Pension / Equity

have you tried asking on http://forums.moneysavingexpert.com/index.php

there some pretty clued up forum users on there

One consideration is your mortgage interest rate. Say it is 4% then you may be better paying that off than earning a return on buy to let that might be the same after expenses and tax etc. Yes you miss out on the capital growth of the second property but that is not guaranteed.

Be careful about taking short term advantages of renting. I knew of plenty that lost their homes by overstretching and running your own business is enough to concentrate on without diversifying too much, taking it for granted and losing it. Keep your pension payments up and build up your mortgage equity by topping it up when you have spare cash.

the best advice I can give you is take absolutely no notice of anyone that says they are a Financial Advisor

Pensions are frequently changing at the moment Rick but my understanding is that even if you're a lower rate tax payer if you're putting in £6000 to your pension the government will be sticking in a fair wedge (about 20% I think). Doesn't mean your pension advisor didn't bend you over but I don't think they are a bad thing per se.

Property? Who on earth knows? The fundamentals became divorced from what I think is reality a long time ago.

Thanks gents. much appreciated

The taxation rules on rental properties is changing as well, which will have a huge impact on potential returns.
Higher rate taxpayers will no longer be able to offset mortgage interest against the rental income. This could make it a dead-duck for those borrowing heavily to get involved in this market, as that concession was the big attraction. Assuming that you would only be able to use around £40-50K of the equity you have, you would be looking to borrow more than 50% (presumably) of the value of the second property, so if you're a higher rate taxpayer you'll struggle to make it work. And don't forget, should you decide to sell that second property, then there is capital gains tax to pay.
EO, is right, you'll be getting tax relief, of one form or another, on your pension contributions and any growth of the value of your fund is also free of income or capital gains tax.
Of course, none of this is relevant if you're invested in poor funds........ as tax is only a part of the equation. My advice, seek advice!

Crisp is correct.If your pension pot isn't rising by more than 4 % then the best advice is to pay off your mortgage as fast as you can using the £500 a month you're currently putting  into your pension pot. Do the maths and calculate how much you will have to pay at 4% ? ( and for how long)with your current level of repayments, before the mortgage is paid off.
Then calculate what the difference will be by paying in an extra £300,£400 or even the whole £500 a month of your current Pension payments. The years gained with no mortgage payment, means those payments can then go straight into your pension pot plus what you pay in now.

fwiw I found this site plenty useful.

.https://www.moneyadviceservice.org.uk/en/categories/pensions-and-retirement

Facts
04 Jan 16 14:45
Joined: 05 May 03
| Topic/replies: 19,911 | Blogger: Facts's blog
Crisp is correct.If your pension pot isn't rising by more than 4 % then the best advice is to pay off your mortgage as fast as you can using the £500 a month you're currently putting  into your pension pot



You are ignoring the fact of tax relief on his Pension Contributions
If O/P is  a Higher Rate 40% tax payer thats a 66.6% return on his Pension Fund every year
For a basic rate tax payer its the equivalent of 25% return on his Pension Fund every year

And the TVM.

whilst pension advice is been given out
ive got 120k in a private sipp and 30 grand in a works stakeholder from which ive just been made redundant, i want to transfer the 32 grand into my sipp but want advice on the best way to do it
are you better off taking the 25% tax free[ i,m 56 ]and getting the tax relief when you put the cash lump sum into the sipp,then transfer whats left,ie 24 grand straight across into the sipp
any advice greatly accepted

The government does not pay a penny into anyone's pension, they give tax relief on contributions. i.e. the contributions go into your pension free of tax. For those with company pensions, the employer’s National Insurance rate is 13.8%. Some companies will return all or part of this to you by way of adding this to your pension when you do salary sacrifice.

Don't forget that you don't finish paying tax when you retire! Pensions are taxable.

When you consider moving bit of pension around, you should find out the basis on which they are invested.
e.g I have made some AVCs when I worked for a large company some years back. I asked advice on whether to move it and was advised not to. The money will usually be invested in some funds. When a large company sets up these schemes, they are able to command very low annual fees. e.g. Perhaps as low as 0.2% per year. If you invested in this type of fund yourself, you might have an annual fee of 1.0% or more. The effects of this are absolutely enormous over time! (See below)

How we operate our pensions has changed enormously since this government removed the requirement for us to buy an annuity, which were heavily in favour of the insurance companies operating them. Many of us will now go for income drawdown and this moves the goalposts significantly. Beforehand, those with money purchase or stakeholder type pensions invest in a pension and the money would be used to buy an annuity at retirement. Now we can instead choose income drawdown and carry on investing past our retirement date.


