Still worth doing pension at 20% tax rate?

[Joe Nonety]

The increase in the higher rate tax band has meant that before, while all my pension contributions (15%) were from my pay that I was paying 42% tax on, now some of it will be from what I'm paying 20% on. I'm not sure if its still worth it and whether I should cut it back to just what would be saving me 42% and increase it in the Spring when a pay increase is due.
Any opinions?

 

[dam099]

You are still getting a benefit of 20%, while it may not be as nice as 42% it is still worth something. What you contribute to a pension ideally should not be motivated purely by tax relief but mainly by your retirement goals.

What else would you do with the money? Invest it? Do you feel confident you can achieve a 20% greater return on your money than your pension manager?

 

[Brendan Burgess]

Hi Joe

I would not be investing in a pension fund if I was getting only 20% tax relief.

You will not be able to access your money until your retirement.
You may be paying high fund management charges.

Tax relief is really tax deferred. If your pension brings you into the higher tax bracket when you retire, then you may be saving 20% now, to pay 42% tax on it later.

Save the money in some other low cost unit-linked fund or use it towards paying down your mortgage if you have one. If increases in your income bring you into the 42% bracket again in future years, transfer the money from your personal savings into your pension contribution until you have used up your 42% tax band.

Brendan

 

[Joe Nonety]

Have reduced to just the 42% relief. Thanks for the advice all.

 

[TRS30]

Does the tax-free lump sum that you can take at retirment not balance that you might end up paying more tax in the future than what you are saving now ?

Also you will only pay the lower rate of tax on your pension payments till you reach the higher limit

I personaly feel that you should put in as much as you can, 20% discount is still better than anything else you'll get at the moment (except SSIA) and whos to know what the tax rates, bands etc will be in 25/30 years time.