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Should I make additional pension contributions via Nest or ISA

TopOfDaMornin
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Should I make additional pension contributions via Nest or ISA

#435739

Postby TopOfDaMornin » August 18th, 2021, 5:03 pm

I was previously was self-employed. I used to save for my pension through monthly ISA amounts invested in various HYP shares and index funds.

I am now employed. This has resulted in a drop in salary. My employers use the Nest provider for pensions. At the moment, I do not make any additional contributions to my pension.

I was wondering what peoples thoughts are on making additional monthly contributions via the Nest pension or doing what I did previously which was through an ISA. My understanding is that at the end of the day, the tax position is about the same.

If contributing via Nest it can be done in 2 ways. Firstly, through the employer (before tax), or secondly, through my salary (post tax).

I am a lower rate taxpayer.

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pje16
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Re: Should I make additional pension contributions via Nest or ISA

#435742

Postby pje16 » August 18th, 2021, 5:10 pm

Better off (far more tax efficient) to contribute to your pension scheme ( as long as you don't need access to the money for quite a while)

TopOfDaMornin
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Re: Should I make additional pension contributions via Nest or ISA

#435743

Postby TopOfDaMornin » August 18th, 2021, 5:11 pm

I see that the annual management charge is 0.3% of the total pension pot each year.
There is also an additional 1.8% on my contributions.


The above seem high to me (when compared to index trackers and ITs) but I don't have the knowledge to compare this to other pension providers.

Surely, with it being a government pension, the charges would be reasonable.



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AsleepInYorkshire
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Re: Should I make additional pension contributions via Nest or ISA

#435747

Postby AsleepInYorkshire » August 18th, 2021, 5:16 pm

TopOfDaMornin wrote:I see that the annual management charge is 0.3% of the total pension pot each year.
There is also an additional 1.8% on my contributions.


The above seem high to me (when compared to index trackers and ITs) but I don't have the knowledge to compare this to other pension providers.

Surely, with it being a government pension, the charges would be reasonable.

Hypothetically;

Option 1 - Pay [say] .5% for pension admin and the like and pension grows by 8% pa
Option 2 - Pay [say] .2% for pension admin and the like and pension grows by 4% pa

Costs are only one part of any investment.

I've created an illustration above - reality can be a little more complicated though

How old are you?
Will your disposable income rise and allow you to add more to savings/pensions?
What's you health like?
When do you want to retire (if possible)?

And many more variables to consider

AiY

mc2fool
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Re: Should I make additional pension contributions via Nest or ISA

#435749

Postby mc2fool » August 18th, 2021, 5:29 pm

TopOfDaMornin wrote:My understanding is that at the end of the day, the tax position is about the same.

The pension is slightly better tax wise. Firstly, you get 20% relief on the way in, even if you may not have actually paid 20% tax ('cos of personal allowance, etc). Secondly, when you get the pension you'll be able to get 25% of it tax free, so if you're still a BRT that will give an effective marginal rate of 15% (75% of 20%).

However, there are of course other factors to consider. I see the matter of charges has already been raised (I'm not familiar with other pension schemes but 1.8% initial charge on money put in made me cough & splutter!). There is also the tie-in factor; should need be you won't be able to get at it until your 55, or 57 depending on how old you are.

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Re: Should I make additional pension contributions via Nest or ISA

#435759

Postby JohnB » August 18th, 2021, 6:14 pm

Have you considered opening a SIPP for additional contributions, they are generally cheaper than company schemes. Or if under 40, a LISA

TopOfDaMornin
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Re: Should I make additional pension contributions via Nest or ISA

#435903

Postby TopOfDaMornin » August 19th, 2021, 11:51 am

JohnB wrote:Have you considered opening a SIPP for additional contributions, they are generally cheaper than company schemes. Or if under 40, a LISA


Thank you. Yes, I have a SIPP as well, which I made a lump sum contribution to about 2 years ago when I had my own company. The money was invested into a Vanguard Targeted Retirement fund. I had put money into the SIPP directly from my company account.

Like you say, I could contribute directly into 'another pension' e.g. SIPP, rather than use the default one being offered by my current employers i.e. Nest.

I find it difficult to know which is the best option.

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Re: Should I make additional pension contributions via Nest or ISA

#435910

Postby MaraMan » August 19th, 2021, 12:07 pm

I know its a minority view but I would seriously consider continuing to use your ISA for some of your investments. Of course with a pension you get tax relief on the way in, but none on the way out. So, if your investments grow then having money in an an ISA may prove to be a wise move in terms of tax free income later in life. Just a thought.
The devil is in the detail as always.

