Pensions are dead, long live pensions


There’s been a lot of discussion about the March 2014 budget and what it actually means to clients with savings.

This article puts the pension changes into easy to understand numbers.

I’m assuming that the investment returns from all sources are the same and with the same charges.

Option 1

Basic rate taxpayer (BRT):


Cost of a pension contribution                                         80p

Total in pensions savings with 20% tax relief                80p + 20p = £1

At retirement

Pension savings                                                                  £1

TFC                                                                                       25p

Taxable savings pot                                                          75p

Tax @20% x 75p                                                                15p

Leaves                                                                                 60p

Total 60p+25p                                                                    85p

Pension lump sum =                                                         85p

Therefore, for a BRT, the (assumed) tax ‘advantage’   for saving in a pension (without access) for 30 or 40 years (and longer with the new proposals) is a 5p tax gain on the 80p investment, which is 6.25%.

That’s why neither the Tory or Labour party will get rid of TFC – there would be no incentive to put savings away for 40 years; why do it? For 6.25%?

Come on?

Tell me why do people save in a pension?

It can’t be for 6.25% given by the Chancellor?

Option 2

When you add in the cost of national insurance deductions @14%, the cost for £1 in a pension is actually £1.18

Cost/Gross Earnings                                                         1.18

Tax @20%                                                                           23.6p

NIC @14%                                                                           14.2p

Net pension                                                                        80p

Gross pension contribution                                             £1

How about we put the full £1.18 into the savings pot for the same cost of 80p net income?

What would that give us?

Contribution                                                                        £1.18

Cost                                                                                       80p


£1.18 x 20% BRT deduction                                              94p

14/80p is a tax advantage of 17.5%

Now we’re talking. That’s what makes pension saving a bit more attractive for BRT’s when compared to an ISA, where the cost of entry/exit is the same, with no tax advantage over a pension.


Net contribution                                                                 80p


Cost of access                                                                     80p

An ISA is less tax efficient than a pension, but provides immediate access and a whole host of self-servicing options on low-charging platforms. It’s easier to understand. Clients can see, feel and smell the cash. They understand the benefits. It’s easy to understand and they can access it all at once. George doesn’t stop people spending their ISA on Lamborghini’s?

Why shouldn’t they spend their pension on the same?

If you save your pension in the right way. It makes a lot of tax sense for a lot of savers.

Let’s go back to our pension and look at HRT’s – for a HRT who is ‘managed’ as a BRT in retirement the tax gain is substantial at @37%; phasing down the pension in lump sums at marginal rates is going to be important.

There are huge financial planning opportunities for financial planners. They can ensure their clients chose the right option.

You intuitively know these numbers. This will help you add them up.

Pension planning it properly gives nearly x3 times the advantage for BRT’s than they’d get from an ISA – and still have full access. For HRT’s pension contributions make a LOT of tax sense, where pension ‘phasing’ becomes even more important.. And they continue to make tax sense. Pensions are dead, long live pensions.

And we never mentioned salary sacrifice or auto enrolment once.


About Author

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Dubbed by friends and colleagues “The Pensions Professor”, John Reynolds is widely acknowledged as one of the country’s leading experts in the financial services education sector. He has spent 20 years teaching, consulting, mentoring and writing on the subjects of pensions and investments. John’s unique ability to take his years of experience and technical knowledge and present it in an easy to understand format, has resulted in his talents being very much in demand. His portfolio of corporate clients include CII, Lloyds, Scottish Widows, Santander and Wesleyan; as well as numerous IFA clients whom he provides technical consultancy, mentoring and training on client case studies and staff training.. He has put his extensive expertise (and heart and soul!) into developing the expertpensions (EPL) proposition. EPL is a structured and interactive technical exam training programme for IFAs. It's designed to give financial advisors the required technical knowledge, study strategy and exam technique to confidently sit and pass the AF1, AF3, AF4 and AF5 exams. Its online, it's fully supported, structured and designed to help advisers reach Chartered Financial Planner status quicker. It's ready to help your advisers reach chartered status

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