OPTIN/OUT work pension help

[LC2]

Hi

I'm hoping for some financial advise and help making decisions..

I'm 33 years old, no mortgage, I can't have children so it's just me and my lovely husband. I have no personal debts, student loans etc..

My wage is £25,701.98 per year currently and I work full time. I haven't paid in to my work pension for quite some time due to moving house etc, & never opted back in. I am waiting for an appointment with a financial advisor but hoping for more insight before I go there

One of the biggest reasons I haven't paid back in to a pot is because 1) i have minimal understanding of it all & 2) the fact of paying tax on my own pension pot when it comes to withdrawing

As stated i earn £25,701.98, I have calculated this as if i were to retire by 60 for easiness..
My work place pays 3% only of my net wage in = £771.06 year x 27 years = £20,818.62
If i were to make the payment 5% of my net wage= £1285.09 year x 27 years= £34,697.43 ( I wouldn't plan on paying more than 5% of my wage in to a work place pension as this would increase the amount i'd be taken on in the end!!)
£55,516.05 in my pension pot
Which i understand 25% is tax free, so I would be able to withdraw £13879 tax free in one lump sum
That leaves £41,637.03 in there which I would pay a 20% tax is that correct? (i pay this now i believe) If so £41,637 - 20% tax = £8,327.40 to the tax man - leaving me with £33,310 in the pot.
I know i'll get a lot of responses saying, the contribution by the company is free money which I totally understand but this is a personal decision, if i end up paying 8.3k in tax !
I know i currently pay more on tax from my wage as i don't pay in to my pension, but essentially income tax is just deferred if I paid in to my pension. You don't pay now, but you pay on withdrawal.
I save £800-1k a month in to bonds / savings accounts currently and will do so until i turn 60 (£259,000 roughly) on top of what I have already
What i was planning on doing rather than paying tax on a work pension was to open up an account and pay £200 each month x 12 = £2400 x 27 years = £64,800 which gives me more money back and i wouldn't be paying any tax on my own money!!
As i've stated I have no knowledge of tax etc... Please let me know of any important info I need to be aware of
Another thing I will be looking in to when i see the financial advisor is where to invest my money etc, any advise or tips on where to invest / save money also would be appreciated x

I'm not a pensions expert by far but the money going into the pension is pretax so the money saved hasn't been taxed.

When you come to take it out it gets taxed as income so you get the state pension then you can chose how much you withdraw each month or year from your pension and any amount above the tax free allowance will be taxed at whatever the income tax at the time is.

My dad is retired but under state pension age, he's withdrawing some money from his pension each year but it's below the tax free allowance so isn't being taxed.

You probably want bespoke advice about the pros and cons of pension Vs bonds /savings accounts. Have you factored in you pay tax on any interest earned above £1000 a year (caveat that some accounts are exempt ie ISAs) and the fact you will have already paid income tax on the money that is going into your savings account?

You're missing the fact that your pension will be invested so should grow to be far more than just the amount you've paid in.

If your savings are earning in the region of 4%-5% then you would expect, given average historical performance, for the stock market to outperform that and the money in your pension to be worth more.

That also doesn't take into account that the money you are paying into savings is already taxed whereas pension contributions are net of tax and that you will pay tax on any interest earned on savings above the first £1000 annually.

I think you really need to speak to a financial advisor as pensions are usually seen to be better than standard savings accounts (not sure about bonds).

You’ve forgotten compound interest. Your 27 x £1000 (£770 net is £1000 ish once HRMC have added their bit) contributions each year will be worth over £100k! And that’s without you contributing anything.

Try here https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php

If you aim to retire at 60 and start taking your company pension, you won't pay tax until you reach the tax threshold (above & beyond the 25% tax-free).
Tax is deducted at source and if the HMRC make a mistake (as they did with my company pension), it is all paid back (a smooth process).

As a standard rate taxpayer you can either pay the tax now then save it in a tax free vehicle (although the amount you can save that way is limited) or put in in a pension, get the company contribution, and pay tax on it when you get it after retirement. Generally a pension is considered good because a) free extra money from your employer and b) 25% tax free and c) you expect to have a lower income in retirement so pay less tax overall.

I'd also swap your bonds and cash savings to a S&S ISA, you are too young to be putting retirement savings into bonds and cash, it should all be S&S and then in the last 10 years start moving to bonds and in the last year or two add cash.

Save into a pension. Your savings get tax relief now, so that is free money (as well as your employer's contributions). With compound interest it will be worth a lot more to you later on. You get 25% through eventually tax free, so later you are only paying 20% on 75% of it rather than 100% now.

