Watch out, high-flyers
Paying more into a pension fund may not save you money, says Paul Gosling
Wednesday 13 November 1996
But putting income aside for old age is both prudent and highly tax efficient - and should be thought of as deferred pay. For tax purposes, a key question is whether that pay will incur more tax now, or after retirement.
Income tax rates for the higher paid are at historically low levels, but there are fears that they will rise, particularly if the Labour Party wins the next election.
The general view is that you should always invest as much as possible in a personal pension - up to the limit of your tax allowance. But Peter Ratcliffe, a senior manager at the accountants Coopers & Lybrand, says that this is not always the case.
Well-paid employees may be better off not making additional voluntary contributions (AVCs), he says, if they are paying tax at the higher rate now, and expect that they will still have to do so when they retire.
"If you are paying higher rate now, but expect to pay standard rate in retirement, then there is a good case for paying AVCs - but if you expect that you will still be a higher-rate taxpayer on retirement, you would be better paying into personal equity plans," he says.
For many middle-income earners, AVCs can provide a disciplined method of saving for old age, which may be essential if your early career path meant that you were a late starter or you had some gaps in your pension contributions.
If you belong to an occupational pension scheme - one which is sponsored by your employer - the taxman will allow you to pay up to 15 per cent of earnings into your pension, including standard contributions and AVCs.
If pensions contributions provide a disciplined method of saving, the reverse of the coin is that they are inflexible. While we all need to be adequately protected for our old age, we also need some savings that can be drawn on, without significant penalty, in an emergency. Although pension contributions can be used as security for a loan, it this an expensive and inefficient method of borrowing, and the value of the loan will be less than the amount held in a pension fund.
There is a further important, if uncomfortable, consideration. If you die before you get old, then you will gain no benefit from your pension.
"If there is a family history of dying in the sixties, it seems daft to invest heavily in pensions," says Mr Ratcliffe. "But if the family history is of living to the mid-nineties then a pension's guarantee of paying you for life is important, and it doesn't matter so much about tax rates."
Since 1980, state retirement pensions have ceased to be up-rated in line with average earnings, and increase instead according to the retail price index. This is more significant than it sounds, and represents a major erosion in the value of state pensions.
For working people in early or middle adulthood, it is sensible to plan for old age on the assumption that the state pension will have little value by the time retirement is reached. The bulk of the pension will, therefore, have to come from a personal or occupational pension.
Before taking any final decision on whether to increase your pensions contributions, you should review your current arrangements. If you are at all uncertain, it may be wise to see an actuary or pensions specialist to project the level of benefits that your contributions are likely to provide. You can then consider whether they will give you a good standard of living in retirement, and if they do not then you should take steps to increase your contributions, bearing in mind that the younger you do so the more affordable extra payments will be
05 September 2014 11:30 PM
30 August 2014 12:00 AM
30 August 2014 12:00 AM
The UK has slipped to 11th in the latest European league table of savers. Rob Griffin checks out the best options
22 August 2014 10:30 PM
Caroline Flint, the shadow energy secretary, says a Labour government would create a new energy regulator
22 August 2014 10:30 PM
16 August 2014 12:00 AM
16 August 2014 12:00 AM
08 August 2014 11:30 PM
- 1 Scottish independence: Ireland since 1919 is a lesson for Scotland in what a Yes vote means
- 2 Thailand deaths: Pair's bloodied bodies found naked on Koh Tao beach
- 3 Lego breaks out of the toy box and heads for the gallery
- 4 Julian Assange and Edward Snowden join piracy mogul Kim Dotcom’s political campaign in New Zealand
- 5 Daniele Watts: Django Unchained actress detained by Los Angeles police after being mistaken for a prostitute
Daniele Watts: Django Unchained actress detained by Los Angeles police after being mistaken for a prostitute
The political class is doing what Hitler couldn’t – destroying Britain
Scottish independence: Nationalist leader Jim Sillars threatens pro-union companies with 'day of reckoning' after independence
Scottish independence: Yes campaign feels the heat as Alex Salmond's NHS claims come under furious attack
£23m Birmingham cycle scheme is attacked by Tory councillor for not catering to the elderly
Salmond accused of laughing off national debt with ‘what are they going to do: invade?’ joke
iJobs Money & Business
£20 - 24k + Benefits: Guru Careers: This is a great opportunity for an enthusi...
£280 - £320 per day: Ashdown Group: The Ashdown Group have been engaged by a l...
£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...
£35000 - £38000 per annum + Benefits: Ashdown Group: Training Coordinator / Pl...
Day In a Page
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony