STOP! Don't pay into that pension plan

Whoa!- I thought saving for a pension was a good idea

Well it can be - you just don't want to be saving into a pension plan too early...

Are you mad? I thought the whole point of pensions..

Let me finish. You know you get a tax break on pension saving

Yeah, sure

25% tax free cash on retirement

Oh that - I wasn't thinking about having to wait until I am 65

55

... I can get tax back today. £80 becomes £100 in my pension fund. Nice perk huh?

Not really. It's only tax deferment going in. You'll have to pay tax on the money when it comes out

Oh

But maybe when you are older - middle aged - you will be paying tax at 40%?

Hope so

Then £60 paid in effectively becomes £100. [Actually you still have to pay £80 in - but you get that extra £20 repaid at the end of the tax year - outside your pension fund]

But what shall I do with my savings in the meantime? That could be 10-20 years away

Stick 'em in an ISA or pay off the mortgage.

So delaying is worthwhile is it?

Yeah, it increases your pension by over 50%

Stop right there - that can't be right

OK - lets take this slowly. Compared to saving in an ISA the basic pension route [20% tax rebate in, 20% tax on the way out] gives you a 9% boost.

Hang on if I end up with £80k in an ISA and £100k in my pension scheme [thanks to the tax rebate] - and I take £25k tax free out of both. Then I will have £55k in ISA, and £75k in my pension pot. The pension is far better.

Yeah - but we are assuming your pension is taxed at 20% remember. So net pension pot is £60k and ISA is £55k. That's only a 9% boost. And the ISA is tax free money you can get at any time. Pension money is locked away. You get the income from the £60k, but you can't get at the £60k. Many people would rather have an ISA, despite the 9% uplift.

But if I am paying tax at 40% when I save into my pension plan...

Then if you pay [net] £60k into both: the ISA ends up at £35k after £25k tax free cash is removed, and the pension pot is at £60k [again assuming you pay only 20% income tax in retirement on the £75k thats left in your pension pot]. That's a 70% up lift over the ISA.

And you reckon a 50% uplift compared to a standard pension by waiting until I pay higher rate tax

Actually its 57%. A pension pot that once cost you £55k, only costs £35k if you can save it out of highly taxed [40%] earnings. That's after taking out your £25k tax free cash, and applying a 20% tax rate to what is left.

Why didn't anyone tell me this?

You can't run a business telling perfectly good customers to come back in 20 years

But there must be a catch right? - I mean 50% extra is so amazing...

Well if you never pay higher rate taxes you won't have gained anything, but you won't have lost anything either. And if you don't have any income at all that year, you are limited in the payments you can claim rebates on [currently £3600 per year]. Also, you might be tempted to spend all your ISA savings - pension savings are much harder to get at. And the comparison only works if you are paying into your own money purchase pension scheme. If you have one at work that your employer pays into, it would be foolish to turn down free money. And if you have a defined benefits scheme [where you can buy extra years] then check it out. And if you can get your National Insurance payments rebated...

No - its just me and my personal pension plan. And I am going to switch my savings elsewhere until my tax rate changes. Thats a killer fact

Killer Vanilla fact

saving into a pension too early can damage your wealth