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Dave Beans

Pension Or Property?

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Pension - if you are a higher rate tax payer and your company pays its NI into a low cost fund or you have a SIPP. Under current rules, avoid 50-65% tax on the way in, pay 20% tax on the way out.

The pensions man made a good point that if you have a house and borrow against it to BTL then you are putting all your chips on black. If the property market goes then you are gone with it. Look at what happened in Ireland.

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tbh, I am in my mid 30's and do not own any property and I do not have a pension since the private sector stopped them as part of the 'package'.

It seems foolish to me buying a property that I am not going to be able to afford to maintain/run from a state pension. I don't and will not earn enough to make a decent private pension so I have been stashing a little spare cash into precios metals in the hope that it will maintain it's buying power over the next 30/35 years. I thin plan to get as many tax payer freebies as I can including a flat, state pension, heating allowance etc. when ever I fancy going on holiday, getting a new car etc. I will sell some of my PM's.

~It's not a good plan, but seems the only route open to post boomers.

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tbh, I am in my mid 30's and do not own any property and I do not have a pension since the private sector stopped them as part of the 'package'.

It seems foolish to me buying a property that I am not going to be able to afford to maintain/run from a state pension. I don't and will not earn enough to make a decent private pension so I have been stashing a little spare cash into precios metals in the hope that it will maintain it's buying power over the next 30/35 years. I thin plan to get as many tax payer freebies as I can including a flat, state pension, heating allowance etc. when ever I fancy going on holiday, getting a new car etc. I will sell some of my PM's.

~It's not a good plan, but seems the only route open to post boomers.

Knowing Fate's liking for a little joke, I can see the following article in the local paper...

"The new tenants, while expressing sorrow that the previous occupant had died only a week after retiring, were nevertheless delighted at finding a biscuit tin full of Krugerrands buried in the garden..."

:lol:

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Q: What kicked off the 2000s property bubble?

A: Brown put a pin in the pensions bubble as then was, with his "pensions raid" tax in 1997.

The "pensions raid" left a lot of money in search of alternative homes. And in 1997, houses were an attractive asset: historically extremely cheap to buy, and with plenty of scope for a growing rentals market. No wonder a tidal wave of money flowed in!

Looking at it like that, making pensions more attractive should be exactly what's needed to readjust the balance and start moving that money back from property to pensions. Shouldn't it?

Well, I expect the smart money types - those who were buying BTL cheap in 1997 or 2000 - are noticing and moving their money back to pensions. But it'll take a few years for the MeToo majority - the types who were buying their BTL at bubble prices in 2003 or 2007 - to update their mindset.

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Pension - if you are a higher rate tax payer and your company pays its NI into a low cost fund or you have a SIPP. Under current rules, avoid 50-65% tax on the way in, pay 20% tax on the way out.

Don't forget the 25% tax free lump sum so you may be able to effectively reduce that to 15% tax on the way out.

Good to see more people catching on with this one. I wonder what will happen when a few million people realise their effective marginal tax rate is 50-65% and decide they will just wait it out for 15% instead.

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Don't forget the 25% tax free lump sum so you may be able to effectively reduce that to 15% tax on the way out.

Good to see more people catching on with this one. I wonder what will happen when a few million people realise their effective marginal tax rate is 50-65% and decide they will just wait it out for 15% instead.

I understand exactly what you are saying about 15% on the way out. But I wondered if you could spell it out a bit clearer for the hard of thinking. They may not understand it as well as us. B)

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I'm a neither. Property is a liability money pit, and can only work if prices comfortably beat inflation every year. Pensions are too inflexible even with the new rules, you still need a tax efficient exit strategy.

So most of my money is in cash currently awaiting a drop in the inflated equities/ precious metals sector. Well for some of the money anyway. If the aforementioned stay high, I am quite happy with cash in the present deflationary environment.

I do jointly own my property, but that is somewhere to live with my partner, not an investment.

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Don't forget the 25% tax free lump sum so you may be able to effectively reduce that to 15% tax on the way out.

Good to see more people catching on with this one. I wonder what will happen when a few million people realise their effective marginal tax rate is 50-65% and decide they will just wait it out for 15% instead.

