Very Basic Pension Sums
Discussion
If you put £10,000 into a pension the HMRC adds 25% so you now have £12,500. You can withdraw 25% of that tax free so 25% of £12500 so £3125 comes out tax free leaving £9375 which you have to pay tax on. £9375 -25% is £7031
So from your 10,000 after tax you have 7031+3125 = £10156 but the man who looked after the fund will have charged more than £156. If the fund is invested wisely it may grow but it could equally grow within an ISA.
I am quite simple so in very simple terms what have I missed ?
So from your 10,000 after tax you have 7031+3125 = £10156 but the man who looked after the fund will have charged more than £156. If the fund is invested wisely it may grow but it could equally grow within an ISA.
I am quite simple so in very simple terms what have I missed ?
Not an expert but you may not automatically pay 25% tax on the drawdown element - it all depends what your annual income is. If below the threshold you can continue to drawdown without paying any tax.
ETA:
Also you have not included any growth you may have achieved on the £10k when invested.
ETA:
Also you have not included any growth you may have achieved on the £10k when invested.
steve-V8s said:
If you put £10,000 into a pension the HMRC adds 25% so you now have £12,500. You can withdraw 25% of that tax free so 25% of £12500 so £3125 comes out tax free leaving £9375 which you have to pay tax on. £9375 -25% is £7031
So from your 10,000 after tax you have 7031+3125 = £10156 but the man who looked after the fund will have charged more than £156. If the fund is invested wisely it may grow but it could equally grow within an ISA.
I am quite simple so in very simple terms what have I missed ?
Where does your 25% income tax come from?So from your 10,000 after tax you have 7031+3125 = £10156 but the man who looked after the fund will have charged more than £156. If the fund is invested wisely it may grow but it could equally grow within an ISA.
I am quite simple so in very simple terms what have I missed ?
One of the major features of UK pensions is the fact you have growth over the years on much more money, as your income is "grossed up".
In New Zealand everyone gets.....a 500 pound incentive. Apart from that everything into a pension fund is out of taxed income, although companies do have contribute 3% of salary I think.
Growth in a pension fund is also taxed.
Some people from the UK were caught after moving to NZ, growth in a UK pension is classed as income here...and subject to income tax, even if you couldn't access the pension due to age!
TryingHard said:
Also you have not included any growth you may have achieved on the £10k when invested.
I think part of the OP's point is that you can achieve the same growth in an ISA wrapper as in a pension wrapper, so for the purposes of this argument, the thinking is that growth is not part of the question. I think this is where the mistake lies - Yes, if you did the withdrawals immediately without any growth, the numbers in both cases don't look that different. But .....The significant bit missing in terms of growth is the time invested - i.e. you don't withdraw either for a long time so growth does matter (a lot).
i.e. In the pension you get the growth compounded on a starting figure of 12500 whereas in the ISA case, you get the growth from a starting figure of 10K.
Do this for 20 years and the two pots will be vastly different.
Ignoring investment growth and charges, the correct sums based on the OP's example are below, which shows a £625 uplift.
£10000 net contribution
£2500 tax relief (20% of £12500)
£12500 gross contribution
£3125 tax free cash
£9375 gross drawdown
£1875 income tax (20% of £9375)
£10625 net drawdown (TFC+Gross DD-Tax)
However the above is based on the assumption that
- the contribution isn't made via salary sacrifice, which would lower the net contribution
- the rate of tax payable in drawdown is the same as when contributing, which often isn't the case. If the £12500 was the only income in the tax year then no income tax would be payable.
£10000 net contribution
£2500 tax relief (20% of £12500)
£12500 gross contribution
£3125 tax free cash
£9375 gross drawdown
£1875 income tax (20% of £9375)
£10625 net drawdown (TFC+Gross DD-Tax)
However the above is based on the assumption that
- the contribution isn't made via salary sacrifice, which would lower the net contribution
- the rate of tax payable in drawdown is the same as when contributing, which often isn't the case. If the £12500 was the only income in the tax year then no income tax would be payable.
TryingHard said:
Not an expert but you may not automatically pay 25% tax on the drawdown element - it all depends what your annual income is. If below the threshold you can continue to drawdown without paying any tax.