MM

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Re: Should I make additional pension contributions via Nest or ISA

#435911

Postby richfool » August 19th, 2021, 12:13 pm

My wife had similar thoughts about her situation, when her employer sought to put her into the NEST scheme. When she reaches retirement she will likely only have a widow's pension and a reduced state pension.

I don't know what the fees are with the NEST scheme., and we were concerned that they may be significant and the ongoing administration for her (as a layman), more restrictive, limiting and demanding, so we erred for contributing into an ISA.

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Re: Should I make additional pension contributions via Nest or ISA

#435912

Postby pje16 » August 19th, 2021, 12:13 pm

MaraMan wrote:Of course with a pension you get tax relief on the way in, but none on the way out.

Not quite right, you can get 25% of your total pot tax free
I have an old section 32 plan (I don't understand the rules) but I will get 75-80% of that tax free

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Re: Should I make additional pension contributions via Nest or ISA

#435918

Postby MaraMan » August 19th, 2021, 12:23 pm

pje16 wrote:
MaraMan wrote:Of course with a pension you get tax relief on the way in, but none on the way out.

Not quite right, you can get 25% of your total pot tax free
I have an old section 32 plan (I don't understand the rules) but I will get 75-80% of that tax free

Yes of course, my mistake. However it doesn't alter my point. It's not difficult to incur tax on a relatively modest pension income, plus all the hassle of tax returns etc. ISA's once invested have a lot going for them in terms of income and ease.

MM

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Re: Should I make additional pension contributions via Nest or ISA

#435922

Postby pje16 » August 19th, 2021, 12:29 pm

Yes agreed
I have quite a bit in ISAs
not sure what the hassle about a tax return is
If you are a BRT and it comes off your salary there is nothing to tell HMRC
I made a one off AVC a few years ago, again no need to tell the taxman

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Re: Should I make additional pension contributions via Nest or ISA

#435949

Postby Urbandreamer » August 19th, 2021, 2:00 pm

pje16 wrote:Yes agreed
I have quite a bit in ISAs
not sure what the hassle about a tax return is
If you are a BRT and it comes off your salary there is nothing to tell HMRC
I made a one off AVC a few years ago, again no need to tell the taxman


If you don't have to fill out a tax return, then you can't imagine the hastle.

My Father in law recieved an Irish state pension and dividend income from a Canadian company who bought a former UK insurance company.
His tax return was the bane of my wife for very many years.

My 2p worth is that for a younger person who is a BRT, a standard ISA makes great sense. Sure, if pensions regulations remain unchanged for 30 years or so you would definately be better putting all the money into a pension. However the odds that pensions won't change over that period are so small that you have to question the idea of putting all your eggs in the pension basket. Those with fewer years before they can access their pension benefit from reduced political risk and can invest more into pensions.

I have a company DC scheme, a SIPP and ISA funds. As I'm over 55 all my surplus goes into my SIPP.

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Re: Should I make additional pension contributions via Nest or ISA

#435978

Postby daveh » August 19th, 2021, 3:22 pm

Urbandreamer wrote:If you don't have to fill out a tax return, then you can't imagine the hastle.

My Father in law recieved an Irish state pension and dividend income from a Canadian company who bought a former UK insurance company.
His tax return was the bane of my wife for very many years.

My 2p worth is that for a younger person who is a BRT, a standard ISA makes great sense. Sure, if pensions regulations remain unchanged for 30 years or so you would definately be better putting all the money into a pension. However the odds that pensions won't change over that period are so small that you have to question the idea of putting all your eggs in the pension basket. Those with fewer years before they can access their pension benefit from reduced political risk and can invest more into pensions.

I have a company DC scheme, a SIPP and ISA funds. As I'm over 55 all my surplus goes into my SIPP.


Depends how complicated your tax affairs are. I've managed to avoid doing tax returns for years (by being PAYE, keeping my taxable dividends within the allowance and staying out of HRT by paying extra into my pension and keeping my capital gains within the allowance). Then I had an unexpected capital gain in a year that I'd made other capital gains within the allowance. I owed tax and needed to report it. There is a capital gains reporting service separate from the tax return, but HMRC said I needed to do a tax return when i tried to use it. It wasn't too bad doing it online specially in subsequent years where I haven't needed to do the capital returns page. This year (after 2-3 returns with either no tax to pay or a few pence due to rounding in the coding notice) they've said I don't have to do a tax return again. I'm a little disappointed as it was simple to do for me and there is the possibility I might have capital gains in the future.

