Why invest in a Pension? Because of Tax Relief!

 

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
1	£10,700	£6,252	71%		1	£10,700	£8,336	28%
2	£22,470	£12,954	73%		2	£22,470	£17,272	30%
3	£35,395	£20,131	76%		3	£35,395	£26,841	32%
4	£49,564	£27,808	78%		4	£49,564	£37,078	34%
5	£65,077	£36,013	81%		5	£65,077	£48,017	36%
6	£82,036	£44,773	83%		6	£82,036	£59,698	37%
7	£100,555	£54,119	86%		7	£100,555	£72,158	39%
8	£120,754	£64,081	88%		8	£120,754	£85,441	41%
9	£142,761	£74,692	91%		9	£142,761	£99,590	43%
10	£166,715	£85,987	94%		10	£166,715	£114,649	45%
11	£192,765	£98,000	97%		11	£192,765	£130,667	48%
12	£221,070	£110,771	100%		12	£221,070	£147,694	50%
13	£251,801	£124,337	103%		13	£251,801	£165,782	52%
14	£285,140	£138,740	106%		14	£285,140	£184,987	54%
15	£321,285	£154,024	109%		15	£321,285	£205,365	56%
16	£360,445	£170,233	112%		16	£360,445	£226,978	59%
17	£402,846	£187,416	115%		17	£402,846	£249,888	61%
18	£448,731	£205,621	118%		18	£448,731	£274,161	64%
19	£498,358	£224,901	122%		19	£498,358	£299,868	66%
20	£552,006	£245,309	125%		20	£552,006	£327,079	69%

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?

steve@bicknells.net