From a recent story in the Times :-

The annual charges you pay on your investment and pension funds may seem like a tiny fraction of the overall total. However, they matter because they will eat heavily into your investment returns.
The Department for Work and Pensions (DWP) calculates that people who save throughout their working life into a pension would lose 24 per cent of their accumulated pot if the annual charge was set at 1 per cent.
If the charge was raised to 1.5 per cent, the chunk of pension pot that would be lost becomes an eye-watering 34 per cent.
However, the DWP’s calculations do not cover the full cost of the fund charges that investors bear. The typical headline charge figure quoted by most investment and pension funds takes no account of other “hidden” charges, such as dealing costs, which are borne by the investor but do not feature in the stated charges.

The tax free lump sum makes it viable (atm) plus employer contributions where applicable to contribute to a pension. Of course if you manage it yourself you have access to the cash whatever your age, and you won't need to rely on an annuity. Some people would prefer not to have access. There's no right or wrong way, people just need to be aware of their options.

I'm struggling to follow your logic there Stow but not being an expert on the issue I'm happy to be corrected. Speaking simply is it not the case that if you're a lower rate tax payer and put £1 into a private pension then the government will put 20 pence into your fund (through claim back)? If that is the case does it really matter what they call it?

Something possibly to take into consideration depending on your circumstances 1st timer is whether you have another job to go to? If you don't and may need to claim some benefits would there be any ramifications flowing from taking a lump sum into your bank and then switching it to your SIPP? I don't know but it would be worth clarifying I'd think.

Tax relief is at the rate tax is due. So yes, a higher tax payer gets higher tax relief on that part of his earnings that he pays into a pension.
i.e. The 40% tax payer is paid 60p after tax on that pound, whereas the 20% tax payer is paid 80p in terms of wages.
In terms of the money itself, the pound earned gets paid into the pension without taxation at that point for all. The government is not putting the 40p nor the 20p into the pensions, they are not taxing the pound at that point. (Your pension is still subject to tax later)

You are ignoring the fact of tax relief on his Pension Contributions
If O/P is  a Higher Rate 40% tax payer thats a 66.6% return on his Pension Fund every year
For a basic rate tax payer its the equivalent of 25% return on his Pension Fund every year



Yes, there's a tax gain on the contributions he makes each month/year
I assume the value of the Fund will be subject to the vagaries of the stock market.
As he's self employed there is no ' Company Pension '

Of course he is already paying at least as much tax as the lower tax payer if not considerably more.
Although he has his own business now, it's likely he has worked for companies before.

ETERNAL  ive no prospect of work at the moment but wont be claiming any beneftits [ wifes working ],plan is to use savings and roughly 4grands worth of share dividends a year to top up wifes wages [no mortgage,debts]till i,m 60 then use roughly 10 grand a year of the sipp  to get me through till 66 and state pension estimated recently at £143 , which i,ll top up with  whats left off the sipp,the wife has her own final salary bt pension to claim when she decides to retire,all of the above is worst case scenario if work in my game in our area doesnt pick up, always prepare for the glass half empty scenario myself ,all scenario gives us 2 grand plus a month with no debts
another point of contention is i still pay 200 amonth into my sipp,would it be better to spend savings which are currently in isa,s or keep them and access the sipp earlier, i have redundo money to last me 2 years ish ,before the more serious decesions about pensions need taking
its a minefield, LOL

You're confusing me even more now Stow. This is what the pensions advisory service says:

If you have set up your own scheme, the contributions that you pay into the scheme are usually treated as being paid net of basic rate income tax relief.

Like workplace personal pension schemes, your pension provider will claim back basic rate tax at 20% from HMRC adding this to your pot. Again, this means that if you pay a contribution of £80, your pension provider claims back a further £20 so a total gross contribution of £100 is paid into your pension pot.

(Your pension is still subject to tax later)

Only on the portion that is over the tax threshold.

I was reading that Osborne is contemplating another radical shake up.

Do you think that you can live on the amount below the tax threshold?

