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M S E Refugee

Pension and ISA

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It looks as if my works pension will pay just below the 20% tax bracket when I retire.

Is it worth putting more money into a Stocks and Shares ISA as the dividends off the investments would be more or less tax free.

Or do I increase my payments into my pension knowing that the more I put in, the more likely I am to fall into the 20% tax bracket.

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Have you looked at a SIPP?

I put lots into this but wouldn't increase payments (AVCs) to my pension provider.

The SIPP isn't as much under your control as an ISA but it does give you the tax relief and is far more under your control than a company pension.

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If i understand you correctly, then i don't think it makes much difference from a tax point of view.

Pay your taxed income into an ISA and don't pay tax when you take it out, or pay your untaxed income into a pension and pay tax when you take it out will pretty much end up in the same place if you're paying the basic rate of tax in either case.

Personally I'm in a fairly similar position, and am continuing the pension contributions required to get a matched contribution from my current employer, while putting any further spare cash into an ISA. I went the ISA route largely incase my career goes off the rails in later life and i need to fund a gap between earning a wage and being able to access my pension funds. This happend to a friend of mine who ended up unemployed in his early 50's and is now scraping a living until he can access his pensions.

A SIPP as Frank suggested is also an interesting option for a bit of diversification. There's a benefit to having multiple pensions, in that you can take them at different times. I currently have 4 pensions, and may take one or more early if i need to top up my income between my peak earning years and proper retirement.

 

 

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25 minutes ago, Frank Hovis said:

Have you looked at a SIPP?

I put lots into this but wouldn't increase payments (AVCs) to my pension provider.

The SIPP isn't as much under your control as an ISA but it does give you the tax relief and is far more under your control than a company pension.

I currently pay extra into an AVC which only costs me 68p in the pound through Pension Salary Exchange and I have 27 years in my work scheme.

I work for Royal Mail and we are very likely to lose our defined benefit scheme.

Our Pension has become unaffordable  due it being invested 90% in Government bonds that have paid next to nothing over the past 15 years.

Despite paying extra into my Pension the projections don't look too clever and it would pay slightly under the tax threshold,that's why I am thinking of using a Stocks and Shares ISA.

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You'd have to work out how much of your annual pension allowance of £40k https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/the-annual-allowance is being used up by your Royal Mail pension.

When I last looked at my company scheme it worked out as being 16x the annual benefit obtained.  That is if your pension contributions for this year will give you an annual pension of £1k then this takes £16k out of the £40k allowance leaving £24k that you can put in.  Your AVCs, at their gross amount, come off this as well so if you're putting £4k into AVCs you have £20k left.  I haven't revisited this but there is a range of multipliers depnding upon the precise nature of your scheme, IIRC the range is 12 to 18.

You can hold the same investments within a SIPP as you do an ISA, plus as long you have paid the tax you can get it back.

I have also mentioned on other threads that whatever tax I cannot mop up with pension contributions I recover by VCT contributions.  You do need to fill in a tax return to get it back but it's worth it to end up paying no income tax each year :)

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3 hours ago, M S E Refugee said:

It looks as if my works pension will pay just below the 20% tax bracket when I retire.

Is it worth putting more money into a Stocks and Shares ISA as the dividends off the investments would be more or less tax free.

Or do I increase my payments into my pension knowing that the more I put in, the more likely I am to fall into the 20% tax bracket.

What about state pension? That's also taxable. That'll be paid to you gross, but adjusted through your tax code. Have you obtained an up to date state pension forecast? 

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1 minute ago, Uptherebels said:

What about state pension? That's also taxable. That'll be paid to you gross, but adjusted through your tax code. Have you obtained an up to date state pension forecast? 

Good point.

You will only be able to get this forecast if you are over 50, I'm not sure how much over 50 but it doesn't work under 50.

You can estimate it by cheking your NI record on HMRC which I've found does now work.  Though it only tells you whether a year is full or incomplete.  It doesn't tell you whether that "full" counts 100% or a lesser amount owing to being opted out; for that you need your pension forecats for which you need to be over 50!

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4 hours ago, SpectrumFX said:

If i understand you correctly, then i don't think it makes much difference from a tax point of view.

Pay your taxed income into an ISA and don't pay tax when you take it out, or pay your untaxed income into a pension and pay tax when you take it out will pretty much end up in the same place if you're paying the basic rate of tax in either case.

Not quite. You can take a 25% lump sum tax-free out of a pension on top of your normal allowance.  A pension is also useful if you are on a higher tax rate as you can arrange things so you are contributing everything in the 40% bracket, and then take it out tax-free/20% bracket. 

Finally, if you salary sacrifice into a pension (assuming your company allows you to) there's an employer NI saving there which potentially can be divvied up between you. 

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2 minutes ago, SCC said:

Not quite. You can take a 25% lump sum tax-free out of a pension on top of your normal allowance.  A pension is also useful if you are on a higher tax rate as you can arrange things so you are contributing everything in the 40% bracket, and then take it out tax-free/20% bracket. 

Finally, if you salary sacrifice into a pension (assuming your company allows you to) there's an employer NI saving there which potentially can be divvied up between you. 

Good points.

So the pension has the edge on tax reduction, and the ISA the edge on availability of the funds (how much that matters obviously depends on how close you are to the government lower age limit on pension access. If you're at or past it, it's not even an issue).

