Pensions

[The Heron]

1 hour ago, JohnfromUK said:

A little (very much background) advice - none of which is anything other than a personal opinion, but made sense and worked for me.

1. Start as early as you can, because anything you can put away early benefits from more years of compounded growth
2. Try and have a 'goal' - such as - I would like to (be financially able to retire at xx years old on roughly yy,yyy annual income)
3. Get a financial advisor - either through your work (my work pre retirement provided one who was very good) or independently, or a government pensions advisor which I believe can be arranged for free these days?
4. Work out a strategy to meet your goal - understanding what it may cost and what the risks are
5. Make a plan to follow through and fulfil the strategy - which may be split between pension (tax free on the way in, taxable on the way out) and ISA (taxable on the way in, but tax free for gains and income on the way out, and possibly other things (e.g. property), SIPP etc. and should show you how much you need to put in each 'pot' per year.
6. Use reputable companies (the FSA has a list I believe)
7. Stick with it.  Remember that every time you make a change, someone else probably makes money as commission

There is no better thing than to start early - as there will be both ups and downs along the road, but the longer you are 'in' the more likely that 'up' will predominate.  It is not much good getting to 50+ and deciding you would like to retire at 60 on 75K a year ......... unless you are already very wealthy!

👍

[AVB]

1 hour ago, JohnfromUK said:

If you pay 40% tax, you can get tax relief on your pension contribution to a pension scheme at that rate.  However there are certain 'limits' which probably won't apply to you now, but might down line;

1. Once your 'pension pot' has reached a certain size, I think the tax relief is no longer applicable.  (You need a pot of over £1M+ for that to apply)
2. There is a limit on how much your contributions can be in a year (to get full tax relief) - that varies with your age - the older, the more you can put in tax free
3. There are also limits for very high earners in the top tax rate I think (not 100% sure as I was never there!)
4. I believe you can use up a previous years 'unused' tax allowance if you have a good year (e.g. big bonus), but you would need to check on that.

But basically - yes - it is a tax saving way of saving for the future.  The downside is that there are currently (and have been more so in the past such as having to buy an annuity) restrictions on how you can draw out that money in your 'pot'.  These are quite complicated - but since you have not been taxed 'on the way in' - many forms of withdrawal are subject to rules and likely tax.  All rules around pensions are subject to regular, often complex, and unpredictable changes imposed by the chancellor of the time.  For example - it is tipped that the chancellor may reduce the tax relief for higher rate tax payers.

The advantages of putting some of your spare cash/savings in ISA are as follows;

1. Although you can only buy it from 'tax paid' income (i.e. no tax relief 'on the way in'), once in for 1 tax year, withdrawals of both income and capital are currently free of all tax.
2. You can draw out from an ISA tax free at any time - for example if you suddenly wanted a lump of cash to buy into say a business, or buy a dream house - you can get at your ISA cash.  Pension - you can't always and may be subject to high tax on lump withdrawals (it's complex).
3. There is a limit (of currently £20,000 per annum) on how much you can put in, but no limit on growth/maximum fund value.  People who have used the ISA scheme to it's full from when it was introduced have now built up large 'pots' that are tax free
4. If you end with with a decent pension (total from state, employment and private pensions), you will probably have to pay tax on it's income each year - but you are not taxed at all on any income from ISA, so it can be very tax efficient 'on the way out'.

Like pensions, all ISA rules are subject to regular, often complex, and unpredictable changes imposed by the chancellor of the time.

Overall - it is a complex minefield, and that is why you need professional advice.  I did a mix of pension and ISA to give me tax relief and flexibility.

This. One reason I put more into pension than ISA was because it was locked up. I have terrible willpower and if it was in an ISA I would have blown on cars. In fact it wouldn’t have made it into an ISA.