However it describes it, it's your £1 going in to your pension free of income tax. They government is not putting a penny into anyone's pension. i.e The £100 described above is £100 of your wages free of income tax.
I do not believe that there is any claiming back. The salary sacrifice effectively reduces your taxable income. i.e You earn 20K and sacrifice 2K into a pension and you are taxed on the 18K left.

tax threshold likely to be 12,500 plus by the end of this government,25 grand tax free for a couple whats that the equivalent of 40 grand for a working man roughly,if you,ve no mortgage or debts,25 grand tax free is a tidy little some for 98% of the population

Flipping eck 1st timer you are getting technical now. Martin from Moneysavingexpert would say make sure you pay off your credit cards etc first.

As for accessing SIPP's or ISA's you are getting very specialised now and a lot of questions spring to mind like ongoing fees, ease of access, investments, attitude to risk etc.

i,m okay regards credit card debt loans etc i dont have any been getting ready for this moment for the last 6 years since i dodged a bullet then,
still a minefield regards what to do for the best

Compared to many I'd say you've planned well 1st timer.

nah i,d banked on 3 or 4 years more work and suprisingly after having no break for 35 yrs ,i,m not enjoying not going to work ,even though its ok money wise for the forseable, must be be head thumping if you need work and desperate for the money

You'll have to go full time on here. Everyone's a winner.

A forum first, EO,ftp and Facts all behaving sensibly towards each other !!

As  a recently retired chappie I strongly recommend you get some part time or voluntary work ftp, you go out of your mind with boredom after the initial enjoyment of free time wears off. All of us need people around us to bounce off and enjoy a bit of banter.

Work should not be the answer. How about golf/fishing/an allotment/a cycling or keep fit club/or anything else but work ......

The requirement is contact with people stow,if you have lots of hobbies or several mistresses all well and good !

For clarity, if an individual makes a payment into a pension, from their own bank account, then the pension company applies to HMRC for basic rate tax relief on the contribution, which HMRC then pays on the grossed up amount. So, if you pay £100 in EOs example above, Prudential (or whoever) will ask for and be sent £25 by HMRC - as £25 represents 20% of the grossed up contribution of £125. If a higher rate taxpayer, the additional 20% must be reclaimed through your self assessment tax return.
It may be that the OP has a limited company (he hasn't stated he is self employed), of which he is a director and therefore employee, in which case the company may well be making employer contributions on his behalf. He gets no individual tax relief on this, although the gross amount is allotted to his pension. However, the contribution is an allowable business expense (provided it's not a pi55-take amount) and therefore will reduce his companies Corporation Tax, which will likely be 20%-22%.
Given the new tax on dividend income from April and the loss of relief on mortgage interest payments, the likelihood is that pensions will become more attractive for investors. Which is of course what the Govt wants, as indicated by any number of other initiatives, because the State Pension is unsustainable going forward.

the mail,telegraph very keen on advising their so called readers
[ higher tax payers ]to squirrel anything they can afford into their pensions before the budget, with osbourne wildly predicted to introduce a flat rate of maybe 30 or 25%, for balance shouldnt these papers,experts be telling 20% tax payers to hold off on any contributions to benefit from any flat rate which wont be below 20% whatever happens

By pension mutures in a few years.  I've got a pot of about £2,000...decisions decisions

For those investing through company schemes, if the company refunds the employer’s National Insurance (13.8%) with your salary sacrifice, then this makes a significant difference. If you invest in your own private pension, you will get your tax refunded into the scheme in the way Desmond Orchard describes, but you will not get the employer’s National Insurance contribution(13.8%) back from your company.

1st time poster 04 Jan 16 17:19 Joined: 25 Dec 05 | Topic/replies: 17,339 | Blogger: 1st time poster's blog
whilst pension advice is been given out
ive got 120k in a private sipp and 30 grand in a works stakeholder from which ive just been made redundant, i want to transfer the 32 grand into my sipp but want advice on the best way to do it
are you better off taking the 25% tax free[ i,m 56 ]and getting the tax relief when you put the cash lump sum into the sipp,then transfer whats left,ie 24 grand straight across into the sipp
any advice greatly accepted

In theory you could do this 1TP, but care needs to be taken as, unsurprisingly, HMRC take a dim view of this type of churning of tax free cash. You could potentially add the residual amount of £24K to your SIPP, it depends on whether the scheme can hold both crystallised and uncrystallised pots under the one umbrella, as taking TFC is a crystallisation event. It is worth remembering that you wouldn't be able to take any further TFC from the crystallised pot either. There would doubtless be various costs associated too, which may make it all seem a bit much of an effort to pinch a couple of grand in tax relief?

Your plan of using flexi-access drawdown of your personal pension to fund you through to your state pension has been a hugely popular strategy these last 9 months.

thanks for the advice desmond