Pretty hard to avoid paying tax on private pension income - the State pension takes up a good proportion of your tax-free allowance.steve-V8s said:
If you put £10,000 into a pension the HMRC adds 25% so you now have £12,500. You can withdraw 25% of that tax free so 25% of £12500 so £3125 comes out tax free leaving £9375 which you have to pay tax on. £9375 -25% is £7031
So from your 10,000 after tax you have 7031+3125 = £10156 but the man who looked after the fund will have charged more than £156. If the fund is invested wisely it may grow but it could equally grow within an ISA.
I am quite simple so in very simple terms what have I missed ?
Income tax threshold is £12,500 so if you have no other income you won’t pay any tax. So from your 10,000 after tax you have 7031+3125 = £10156 but the man who looked after the fund will have charged more than £156. If the fund is invested wisely it may grow but it could equally grow within an ISA.
I am quite simple so in very simple terms what have I missed ?
You can take out about £16,500 tax free - 25% of this is your tax free lump sum, the rest is taxable but as it is below the income tax threshold no tax is due.
That’s my understanding anyway…
steve-V8s said:
If you put £10,000 into a pension the HMRC adds 25% so you now have £12,500. You can withdraw 25% of that tax free so 25% of £12500 so £3125 comes out tax free leaving £9375 which you have to pay tax on. £9375 -25% is £7031
So from your 10,000 after tax you have 7031+3125 = £10156 but the man who looked after the fund will have charged more than £156. If the fund is invested wisely it may grow but it could equally grow within an ISA.
I am quite simple so in very simple terms what have I missed ?
After 20 years growing at 4% a year the ISA would have £21.9k in it while the pension would have £27.4k in it: that's 25% more. Yes there's some tax to pay on the way out of the pension but there are ways of managing that. So from your 10,000 after tax you have 7031+3125 = £10156 but the man who looked after the fund will have charged more than £156. If the fund is invested wisely it may grow but it could equally grow within an ISA.
I am quite simple so in very simple terms what have I missed ?
V8mate said:
TryingHard said:
Not an expert but you may not automatically pay 25% tax on the drawdown element - it all depends what your annual income is. If below the threshold you can continue to drawdown without paying any tax.
Pretty hard to avoid paying tax on private pension income - the State pension takes up a good proportion of your tax-free allowance.steve-V8s said:
Are you saying that If you choose not to take a lump sum the 25% Tax free amount then applies if you simply take an income ? So you get the tax allowance £12700 and 25% of the amount of income above that is tax free?
You don't have to take the whole 25 % as one lump sum at the start. You can take regular smaller sums of which 25% is tax free & the remaing 75% is subject to tax. How much tax is payable depends on all of your other sources of income, if any. There are also other ways to play the system:https://www.youtube.com/watch?v=AMJ8Ya3CPj4
Any amount that you take as pension income will be added to any other income you have, and so, after taking account of your personal allowances, that total income will be subject to income tax at your appropriate rate.
Commuting up to 25% of your pension value is tax free, so taking cash up to 25% is tax efficient. The remaining 75% of the pension value will be used to provide income, and so potentially taxable.
That's how I understand it...simples really.
R.
Commuting up to 25% of your pension value is tax free, so taking cash up to 25% is tax efficient. The remaining 75% of the pension value will be used to provide income, and so potentially taxable.
That's how I understand it...simples really.
R.
BoRED S2upid said:
You’ve missed any employer contributions they ain’t contributing to your ISA. I’m guessing you are self employed an ISA may actually work better and you don’t have to wait to withdraw the lot if you want to retire early.
As a Sole Trader pension contributions are one of the key/few ways of getting your tax bill down. They are way better than ISA contributions.The video link was good, thank you.
As I understand it when you do something with the fund you have to decide what happens to the rest of it. You can choose to move some of it into one shoe box from which you take an income and put the rest in a different shoebox where it hopefully continues to grow. Provided the amount you initially moved was less than 25% of the total, that income is tax free. If the amount you left invested does grow the total fund value has increased so the 25% figure is now bigger so you can take some more tax free.
As I understand it when you do something with the fund you have to decide what happens to the rest of it. You can choose to move some of it into one shoe box from which you take an income and put the rest in a different shoebox where it hopefully continues to grow. Provided the amount you initially moved was less than 25% of the total, that income is tax free. If the amount you left invested does grow the total fund value has increased so the 25% figure is now bigger so you can take some more tax free.
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