I haven't forgotten it and as you write makes it even better. The closer you get to retirement, the easier it is

http://www.telegraph.co.uk/finance/economics/10602490/Imagine-the-explosion-of-growth-if-we-got-serious-about-tax-cutting.html

Earnings above £7,717 are briefly taxed at a rate of 12.1pc; above £7,769 this jumps to 22.7pc; then the combined tax rate shoots up to 40.2pc from £9,440, briefly reaching 57.8pc above £41,450; it then falls back to 49pc from £41,558; rockets to a bonkers 66.6pc from £100,000; falls back again 49pc from £118,880 and then settles at 53.4pc from £150,000. Labour’s 5p hike would push the combined tax rate above £150,000 to 57.8pc.

The effective tax rate when benefit withdrawals are included is even crazier: people with large families are wiped out between the £50,000 to £60,000 thresholds as their child benefit is progressively removed.

Edited by arrgee1991

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I understand exactly what you are saying about 15% on the way out. But I wondered if you could spell it out a bit clearer for the hard of thinking. They may not understand it as well as us. B)

A very simplistic example, but if you do this one day before you retire at the end of the tax year....

You get £1000 gross of the money you earn over £42K

That £580 net as you pay £420 tax +NI

If you put the £1000 into the pension it can become £1138 with employers NI added under salary sacrifice

The next day in the new tax year when you have stopped working...

With zero growth when you withdraw you get £284.50 tax free

The remaining £853.50 is taxed at 20% = £170.70

So you get another £682.80

Which leaves you with £967.30

That is 14% off the £1138 or just 3% off the original gross of £1000. Or alternatively 66% growth on the £580 net you would have got yesterday.

The closer you get to retirement, the better this works as you lose the risk of a radical change to the tax regime. Also should you have a large pension fund, then you have to drawdown over a longer period, but given you need an income when you retire that's no bad thing.

Edited by arrgee1991

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Pensions are too inflexible...

The only inflexible part is you can't get hold of it until you are 55. They are flexible enough to allow you to invest in many asset types, either directly or indirectly. The big downside are the charges, but they can be kept low by choosing the right investments.

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The only inflexible part is you can't get hold of it until you are 55. They are flexible enough to allow you to invest in many asset types, either directly or indirectly. The big downside are the charges, but they can be kept low by choosing the right investments.

I think if you are income rich, asset poor they do make sense as per your higher rate tax payer example. For those of us that are asset rich and income poor, the tax saving advantages are more difficult to justify.

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Pension. In my pension planning I was able to make the assertion: With n% confidence my pension will be x, generating an income of y for z years in retirement.

Add to that I am a higher rate tax payer, have a low cost pension wrapper, and my employer makes contributions via salary sacrifice. With property it would just be a big I don't know. Too many variables make it more like speculation than investment.

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I understand exactly what you are saying about 15% on the way out. But I wondered if you could spell it out a bit clearer for the hard of thinking. They may not understand it as well as us. B)

The simplest explanation is that for every £100 you withdraw, you take £25 tax-free. The remaining £75 is taxed at 20% => £15 overall tax paid, £85 income kept.

So overall, you only paid 15%.

In practice, the effectiveness of this depends on your EMTR (effective marginal tax rate), affected by your personal circumstances i.e. income, benefits, salary sacrifice, DLA/PIP, tax credits, student loans etc.

The more you tax someone, the more it becomes pointless to earn any money NOW, just collect it later at a dramatically lower rate. (IF they dont change the rules again!).

As arrggee's figures show in some cases, it really isn't far off from getting to keep almost all of your top-rate salary tax-free. You just have to shift income from top-rate good years to age 55+ basic-rate years.

This all worked before the latest pension changes (I was doing it anyway) but it was difficult to get a high enough income to meet the flexible drawdown restrictions, now anyone can do it. If the rules stay like this, I will clear the mortgage 10 years early without it costing me anything.

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As arrgee's figures show in some cases, it really isn't far off from getting to keep almost all of your top-rate salary tax-free. You just have to shift income from top-rate good years to age 55+ basic-rate years.

Exactly and for those who have the child benefit clawed back between £50K and £60K, and those who have their personal allowance removed at over £100K it is even better.

An example with two children

IN

£10000 gross

£4030 net - (£4200 tax + £1770 cb)

£11380 with employers NI

OUT

£2845 tax free

£8535 taxed at 20% = £1707

£6828

£9673

£4030 makes £9673 - 140% gain

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I think if you are income rich, asset poor they do make sense as per your higher rate tax payer example. For those of us that are asset rich and income poor, the tax saving advantages are more difficult to justify.

