rate lifetime tracker interest only mortgage and intend to use my ISA savings to clear this off in the future when both the amount in the ISAs are sufficient AND interest rates increased to the point I'm not making enough more in the ISA to continue with the risk. I then intend at retirement to draw my pension fund in stages under flexi access drawdown taking some tax free cash and some taxable income each year, with tax brackets in mind, drawing additional income wanted from either ISA or direct unit trust encampments each year (use my CGT allowance too).
Hopefully enough info here that if this triggers questions you know it's time to take some regulated advice.
Another useful phrase I quote that many like (although this one isn't one I came up with but that I pinched from an accountant contact) is that when considering your income position 'it isn't what you earn, but what you keep' that is relevant - i.e. using tax-efficient saving options like pensions can result in a much better financial position than if you ignore them compared with someone else on the same salary or earnings.
foiled said:
I guess dead people can't speak??
Basically pensions are deferred tax products, and as tax generally only goes up, that's not necessarily a good idea.
All my spare cash is going into ISAs which seems much more flexible
Tax deferred yes, but as well as benefiting from growth in the interim (a bit like using interest free credit and leaving money in the bank rather than paying cash for something) the big win is if your tax rate reduces when you draw out. 40 percent relief in and 20 percent tax on the way out for example, along with a quarter available as tax free cash.Basically pensions are deferred tax products, and as tax generally only goes up, that's not necessarily a good idea.
All my spare cash is going into ISAs which seems much more flexible
Pension savings are THE most efficient savings vehicle for many, but the price you pay for that is more restrictions on access, hence I like most I advise do a mixture of both.
Based on 'money purchase' funds then any money you haven't spent when you die passes on to your designated beneficiaries so it's not lost. It's true that 'final salary' scheme monies are very different for death benefits (ie usually just a widow or widower income until they die if they die second) but that's a whole different conversation and I'm also not talking about buying an annuity which virtually nobody does any more.
Jules Sunley said:
the big win is if your tax rate reduces when you draw out. 40 percent relief in and 20 percent tax on the way out for example, along with a quarter available as tax free cash.
Pension savings are THE most efficient savings vehicle for many, but the price you pay for that is more restrictions on access, hence I like most I advise do a mixture of both.
^^^ This and this.Pension savings are THE most efficient savings vehicle for many, but the price you pay for that is more restrictions on access, hence I like most I advise do a mixture of both.
foiled said:
Basically pensions are deferred tax products, and as tax generally only goes up, that's not necessarily a good idea.
All my spare cash is going into ISAs which seems much more flexible
As I said earlier, it's perfectly possible to never pay any tax on your pension withdrawals, depending on your circumstances.All my spare cash is going into ISAs which seems much more flexible
Also, putting spare cash into an ISA means you might earn 1% a year if you're lucky. Maybe more in an s&s ISA. a 40% taxpayer paying into a pension earns 66.6% on day 1. And money left behind in an ISA is subject to IHT, money in a pension isn't (up to age 75).
I'm not against ISAs, I have some myself. But pensions are a often better option, circumstances depending.
Jules Sunley said:
As I always say to clients, nobody has ever said after retirement 'my pension funds are so massive I wish I had spent more when I was younger' so as long as what you are paying in is affordable to you now then the more the better in most cases.
Cheers
In slight contrast, I'm acutely aware of older age pensioners (relatives in a few cases) where they could have spent far more during their younger years than they did!Cheers
That generation was far more used to scrimping and saving - why replace the bathroom when the grout cleaner and a new tap washer "will do".....
Indeed, the last years of my mum's life was spent with me suggesting things she could buy, or services she could use to make her dotage years more enjoyable. & certainly as a youngster growing up, it never felt like we were....profligate with the spending (quite the opposite, although in reality we were firmly "middle class" and reasonably well off, as it turns out!)
I do, however, firmly agree that your future self will thank you for investing as much as you reasonably can as early as you can - the power of compounding is not a well taught subject in life!
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