10 Reasons to Pay Into A Pension
Published / Last Updated on 30/01/2015
Video offers 10 simple reasons as to why you should save and invest money in a pension scheme for the various tax relief benefits and other reasons that you may never encounter as to why invest in pensions.
Transcript:
“Hello there. I’m always dream up ideas for videos and things like that and I’ve just literally a thought of one a couple minutes ago, so I thought I would whizz down and shoot it so despite me sort of surf bum hair, surfaholic T-shirt, actually still do a bit about pensions as well.
So this video: “10 reasons to pay into a pension scheme” and I’ve just literally zapped them onto my iPad so forgive me if it's unscripted and I'll just whizz through it 1 to 10.
10 reasons to pay into your pension scheme:
1. Capital gains tax free growth.
Your pension fund can make profits etc. growth on the stock market growth on commercial property if you've invested in commercial property et cetera and a pension fund pays no capital gains tax. Whoopee!
2. Income tax free growth.
If your pension fund invests in assets that generate an income then there is no income tax to pay on that income received inside your pension fund. Now, please don't confuse that with you personally drawing an income from your pension, which is potentially taxable (woops minus mark). Inside your pension fund, if it invests in assets which receive an income to grow your pension fund, tax free marginal charge on dividends but a tax credit that can't be reclaimed but fundamentally still income tax-free inside the fund.
3. The classic tax relief.
Tax relief at your highest rate of income tax. So if you're a 20% income tax payer or a 40% or 45% rate taxpayer, you get tax relief on your pension contributions and what I’ll do with that is just give you a very quick example: so if you are a basic rate taxpayer let’s say you pay £80 into your pension fund, immediately for let's say a personal pension that’s made up to £100 instantly. So you tell me where you're going to get a return on your investments of 20% instantly? Pay in £80, it’s worth overnight £100. Now let's throw in higher rate taxpayers: so you're a 40% taxpayer and you pay into a pension fund, pay into a personal pension for example: Pay your £80 you then get the 20% relief in the same way as a basic rate taxpayer, so your £80 inside your pension is made up to £100 immediately and then the other 20% tax relief that’s due when you file your tax return, you'll get a tax refund. So number 3 was tax relief on pensions.
4. Inheritance tax free.
Your pension fund, if you haven't touched your private pension and you pass away, your pension fund can be paid to your loved ones tax-free. Wow! So pay in, get the tax relief, build up some growth all tax-free and then if you pass away your loved ones can inherit your pension fund tax free. On top of that even if you started to draw your pension whether you’ve had your tax-free lump sum and you're taking an income either from the new flexible drawdown rules or indeed from an annuity, by concession the government of now confirmed that your loved ones can receive that income tax-free or take the whole fund out tax-free if you die before the age of 75. So if you pass away prematurely, so massive tax breaks are so there we go death benefits for pension funds treated as another way to plan for estate planning on leaving your loved one something.
5. The tax-free lump sum.
You pay into your pension, you get tax relief when you pay in and then with let's say a private pension personal pension you can receive, after age 55, access to your pension fund 25% as a tax-free lump sum so that was number five tax-free lump sum.
6. Protection from creditors.
You're in business, you're self-employed or you're in business or potentially who knows if you something goes wrong with your credit or you lose your job or whatever it might be and you’re in trouble with your creditors. Your pension fund is ring fenced, it’s potentially protected from creditors.
7. Access from the age of 55.
So the government has blown wide open now with pensions flexibility laws. Gone are the days where it was: ‘right, I pay into my pension fund, eventually get to 60 or 65 or whatever it might be and then I have to have a lump sum and I have to buy an annuity and hopefully I live for 20 or 30 years, so that I get my money back that I've paid in. Now, with flexibility rules you can access as much or as little of your pension fund as you want from age 55. Great point that was number seven, what else can I convince you to pay into a pensions.
8. Employer contributions.
If your employer pays into your pension fund for you then it's not a benefit in kind. You don't get ‘pinged’ for national insurance contributions or anything like that or any benefit in kind tax. As an employer you can write off contributions against your corporation tax bill or if you're self-employed and you employ people write off against income tax bill. If you're an owner manager of your own business, as an employer of yourself, you can get money out of your business and pay into your pension fund and then, like I said, go back to the old age 55 thing and access your pension funds, no problem. So employer contributions.
9. Get Personal Allowance Back
Getting a little bit technical now and probably scraping the barrel, doesn’t affect everybody, many of you may not be aware but some of you will, particularly those that are caught, are losing your personal allowance. If you earn and I’ll keep the numbers simples because the numbers are changing: the personal allowance currently in January 2015 is £10,000, the personal allowance is that bit of money that you can earn before you pay tax. It's going up to £10,600 with effect April 2015 but let's keep it simple, let’s keep it up at that round £10,000 figure. So your personal allowance is £10,000. Now if you earn over £100,000 you start to lose your personal allowance and the way they reduce it is for every £2 you earn over £100,000 your personal allowance is reduced by £, so every £2 over your personal allowance is reduced by £1. So if you do the numbers: £10,000 personal allowance if I am £20,000 over the £100,000 threshold as in you earn £120,000 for every £2 over you lose £1 of your personal allowance. £120,000 salary, £20,000 over, means you've lost your personal allowance. Now, if you pay into a pension scheme, indirectly it reduces your salary, so consider paying into a pension if you're a higher earner, pay into a pension scheme that technically reduces your net relevant earnings, your salary and you could be getting back some or all of your personal allowance. Well worth it.
10. Get Child Benefit Back
The one that more people are caught by is: if you earn over £50,000 and you or as a family unit and one of you earns £50,000 or more you start to lose your entitlement to child benefit, family allowance. If you earn £60,000 or more or one of you in the family earns £60,000 or more, you technically lose your child benefit, you face a tax charge to recover the child benefit that you've received. So I turned £60,000 plus, family allowance gone, child benefit gone. I earn £50,000, between £50,000 and £60,000 you've started to lose some of your family allowance because you face a tax charge on that. Again same principle as the number 9, number 10: pay into a pension if you earn over £50,000 a year and you're starting to lose or getting tax charges to recover family allowance, child benefit, pay into a pension scheme. Indirectly, you reduce your earnings and you may get some or all of your family allowance back.
So I know that was a quick video but it's 10 reasons to pay into a pension scheme there are fantastic tax benefits here and it's not just about: “I need to save for retirement”, there are so many tax breaks in there that make it perhaps probably your first stop choice for investment purposes. As ever, do contact me if you'd like to explore any of those 10 reasons that I've given you as to why you should think about saving in pensions or equally if you want to talk about topping your pensions up or starting a new pension contact me. Thanks very much for watching.”
