I have been looking at the Tax Relief impact on Pension Investments
Lets say you invest £10,000 per year of earned gross income, increasing each year by 3% for inflation and see the effect of tax relief at 40% and 20%, assuming a return on the investment of 7% (which you should get with Commercial Property Investment)
|40% Tax Rate||20% Tax Rate|
|Year||Pension||No Pension||% Diff||Year||Pension||No Pension||% Diff|
Even when you consider:
- Your money is locked up till you are 55
- You pay tax when you take money out of the pension
- You can get 25% out of the pension tax free
The difference in growth is massive
If you do salary sacrifice you can increase the tax effect by saving national insurance too.
So why aren’t more people investing in pensions?
6 thoughts on “Why invest in a Pension? Because of Tax Relief!”
Because they are on low/medium incomes and can’t afford to. We provide our low/medium paid staff with a matched basis money purchase pension because we are a responsible employer however we don’t expect it to yield them anything like a “living pension”
Sometimes it makes more sense NOT to contribute to a pension in certain years. The vagaries of the current economic times give rise to sometimes extended periods without income.
In years where income is lower (or, heaven forbid, zero), marginal tax rates are consequently lower, and the tax credit would thus be lower.
It would make more sense in these cases to wait until income is high again, and to then make a ‘balloon’ pension contribution to get a large tax credit.
Also – if one is in the fortunate position of taxable post retirement income being the same or higher than that in pre-retirement (from annuities, interest, property rentals etc) – again it would make sense not to make pension contributions closer to retirement.
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