Near impossible to justify any pension contribution at basic rate tax. The only gain is the national insurance. With salary sacrifice, the gain is only around 20%. Compelling people to have pensions who are only paying basic rate tax may be good for the government, but it produces very little benefit for the worker.

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Exactly and for those who have the child benefit clawed back between £50K and £60K, and those who have their personal allowance removed at over £100K it is even better.

An example with two children

IN

£10000 gross

£4030 net - (£4200 tax + £1770 cb)

£11380 with employers NI

OUT

£2845 tax free

£8535 taxed at 20% = £1707

£6828

£9673

£4030 makes £9673 - 140% gain

They are basically the figures for my situation (2 kids), I just couldn't believe it when I first worked it out. I went through the figures with our financial director so he set up salary sacrifice for any employee that wanted it. (He then dropped to a 4-day week)

Now, I get to keep £9673 out of that £10K. Shocking.

arrgee1991, your next homework is to do include the student loan in the above figures :)

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The thing that gets me is the 0.5% charge the pension company takes. Doesn't sound a lot but over 40 years that's 20%. I have a company pension. which I am taking now at age 50 and have just taken out a SIPP which I hope to start drawing when I am 55 and retire fully. When I am 66 and get state pension I hope to close the SIPP completely to save charges and use ISA's with no charges instead.

It shouldn't be like this surely there should be a simpler way?

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The thing that gets me is the 0.5% charge the pension company takes.

You must be with the wrong pension company. The figures published by the press following the budget and comparing SIPP providers show even the most expensive don't charge that much. Unless you use a flat-fee provider and have a small pot.

Doesn't sound a lot but over 40 years that's 20%.

Only if your entire pot is a lump sum you put in when you're at an age where ... most of us wouldn't have any money tom put in anyway.

I have a company pension. which I am taking now at age 50 and have just taken out a SIPP which I hope to start drawing when I am 55 and retire fully. When I am 66 and get state pension I hope to close the SIPP completely to save charges and use ISA's with no charges instead.

Where do you find an ISA whose charges are different to the same provider's SIPP?

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You must be with the wrong pension company.

I suspect many are. And it's not just the headline charges, there are other more opaque charges you may not be aware of.

http://www.telegraph.co.uk/finance/personalfinance/investing/funds/10744034/The-real-cost-of-funds-five-hidden-charges.html

On a £15,000 investment pot that produces a 5pc return each year, investors will pay an extra £851 in hidden charges over five years.

BIZARRE 'HIDDEN CHARGES’

Trading fees

Many savers think that the annual charge covers the cost of a fund manager buying and selling shares, but this is not the case. The more a fund manager trades, the more you pay.

£45 a year on £15,000

Other costs of buying and selling investments

Buying and selling investments carries another cost that investors don’t appreciate – the difference between the market’s “buy” and “sell” prices.

£16.50 a year on £15,000

Admin

Fund management firms have administrative costs, which are passed on to savers. These include paying brokers and trustees.

£25.50 a year on £15,000

Marketing

Some fund management firms charge investors extra towards the cost of marketing and distributing the fund.

Unknown

Performance fees

Some funds also charge a performance fee. Again, many investors will be unaware they are paying extra as most will assume that the annual fee should be sufficient incentive for a fund manager to beat the stock market.

Unknown

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If you have a non-working spouse, the numbers can get even better. An example for a top-rate tax-payer, retiring at basic rate.

1. Gross pay = £100

2. Sacrifice scheme to get £112 in pension

3. Take out 25% = £28, put into spouse pension

4. Take out the rest at basic rate = £67.2

5. Spouse gets pension grossed up to £35

6. Withdraw spouse pension tax-free (take more than one year if required)

So you end up with keeping £67.2 + £35 = £102.2 out of the original £100 gross.

(effectively, only the employer NI ended up in the government coffers).

When the powers that be work this out, I can see there being a massive reversal in these proposals. It really is too good to be true.

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A regular guaranteed linked to inflation pension plus state pension, some rainy day emergency savings, plus a fully paid for home that either means you have more to put into a pension or have more to live on when you have to reduce your working hours.......so a mixture of both but no debt only credit.

......but utopia does not exist.....so the only other way out is to live on debt....same result without putting the working hours into it....leave it for others to pay one day. ;)

Edited by winkie

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