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Post by dan1 on Mar 20, 2017 15:02:42 GMT
Not sure I understand what your trying to say? I'll try again...if you're a 40% tax payer, increasing pension contributions is a great way to reduce your tax bill, but according to my IFA it's only really worth doing this to take yourself out of the 40% tax bracket (otherwise all the tax you save putting it in just gets taken off again when you take it out at the other end, so you might as well invest/diversify elsewhere). So as well as being limited to your salary level, this further limits the usefulness....unless you also happen to have a whole load of p2p and other income to offset that would otherwise push you back into 40% anyway. Hence really only benefits those with both high salaries and wealth. I think it all depends on what your taxable income (i.e. from employment, interest, dividends, pensions etc) is likely to be in retirement. What your IFA suggests seems to imply that your income will be in excess of the personal allowance and therefore you'll be paying basic rate tax at your marginal rate. So, not much point saving basic rate tax on pension contributions now to only pay it when you draw it - you may as well have access to the money now in case of future messing with pensions (inevitable). Only, that's not the whole story. If you can salary sacrifice then you'll save 32% in tax now at the basic rate and only pay 20% in retirement (assuming tax rates/legislation stays the same!). In addition, you get to extract 25% tax free from the PCLS. Given the personal allowance will increase to £12.5k (election pledge, I think?) then as a couple you can draw £25k from pensions tax free assuming no other income. That's more than enough to have a good retirement, and don't forget it can be topped up by extracting from ISA's, also tax free.
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bg
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Post by bg on Mar 20, 2017 15:37:45 GMT
On top of the reasons outlined above (in particular being able to take 25% of your pot tax free) there are other reasons why it is beneficial to maximise your contributions:-
Your personal allowance starts to taper away over £100k meaning above this level your marginal rate of tax is well north of 50% in a certain bracket. It's definitely worth trying to get this back if it's the case.
Depending on your employer, they may offer some sort of salary sacrifice scheme to they will pay into your pension before national insurance contributions are made.
Most employers match any pension contributions you make up to a certain level (in fact I think they may now have to do this by law). It's definitely worth taking advantage of this regardless of your tax position.
To say it's not worth paying into a pension if you are a basic rate payer now as you will be taxed at the basic rate on the way out also ignores the power of compounding returns which can be very significant. Any dividends or capital gains made in the pension will be exempt from further tax before they are reinvested. Outside of a pension rapper you will have to pay tax at your marginal rate. Compounded over a number of years this could really add up.
There are significant IHT benefits for assets left in a pension.
Any transactions/dividends in a pension/SIPP do not have to be included on your tax return. A massive admin benefit irrespective of any tax savings.
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pom
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Post by pom on Mar 20, 2017 15:41:39 GMT
stevio dan1Remember we were talking about the feasibility of carrying forward previous years allowances. Not non-earners/low earners...and anyone wanting to pay in multiples the regular 40k limit a year is probably expecting to pay tax in retirement  Hence my whole point that these allowances are naff all use for regular folk.
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Post by dan1 on Mar 20, 2017 16:00:03 GMT
On top of the reasons outlined above (in particular being able to take 25% of your pot tax free) there are other reasons why it is beneficial to maximise your contributions:- Your personal allowance starts to taper away over £100k meaning above this level your marginal rate of tax is well north of 50% in a certain bracket. It's definitely worth trying to get this back if it's the case. Depending on your employer, they may offer some sort of salary sacrifice scheme to they will pay into your pension before national insurance contributions are made. Most employers match any pension contributions you make up to a certain level (in fact I think they may now have to do this by law). It's definitely worth taking advantage of this regardless of your tax position. To say it's not worth paying into a pension if you are a basic rate payer now as you will be taxed at the basic rate on the way out also ignores the power of compounding returns which can be very significant. Any dividends or capital gains made in the pension will be exempt from further tax before they are reinvested. Outside of a pension rapper you will have to pay tax at your marginal rate. Compounded over a number of years this could really add up. There are significant IHT benefits for assets left in a pension. Any transactions/dividends in a pension/SIPP do not have to be included on your tax return. A massive admin benefit irrespective of any tax savings. Lots of benefits to pensions but don't ignore the risk of future tinkering by those in power. What will happen to the 25% tax free lump sum, will pensions attract NI in future? With regard to compounding benefits, I understand that all things being equal this is not the case. It is counter intuitive. For further details see here
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bg
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Post by bg on Mar 20, 2017 16:21:33 GMT