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6 hours ago, Uptherebels said:

What about state pension? That's also taxable. That'll be paid to you gross, but adjusted through your tax code. Have you obtained an up to date state pension forecast? 

The state pension doesn't really feature in my plans,it will be a bonus if I get one.

The government have already cheated me out of 2 years of it by raising the age from 65 to 67.

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9 minutes ago, M S E Refugee said:

The state pension doesn't really feature in my plans,it will be a bonus if I get one.

The government have already cheated me out of 2 years of it by raising the age from 65 to 67.

Well, whether or not it features in your plans, they'll tax you on it don't worry! 

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7 hours ago, SpectrumFX said:

Good points.

So the pension has the edge on tax reduction, and the ISA the edge on availability of the funds (how much that matters obviously depends on how close you are to the government lower age limit on pension access. If you're at or past it, it's not even an issue).

Pretty much it. Obviously not advice, but my non house wealth is roughly spread 3:1 in favour of pension v other savings/investments.  That's partly because I'm planning on taking the pension from 55, but might give up work before hand.  Feels about right - I'm about ten years away from 55, and would hopefully last until my 80s (maybe longer if my grandparents are anything to go by). 

Edited by SCC

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On 06/04/2017 at 16:58, THE MAJOR said:

Best advice? Get as much money together as you can, shitloads of it, because it won't be long before they come after your pensions too. :Old:

The environment pensions exist in today is a world apart from 10/20/30 years ago, anyone who makes concrete plans based on the rules now is a fool. The whole thing will be subject to sudden and detrimental change, from increasing state pension ages to altering tax regimes, investment choices and political meddling.

Be warned that it is not uncommon for privately held retirement funds to be seized by cash strapped states.

http://www.reuters.com/article/hungary-pensions-idUSL6N0TG2MP20141127   (2014)

http://www.zerohedge.com/news/2013-09-06/poland-confiscates-half-private-pension-funds-cut-sovereign-debt-load  (2014 part 1 - 50%)

https://www.bloomberg.com/news/articles/2016-07-04/poland-to-overhaul-its-35-billion-private-pension-fund-industry  (2016 part 2)

https://www.bloomberg.com/news/articles/2015-03-05/some-governments-in-need-raid-private-retirement-accounts

Don't rely on a single pot in addition to anything the state provides, you need a Plan B,C,D & E, split it up and try to keep the states dirty hand out of as many as possible.

Beware the lifetime ISA as I believe this will be a means of instant plunder should you be deemed to need care later in life, this area will be a lucrative growth industry for the private sector.

 

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17 hours ago, Chewing Grass said:

The environment pensions exist in today is a world apart from 10/20/30 years ago, anyone who makes concrete plans based on the rules now is a fool. The whole thing will be subject to sudden and detrimental change, from increasing state pension ages to altering tax regimes, investment choices and political meddling.

Don't rely on a single pot in addition to anything the state provides, you need a Plan B,C,D & E, split it up and try to keep the states dirty hand out of as many as possible.

 

 

my thoughts exactly.  anyone who thinks their UK based pension is safe is not better than a BTL landlord planning retirement without planning for the S24 bombshell.

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Good points @Chewing Grass.  I'd perhaps be far less aggressive about pension saving via the company scheme if I was 30 years away from retiring rather than just over 10 (with current regime).  Even so, the plan is to stop/reduce loading it up in the next year or so while working less and considering other investments for any remaining free cash (I'm not yet making the most of the £5K £2K tax free dividend allowance yet for example).  

Ultimately, our most valuable commodity is time and it can't be reclaimed once gone. I plan to experience at least some of the benefits of retirement as soon as. 

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4 hours ago, M S E Refugee said:

I have decided to reduce the amount I pay into my Pension as my employer and the Government keep changing the rules of the game.

The best course of action for me is to pay down the mortgage and put as much as I can into a Stocks and Shares ISA.

I'm starting to think whatever I do it will be stolen to a certain degree or other.

The stock market is looking a bit peeky at the moment and I full expect the government to trash the rest.

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6 hours ago, M S E Refugee said:

I have decided to reduce the amount I pay into my Pension as my employer and the Government keep changing the rules of the game.

The best course of action for me is to pay down the mortgage and put as much as I can into a Stocks and Shares ISA.

Do seriously look at a SIPP.  Same investment rules as an ISA.

Upside: full tax relief on your investment.  If only paying base rate and you want to put in £10k you only need to pay £8k and a few months later HMRC put in the £2k. Instant 25% return!

Downside: can't touch until you're 55 and then you have to follow the rules on drawing to avoid paying tax.

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4 minutes ago, Frank Hovis said:

Do seriously look at a SIPP.  Same investment rules as an ISA.

Upside: full tax relief on your investment.  If only paying base rate and you want to put in £10k you only need to pay £8k and a few months later HMRC put in the £2k. Instant 25% return!

Downside: can't touch until you're 55 and then you have to follow the rules on drawing to avoid paying tax.

I can pay  68p in the pound through Pension Salary Exchange at work paying into my AVC.

When I come to draw my Pension it would probably be tax free as it would most probably be under the income tax threshold.

I don't really want to pay more into a pension so the government can take more tax off me,this is why I am thinking of now saving in a Stocks and Share ISA so I can get tax free income from the dividends.

I work for Royal Mail and it looks as if I am going to be screwed over when they change the pension next year.

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