Starting a pension

A company can generally pay what it likes into pension schemes for various employees, and will often contribute more for members who are more 'important' or higher up the food chain.

However, consider an employer contribution as additional deferred pay, which you won't get for a number of years. If your employer is offering to make the contribution, you may as well accept it. If your employer offered you a bonus, would you turn it down ?

If you pay 40% on any income, then you will receive 40% tax relief on contributions to the stakeholder scheme. Tax relief is calculated on gross income, including items such as P11D benefits.

As 22% tax relief is given at source, your 3% contribution will be an effective 2.34% contribution. The other 18% relief can be reclaimed via your tax return, so you are effectively paying a 1.8% net contribution for an effective 3% contribution.

I don' t think there is anything intrinsically bad in paying into a stakeholder pension scheme. What is important in any pension scheme is the type of funds that you invest your contributions into. The growth (or lack of growth) of specific funds ultimately determines what level of funds you will build up at retirement.

Rgds SS

hmmm. I understood that the maximum contribution was 17.5% (for your age).....

Anyways, as someone else has already said, the company is giving you money free of charge. I'd take it, the stakeholder shouldn't be tied to the company anyways, so you can take it with you.

yeah you are probably right. The company will only match my contribution upto 3% though. You are right about it being free money though.

Am I right in thinking all the cotributions I make to it will be tax free from my gross salary thus reducing my taxable income? Is the company contribution tax free too? Why is it so complicated?

The pension contributions do not reduce your taxable income, as they come out of taxed income. The tax relief is applied when you pay the contribution - i.e. you pay a contribution of £78 and tax relief of £22 is added at source, making a contribution of £100 that is actually applied to your pension plan.

Under certain 'occupational pension schemes' premiums can be deducted gross, and reduce your taxable income. But under a personal pension / stakeholder, the method is as outlined above.

The company contribution is paid gross, but they can offset it as an expense against corporation tax.

Bitstring , from the wonderful person snipped-for-privacy@aol.com said

Yes

Yes

It isn't, it (stakeholder pensions) is really simple compared to the sort of mess you can get into with the 7 or 8 sorts of other (previous) pension schemes, grandfathered exemptions, and special cases.

What you need to do is stuff as much as you can into the stakeholder scheme, with your employer stuffing it in too, and then consider stuffing some more into a secondary scheme if necessary, especially if you think you might not be a 40% taxpayer all your life (you pay tax on the pension you draw from your pension pot, but you might only be paying

As someone already said, what you invest it in is of more import than what scheme you use to invest it. Given 40 years something based on the w/wide stock market may be appropriate (China should really be humming in 40 years time, unless they've re-nationalized the whole country or something daft, or global warming has wiped us all out).

kind of.

Let's say you earn £40,000 hence probably a 40% tax payer and your maximum contribution is limited to 17.5% = £7,000 gross. What actually comes out of your pay packet is £7000*0.78 = £5460 since the government tops it up with basic tax relief.

You can then claim the other 18% = £1260 as higher rate tax relief. Your £7,000 contribution has cost you £4,200. Bargain!