On top of the reasons outlined above (in particular being able to take 25% of your pot tax free) there are other reasons why it is beneficial to maximise your contributions:- Your personal allowance starts to taper away over £100k meaning above this level your marginal rate of tax is well north of 50% in a certain bracket. It's definitely worth trying to get this back if it's the case. Depending on your employer, they may offer some sort of salary sacrifice scheme to they will pay into your pension before national insurance contributions are made. Most employers match any pension contributions you make up to a certain level (in fact I think they may now have to do this by law). It's definitely worth taking advantage of this regardless of your tax position. To say it's not worth paying into a pension if you are a basic rate payer now as you will be taxed at the basic rate on the way out also ignores the power of compounding returns which can be very significant. Any dividends or capital gains made in the pension will be exempt from further tax before they are reinvested. Outside of a pension rapper you will have to pay tax at your marginal rate. Compounded over a number of years this could really add up. There are significant IHT benefits for assets left in a pension. Any transactions/dividends in a pension/SIPP do not have to be included on your tax return. A massive admin benefit irrespective of any tax savings. Lots of benefits to pensions but don't ignore the risk of future tinkering by those in power. What will happen to the 25% tax free lump sum, will pensions attract NI in future? With regard to compounding benefits, I understand that all things being equal this is not the case. It is counter intuitive. For further details see hereI don't understand what you mean all things being equal. Pensions and ISA's are not the same things, they are not 'equal'. As the article points out pensions pay 25% tax free giving pensions a huge edge. On top of this I was not comparing pensions with ISA's. I was comparing pensions with investing outside of any sort of wrapper. I would recommend doing both. Agree there is always the risk of future governments tinkering with pensions but equally this applies to ISA's. Also I can not see a scenario where a government starts taxing money that is already in a pension or changing the rules that apply to monies already saved (such as dropping the 25% tax free lump sum). There would be uproar. What I can see them doing is continuing to limit the amount you can pay in and maybe even reduce the tax relief you can claim on future payments into a pension. This is yet another reason why it's worth maximising contributions now in my opinion.
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pikestaff
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Post by pikestaff on Mar 20, 2017 16:34:06 GMT
...pensions pay 25% tax free giving pensions a huge edge... ...I can not see a scenario where a government starts taxing money that is already in a pension or changing the rules that apply to monies already saved (such as dropping the 25% tax free lump sum)... Hmmm. I think the 25% tax free lump sum is hugely at risk, certainly on larger amounts. The black hole from the NI U-turn has to be filled somehow.
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bg
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Post by bg on Mar 20, 2017 16:39:22 GMT
...pensions pay 25% tax free giving pensions a huge edge... ...I can not see a scenario where a government starts taxing money that is already in a pension or changing the rules that apply to monies already saved (such as dropping the 25% tax free lump sum)... Hmmm. I think the 25% tax free lump sum is hugely at risk, certainly on larger amounts. The black hole from the NI U-turn has to be filled somehow. Can't see it. I think they may move to a flat rate tax relief and almost certainly reduce the annual allowance but to touch the 25% tax free lump sum would be political suicide.
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pikestaff
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Post by pikestaff on Mar 20, 2017 16:52:48 GMT
bg We shall see. I was sufficiently worried about it last year that I brought forward a pension drawdown to the day before budget day. I was wrong then but I don't expect to be wrong forever.
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duck
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Post by duck on Mar 20, 2017 17:19:50 GMT
Not necessarily A Non-earner can contribute £3,600 gross - a payment of £2,880 to which the taxman adds £720. This could be children and non-earning spouses who don't pay any tax intially ...... Both my wife and I retired 'early' and I have been utilising this allowance for her. I don't have any pensions worth mentioning (Robert Maxwell stole my first pension and another has lost 80% of the cash that I paid in .... ) but the pension contribution & 17K allowance is very useful. With P2P income I utilise her 17K allowance and my 17K plus some more is again covered by P2P income but I'm maintaining it at a level that I remain a lower rate tax payer. In a slightly bizarre way I am looking forwards to the lowering of Corporation Tax in order to take some of the sting out of Dividend Tax since my business is still alive and kicking with it's income stream now being interest on it's investments. Tax and tax law is never an 'interesting read' but IMHO looking at investments and how the tax laws interact can be 'profitable' and in some instances dictate which platforms you invest with and how you invest.
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bg
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Post by bg on Mar 20, 2017 18:29:33 GMT
bg We shall see. I was sufficiently worried about it last year that I brought forward a pension drawdown to the day before budget day. I was wrong then but I don't expect to be wrong forever. Well look at it this way...take an example of a guy who is just about to retire and has been working for 40 years. He retires earning 40k a year and has contributed 5-10k a year for his working life. With investment growth he now has a pension pot of £700k (so below but not a million miles from the lifetime allowance). Some people may look at the 700k pot and say he's a big hitter and can pay the tax but in reality after taking the 25% lump sum he would get a pension of probably 20-25k a year (assuming he bought an annuity). Maybe comfortable living if he is debt free but hardly retiring on a yacht. If the government was to turn round after 40 years of him investing under a set of rules and assumptions and remove the lump sum he would understandably be furious. I can accept them changing the rules for investment contributions going forwards but would say retrospective changes such as that would be morally wrong and completely undermine any incentive for people to save for retirement (which the country desperately need). It would also lead to a huge flurry of people taking pensions early to get the 25% before any phasing out happened.......hardly good for anyone. Middle England would revolt.