Thank you for all of your replies.

My dad is retired but under state pension age, he's withdrawing some money from his pension each year but it's below the tax free allowance so isn't being taxed. - I didn’t know you could do this, as I plan to retire at 60 so same as your dad under the state pension age I’d be happy to withdraw below the tax free allowance each year so I don’t pay any tax

You've forgotten compound interest. Your 27 x £1000 (£770 net is £1000 ish once HRMC have added their bit) contributions each year will be worth over £100k! And that's without you contributing anything. —- so HMRC make a contribution to my pension pot as in interest? Is that correct?

work place pays 3% only of my net wage in = £771.06 year x 27 years = £20,818.62
if I paid £200 per month in to my work place pension x 12 months x 27 Years = £64,800
So if the total pot was £85,618, I retire at 60 and for understanding sake I retired now (pretend I’m 60) how much would be in the pot with the interest rate in this current climate? So sorry I’m just Trying to understand 😂

Yes. Pension contributions are always tax free, so you either do the contribution from your gross salary, then you pay tax as usual on what’s left. Or you pay out of your net salary and HMRC adds the tax that has been paid on that contribution back in to your pension.

Sorry to edit - HMRC aren’t contributing the interest, they contribute the tax paid on the actual monthly contribution. The compound interest is what the total of your contributions will generate in interest - year 1 at 5% your £1000 becomes £1050. Year 2 at 5% on the £1000 you contribute this year, plus the £1050 from last year gives you £2152 etc. After 27 years you’ll have £100k.

Use the compound interest calculator - contributing £3000 a year (you, employer, HMRC), for 27 years, earning roughly 5% interest per year gives you a pension pot of £180k. The same amount over 20 years gives you £108k.

Titchy is nearly right - the only misleading thing is the term “compound interest” which I see has already caused confusion. In a private sector workplace pension your savings will be invested in the stock market so will earn investment returns rather than interest. Those returns might be quite a lot higher than 5% a year. They will almost certainly, over the long run, be a lot higher than you can get from a bank account or premium bonds.

As already noted, when you pay into a pension your employer pays in, and so does the taxman through tax relief. Assuming you pay £1000 in, it will only cost you £800 out of your after tax pay packet. And if your employer pays in £1000 too then you now have £2000 of pension savings for a total cost of £800 to you. That £2000 might turn into £10,000 by the time you retire in 30 years. At which point you can withdraw 25% tax free in one lump sum, and hopefully manage the rest to only withdraw an amount under your annual tax free allowance.

This is all quite complex, I realise. The simple summary OP is you should definitely, definitely pay into your workplace pension .

Just to add another consideration, contributing to some workplace pensions (and my experience is public rather than private sector) also means you are taking advantage of your employer's "death in service" policy. This means, if you die before you retire and take your pension, a Life Assurance type policy would be payable to your nominated beneficiaries. Just something that would be worth checking with your HR team.

One additional advantage of pensions over savings accounts is that if you ever need to claim means-tested benefits like UC, pensions are not taken into consideration as capital, if you are below the age you can access it. There is a limit of £16,000 you can have in savings and you won't be able to claim UC at all if your savings are above that (and there is also a reduction in your UC amount if you have between £6,000-£16,000). ISAs, bonds and money in savings accounts and current accounts get counted towards the limit but not pensions. So if you lost your job or became too sick to work you'd be expected to use that money to live on, whereas if you saved it in a pension you'd still be able to claim.

Restart your pension plan ASAP. 3% is free money you get. In the weeks and months ahead you can educate yourself. Don't worry about the investment return just yet. Start your 5% contribution. Increase it by 1% every year. When you are 60 you will be glad for every penny you've saved

Never let the tax tail wag the dog. It's a no brainer to pay in to the pension. The FA will tell you this.

You are making a poor set of decisions here with limited knowledge. Firstly you are missing the personal allowance and that is really important re calculations for tax.

Say you had a pension pot of £200k. You could take the 25% tax free but then if you retired at 60 you could take the personal allowance (currently £12.5k) out each year tax free before you took your state pension at 68. After that, yes you’re likely to be paying 20% tax but you’ll have had the vast majority of that pot tax free if you planned it properly in drawdown.

Let’s say you have 27 years of growth on your employer contributions alone (assuming £70 a month at 6%) you’re easily giving up at least £55k of free money over that time period. Likely more if you account for inflation and wage growth.

This, plus by saving into pension you will save taxes now. I will contribute at least 10 percent of your salary, more if you can afford it.