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Re: Should I make additional pension contributions via Nest or ISA

#435980

Postby scrumpyjack » August 19th, 2021, 3:30 pm

MaraMan wrote:
pje16 wrote:
MaraMan wrote:Of course with a pension you get tax relief on the way in, but none on the way out.

Not quite right, you can get 25% of your total pot tax free
I have an old section 32 plan (I don't understand the rules) but I will get 75-80% of that tax free

Yes of course, my mistake. However it doesn't alter my point. It's not difficult to incur tax on a relatively modest pension income, plus all the hassle of tax returns etc. ISA's once invested have a lot going for them in terms of income and ease.

MM


There is no guarantee that in 20 years time ISAs will still be tax free. Whereas with a pension contribution you get the tax relief on the way in (plus the 25% tax free at the end, if that still applies)

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Re: Should I make additional pension contributions via Nest or ISA

#435981

Postby pje16 » August 19th, 2021, 3:39 pm

scrumpyjack wrote:There is no guarantee that in 20 years time ISAs will still be tax free. Whereas with a pension contribution you get the tax relief on the way in (plus the 25% tax free at the end, if that still applies)

Who knows what will be in place in 20 years time - no guarantee about tax relief either (we have Covid to pay for)
There will be an uproar if any tax free elements get removed - one way to ensure you are not elected next time round :!:

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Re: Should I make additional pension contributions via Nest or ISA

#436090

Postby Kantwebefriends » August 19th, 2021, 10:04 pm

OP, does your employer offer Salary Sacrifice? If so that's quite an advantage for a pension contribution at work.

If you are under 40 consider a LISA too.

TopOfDaMornin
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Re: Should I make additional pension contributions via Nest or ISA

#436092

Postby TopOfDaMornin » August 19th, 2021, 10:07 pm

Kantwebefriends wrote:OP, does your employer offer Salary Sacrifice? If so that's quite an advantage for a pension contribution at work.

If you are under 40 consider a LISA too.

No, they do not offer Salary Sacrifice.

Yes, I am over 40.

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Re: Should I make additional pension contributions via Nest or ISA

#436094

Postby richfool » August 19th, 2021, 10:18 pm

TopOfDaMornin wrote:I was wondering what peoples thoughts are on making additional monthly contributions via the Nest pension or doing what I did previously which was through an ISA. My understanding is that at the end of the day, the tax position is about the same.

If contributing via Nest it can be done in 2 ways. Firstly, through the employer (before tax), or secondly, through my salary (post tax).

I am a lower rate taxpayer.

I note some of the fees on the NEST scheme are:
What do Nest charge?

We apply two small charges for managing your pension pot.

We take 1.8% of the money going into your pot, known as a contribution charge. For example, if £25 was being added to your pot each month we’d take a contribution charge of 45p.

We also take 0.3% of the value of your retirement pot over the year. This is known as an annual management charge. So if your total retirement pot is worth £5,000, we’d charge £15 over the year.

Making transfers into Nest

As well as making regular contributions from your salary you can also transfer money into and out of Nest. This means you can bring your pension pots together, making your savings easier to manage.
Our contribution charge doesn’t apply on transfers into Nest. Just remember that our 0.3% annual management charge is based on how much is in your pension pot, this includes any funds you’ve transferred in.
We also don’t charge for transfers out but it’s important to check if your new pension provider has fees.

https://www.nestpensions.org.uk/schemew ... -fees.html

chris
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Re: Should I make additional pension contributions via Nest or ISA

#437026

Postby chris » August 24th, 2021, 10:50 am

Although tax relief is mentioned, the employer's contribution does not seem to have been mentioned (or I have missed it).

Let's assume that you are on £30k per year and want to pay £1500 into your savings (whether ISA or pension)

With a pension, your gross £1500 will cost you £1200, but your employer will also have to contribute an extra £900 so for your £1200, you are saving £2400. However, NEST pinch £43.20 of that plus the 0.3% on the total value (£7.20 assuming no growth in the first year and higher than that in subsequent years). £2349.60 for £1200 is virtually doubling your money.

If you wanted to put more into your pension, I would put it into your SIPP to avoid that 1.8% initial charge, assuming that your SIPP's overall charges are lower than NEST, but would at least take advantage of the benefit of employer contributions as well as tax relief by joining your employer's scheme. You could also put additional funds into an ISA if you wanted to save more than the £1200 from your net salary.

Obviously if it was all in an ISA you would pay in £1500 and receive £1500 (less any charges your ISA provider makes).


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