Personal pension strategy

No. The fact that the 0% is on the "enhanced" value is irrelavent, since with the pension route you are contributing gross, so the enhancement works on a larger sum.

Compare two investment strategies, person A invests in a pension and person B invests in ISAs. Both pay 40% tax, and both underlying investments are the same so they grow at the same rate. They both contribute the same net amount (so person A will actually contribute 66.7% more gross, but the net costs are identical).

Say person B ends up with a fund of 100,000.

Person A will end up with a fund 166.667% of person B's, ie 166,667. He can take 25% of this fund tax free, giving him a lump sum of 41667. He can do what he likes with this, so in this respect it is identical to the first 41667 of B's fund.

So we need to compare the annuity person A must buy with the remaining 75% of his fund, ie 125,000, with B's 58,333 which he can do what he wants with.

A will get taxed on his annuity income, assume it's all at 22% (his allowance and 10% band are used up by other income). So A effectively has a pot of 97,500 (net of tax) which he must use for an annuity, and B has a pot of 58,333 which he can do what he likes with.

So B has the flexibility, but it has cost him over 40% of the amount he could have had. It will be very unlikely that this extra flexibility would be able to earn him the same retirement income as A, unless he takes risks with his capital.

Reply to
Andy Pandy
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No doubt that is a level annuity. How much will 7.3% be worth when he's 80 and RPI has been rising at 3% p.a.? Under 3% unless I'm very much mistaken.

What would an LPI annuity bring in?

Reply to
Terry Harper

Diagnosis: selective myopia. This is something an optician cannot fix. You need a psychiatrist.

Reply to
Ronald Raygun

"john boyle" wrote

Alternatively, you'd be better off with the annual-paying annuity if you die on the 1st/2nd day of the annuity year - you'd get an extra full year's (higher) payment, rather than just an extra 1/12 of a year's (lower) payment!

Reply to
Tim

"Terry Harper" wrote

Still more than the alternative of drawing the income from a

5-6%-ish -paying (ISA) savings account! :- 7.3% / 1.03^30 = 3.01%
Reply to
Tim

"Andy Pandy" wrote

How do you know the tax-free lump sum legislation won't have been scrapped in (say) 30 years' time, when the investor comes to retire? :-(

Reply to
Tim

Does not the "With Proportion" option cater for annuities which are paid in arrears?

Reply to
Doug Ramage

You don't. Nor do know future tax rates.

But you don't know that ISAs will still be around in even 5 years (IIRC the government only guaranteed them till 2009), so you might end up having to pay extra tax on dividends/interest & CGT on your ISA savings.

Given the mess pensions are in at the moment, I think the tax advantages of ISAs are more likely to be reduced than pensions, in fact with pensions it's going the other way, I believe you'll be able to get 25% tax free from AVC's in 2006, whereas you can't now.

Reply to
Andy Pandy

In message , Tim writes

Ahh, but Ronald was suggesting annually in arrears! Most annuities tend to be 'in arrears'.

Reply to
john boyle

We all know that the first target of GB's stealth taxes was pension funds, and their ability to reclaim tax credits. It took him much longer to remove the same ability from ISAs and PEPs.

Right now he needs to encourage saving, both in ISA and Pension Fund form. He also needs to borrow a considerable amount of money.

Reply to
Terry Harper

Does this mean that, in general, everybody with a PP should draw their pension at 50, even if they don't "need" the cash?

I hope I am not mis-understanding you.

Reply to
John-Smith

His excuse was that most occupational pension funds were in surplus so they didn't need the tax credits. ISAs were his baby hence his preferential treatment (initially at least).

Specifically, he needs to encourage people on low and average pay to save. People on high pay will generally save anyway, or have a decent occupational pension. From the government's POV, the main thing is to have as few people as possible claiming means tested benefits in retirement.

But they're already going about it the wrong way by increasing means tested benefits faster than contributory benefits, if they then compound this by reducing pension benefits further for people on low/mid incomes then they will just be decreasing even further the incentive to save.

I can see them abolishing the extra tax relief on pensions for higher rate tax payers, I think the only reason they haven't done this so far is that it'll make occupational pensions very complicated. Mind you that's never stopped him in the past...

Reply to
Andy Pandy

In message , John-Smith writes

I wouldnt advise it if they were still working and/or didnt need the dosh right away.. But I am not advocating that Pensions should always be taken that early, but retired people often wonder whether to take a pension at, say, 62 or wait till 63, then I would take it @ 62 while you can enjoy it .

Reply to
john boyle

do people on low pay have any money to save, though. Isn't that why stakeholder products have flopped, their target market has no discretionary cash left to save/invest ? (or spends it on other more immediate things).

Phil

Reply to
Phil Thompson

Practically everyone has discretionary cash to spend, even those on benefits.

Yes, and who can blame them when saving now will just result in lower benefits later.

Reply to
Andy Pandy

"john boyle" wrote

I know. That doesn't affect my comment! :-

Don't forget that an "annually in arrears" annuity should pay each year

***more than 12 times*** the amount that a "monthly in arrears" annuity pays each month!!

If you die ten-years-and-one-day after starting an "annually in arrears" annuity, you'll receive 10 years' payments. If you die ten-years-and-one-day after starting a "monthly in arrears" annuity, you'll receive 120 months' payments. But the 10 years payments should exceed (by more than is required to combat inflation) the 120 month's payments....

Reply to
Tim

"Andy Pandy" wrote

Hmmmm. So, if someone would be a higher rate taxpayer both before and after retirement :-

A contribution of 100 (gross) would be 78 (net) paid, with 22 tax relief added-back [but no longer a further 18 "high-rate" relief].

OK, so "losing" 78 out of net pay just before retirement will provide the following value after retirement: The "fund" will be produced from the 100 gross contribution -- a quarter of which can be taken as TFLS (assuming for now that this still applies in future) and three-quarters as pension, taxed at 40%. That's equivalent to

25 + (75 x 60%) = 70.

So, to gain benefits worth 70 (net) after retirement, the high-rate taxpayer (high-rate both before & after retirement) will have to pay contributions worth 78 before retirement. Do you think he'll bother to save to a pension then, or use other non-pension routes as John Boyle has suggested??

If the TFLS is also scrapped by then, the HRTP would only get benefits worth

60 from his/her 78 contribution..............
Reply to
Tim

If HRT relief were abolished it'd probably be daft use pension savings to obtain a pension income above the HRT threshold. But this really won't matter to the government - their objective is to get people to support themselves in retirement and not claim means tested benefits (pension credit, HB etc). Anyone paying HRT in retirement will almost certainly not be claiming means tested benefits.

They could of course, to make up for the lack of HRT relief on pension contributions, not charge HRT on pension income. This probably won't cost much as I guess only a very small proportion of pensioners pay 40% tax on their pension income.

Yes, but the same happens now, to a lesser extent. People over 65 have an effective 33% tax band from around 19,500 - 24,000, due to the higher personal allowance which gets withdrawn as income exceeds the 19,500 threshold. So a basic rate taxpayer could get just 22% tax relief on their AVC contributions but end up paying 33% tax on their AVC income.

Reply to
Andy Pandy

In message , Tim writes

I take your point. The question is, of course, the what the NPV of the monthly payment is versus the annual payment using a constant discount rate.

Reply to
john boyle

Or it could even be because it would be unfair in principle. Mind you that's never stopped them in the past either.

Reply to
Clifford Frisby

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