How will you know when you are ready to retire if you don't know what your pension is worth?
Poll: Pensions - Are you worried about the future?
- Thread starter SideWinder
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Question about this, which may be a stupid one - but aren't you taxed on the monies at the end anyway? I know their is a tax free lump sum, but I believe you pay tax after £12,570 in today's money.
My Dad (probably has his wires crossed here I no doubt) believes my brother is paying tax on his contributions now (he's PAYE) so he doesn't at the end. Doesn't makes sense to me as surely saving tax free is better due to compound interest.
i only started my pension a couple of years ago, even at the retirment age it wont be a great deal when you break it down into monthly payments. not really much chance of me retiring at 50 like some of the rich people.
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Soldato
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Yep pensions are tax free (of basic rate if taken at source). So you pay in gross but at the end they are income so you pay tax on the income.
Have to claim the other part of tax back once its in your scheme in effect if that applies to you.
I dont believe there is a way to pay for pensions after tax to avoid tax later.
Osbourne was consulting on switching it to tax up front and being tax free when taken later. It was way to make more tax in the shorter term.
I don't think it got past consultation
Its seen as an easier way to get people to save to make it tax free.
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You're right, that is absolutely the case. However a) you still have the annual tax-free allowance and b) you'll still be making deductions at the lower-rate threshold (25%) instead of the 45% threshold. That ignores NI savings too.
With a big enough pot, that 25% pot tax-free allowance could be huge
25% lump sum tax free at the end and then any pension is taxable with the current thresholds of the day, so you still get your personal allowance amount tax free as well and then whatever the base rate/high rate is depending on size of all your pensions and so on.
Pensions are tax free on the way in. 25% tax free and remaining 75% taxed at your marginal rate on the way out. In essence those who are basic in and out are at least 5% better off ignoring National Insurance and growth.
If you're higher stepping down to basic you're even better off. As OldKitMan notes above if you retire before state pension or any DB scheme kicking in you can use your Personal Allowance thereby keeping all the taxed saved at that level further increasing the tax vehicle return.
Then there's the fact pensions are outside your estate for IHT, usually employers contribute, and if you are unfortunate enough to pull the plug before 75 whoever you leave the scheme to gets it 100% tax free.
The LTA limit sucks but to be frank even at it's current level you have to be earning six figures to really be impacted by it.
If you're higher stepping down to basic you're even better off. As OldKitMan notes above if you retire before state pension or any DB scheme kicking in you can use your Personal Allowance thereby keeping all the taxed saved at that level further increasing the tax vehicle return.
Then there's the fact pensions are outside your estate for IHT, usually employers contribute, and if you are unfortunate enough to pull the plug before 75 whoever you leave the scheme to gets it 100% tax free.
The LTA limit sucks but to be frank even at it's current level you have to be earning six figures to really be impacted by it.
Yes and No.
Adult care can be hugely expensive if you need carers to come in, or worse yet end up in a care home due to dementia or similar ailment.
It all depends on whether you win or lose the dementia lottery these days. This seems to be an area which people are still "behind the times" when it comes to their pension pot.
The question should not be "how big does my pension pot need to be to give me a cushy retirement"
The question should be... "How big does my pension pot need to be to cover the insane care home costs should I lose the dementia lottery" because if it's not enough, they will come for your house.
*Edit* :- Not sure if health insurance covers ongoing care costs etc.. for conditions such as dementia? To my knowledge they mostly seem to be "end of life" policies to pay out upon death?
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That's the other kicker about saving up a large pot and also paying off the mortgage. There is a possibility it all goes into paying for care at old age!
What a life. Enjoy it whilst you can.
Soldato
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My experience (family members) is that healthcare does cover much of these stuff in old age but the premiums are eye watering and then once a really serious age related issue crops up, come renewal, they go from eyewatering to beyond a joke, and/or suffer restrictions in cover that make them non viable.
I know someone who had this pay out for them recently. Cleared their mortgage!
On the downside they have a critical/terminal illness
Yeah, nearly died (heart related) and on meds for the rest of their life but actually not too bad in the bigger scheme of things.On the downside they have a critical/terminal illness
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Depends on the scheme. If it's a salary sacrifice scheme, you get the full relief without doing anything. If your contributions are paid into the scheme after tax, then correct. Not good...
IIRC salary sacrifice is quite a specific term - bit different. That is pension contributions that are NI effective (but lower your gross declarable income).
Contributions for a "normal" workplace pension should be taken from gross automatically (i.e. no tax paid/nothing to claim back).
It really depends on the employer, as it appears Mekrel found out to his cost. Some use relief at source schemes and so you need to claim back higher rate relief.
I wonder why an employer would use a net pay scheme and gross up rather than salary sacrifice and save the NI.
I wonder why an employer would use a net pay scheme and gross up rather than salary sacrifice and save the NI.
I am sure someone (who is actually qualified) will know the proper name, but there is a distinct thing called "salary sacrifice" or "salary exchange" which is where you agree with your employer you'll only get paid £50k instead of £55k, and they'll chuck the £5k plus any NI saving they make into your pension.
Pensions I am familiar with are paid before tax, but not in a salary exchange agreement. That means NI is slightly higher than on a proper salary sacrifice scheme. I am in this system.
I imagine the saving of NI is offset by the employer reducing their contributions (a % of your new lower salary) so net benefit is minimal.
(You may have said this in your post but I wasn't clear).
Soldato
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I think salary sacrifice needs some HMRC approval, im slightly out of touch here