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jonah
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Post by jonah on Mar 20, 2017 20:51:09 GMT
I've just had a look at his blog. Why do these early retirement blogs always sound like they're trying to sell you a bridge? It makes me sceptical of their advice even if it otherwise seems perfectly sound. As someone who is currently pondering...I have to say that MMM is about the only one I've ever bothered to read more than a couple of entries for....and even then not many. Most of it is after all common sense...spend less, need less.... in fact most of them are so dull they're enough to make me want to forget the whole idea  I agree. Based on the first 20 or so posts of his a few years ago I significantly changed my life, in terms of money at least. I've not read beyond there, but the broad principles he suggests are, imo, sound.
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stevio
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Post by stevio on Mar 20, 2017 21:39:12 GMT
I always find it interesting that everyone focuses on ISAs and SIPPs/pensions but there is no discussion of life assurance bonds as a tax efficient investment vehicle. I took fixed protection on my pension in 2012 (to protect my future LTA at £1.8mm) so since then I can't make any further payments into my SIPP. I turned to a offshore life assurance bond as an additional product to provide gross roll-up (which is the key driver) but it has useful other advantages such as 5% annual withdrawal without triggering a chargeable event, top-slicing relief (very useful long-term), IHT aviodance, the ability to transfer units to spouse or children etc. Clearly it has disadvantages such as cost (mine costs 40-45bp similar to an online broker platform charge) and the fact that it's only really useful for funds (you can't buy single stocks or loans so P2P is out of scope without a wrapper). I see it as a useful diversifier in then sense that I don't like too much concentration of wealth into any particular product/wrapper. My next "product" will probably be an FIC since dividends are not taxed which make it attractive for equity holdings. pikestaff. I tend to agree with you medium term on the PCLS but short term possibly not. Osborne wanted to kill pensions completely and replace them with pension ISAs. The PCLS was on the radar given they had already slaughtered the LTA. The assumption was that in coalition with the Lib-dems they would be able to run rough shod over the Tory back-benchers and cap the PCLS at a certain sum (high enough that most middle class voters wouldn't care, say £100k) and then let that value wither away with inflation. Of course right now, May doesn't have the numbers really to get away with it. She can't even get away with a perfectly reasonable 1% increase in NIC! I always like to read your posts as I come away with products I never knew existed but an uncontrollable desire to Google
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Post by bracknellboy on Mar 20, 2017 22:01:44 GMT
I also greatly enjoy samford71 's posts - but then I'm a masochist and so revel in the inferiority complex they invariably induce :-) A typical reaction being 'I see the words, but not the meaning...'. I always feel like I've missed out on an important bit of my education.... That life assurance bond though, looks to have remarkably similar charateristics to a Discretionary Gift Trust (sorry, DGT - must remember to add to the universe of alphabet soup) that I am somewhat familar with.... |
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bigfoot12
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Post by bigfoot12 on Mar 21, 2017 10:01:56 GMT
My next "product" will probably be an FIC since dividends are not taxed which make it attractive for equity holdings. I, too, always appreciate your posts. One of the few things that I really miss now that I no longer work in the City is hearing about these sorts of products. I haven't heard about Family Investment Companies before, but I will certainly find out more. ... there is no discussion of life assurance bonds as a tax efficient investment vehicle.(mine costs 40-45bp similar to an online broker platform charge) I might have to move this post to a new thread, but this is why I didn't invest in one:- a) I deeply regret the money I put into a SIPP many years ago - I feel very exposed every budget. I wouldn't want to tie money up in a product that would be an easy target for a chancellor. b) When I looked the fees seemed higher than samford71 is paying, perhaps they have fallen or I looked at a poor scheme. The funds available in those days also had higher fees than my other investments in addition to the bond fees. c) Any capital growth is taxed as income tax (I know that some of the things you mention can mitigate this, but see d). d) It seems to be a product for someone who expects to be in a lower tax band in the future. I don't think that I will be. e) My main concern is that tax in the future will be higher. 28% CGT isn't that bad compared to what we might see in the future. It seems surprising that employment is taxed so much more than investment income. And given that the NHS, long term care and the pension system are going to require considerably more money in the next 20 years. I assume that tax is going to be increasing. Also I have invested in growth companies and funds, which have given me some of the benefits of gross roll up without some of the risks (because early on there isn't much of a dividend and I am taxed only when I sell). However it is a few years since I last considered one; things may have changed and I am probably wrong about (b). BTW I just had a quick look and nearly every company that I have heard of seems to have offloaded its offshore insurance business to a Private Equity group in the last 5 years.
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Hence my whole point that these allowances are naff all use for regular folk.
