We've often written aboutour preference for Isas over pensionsas a savings vehicle. The removal of the requirement for anyone to buy an annuity and of the cap on drawdown at retirement changes the equation a little (more flexibility is good).
But Ian Cowie, writing in the Sunday Times, makes a reasonable point about the treatment of dividends inside pensions once drawdown has begun.
If you get paid a dividend outside a pension, you are assumed to have made a 10% tax payment already (via the corporation tax the business has paid). Basic rate tax payers then have no further liability, and higher rate payers have only another 25% to pay.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
But if you get paid a dividend inside a pension and then draw down the income, you end up paying more. You pay the 10% (or rather, you aren't effectively reimbursed the notional 10% via reduced dividend tax rates as you are outside a pension) and you also pay your marginal rate of income tax (rather than the lower dividend tax) on withdrawals.
"As a result," says Cowie, "equity based income is taxed first inside the fund and a second time in the hands of savers". I can see the point he is getting at here.
The notional 10% tax is a bit of a red herring, but it is true that dividends earned inside a pension wrapper in drawdown are generally taxed more heavily than those earned outside a pension (20% or 40% in a pension, 0% in an Isa and 0% or 25% outside a wrapper) but that obviously needs to be set against the full income tax relief you get when you put money in a pension. Relief on the way in. Tax on the way out.
Still, if it is a tax-free retirement you want, this tax set-up is another argument for filling your Isa every year before you spend too much time working on pension contributions beyond your occupational pension.
-
Christmas at Chatsworth: review of The Cavendish Hotel at BaslowMoneyWeek Travel Matthew Partridge gets into the festive spirit at The Cavendish Hotel at Baslow and the Christmas market at Chatsworth
-
Tycoon Truong My Lan on death row over world’s biggest bank fraudProperty tycoon Truong My Lan has been found guilty of a corruption scandal that dwarfs Malaysia’s 1MDB fraud and Sam Bankman-Fried’s crypto scam
-
Our pension system, little-changed since Roman times, needs updatingOpinion The Romans introduced pensions, and we still have a similar system now. But there is one vital difference between Roman times and now that means the system needs updating, says Merryn Somerset Webb.
-
We’re doing well on pensions – but we still need to do betterOpinion Pensions auto-enrolment has vastly increased the number of people in the UK with retirement savings. But we’re still not engaged enough, says Merryn Somerset Webb.
-
Older people may own their own home, but the young have better pensionsOpinion UK house prices mean owning a home remains a pipe dream for many young people, but they should have a comfortable retirement, says Merryn Somerset Webb.
-
How to avoid a miserable retirementOpinion The trouble with the UK’s private pension system, says Merryn Somerset Webb, is that it leaves most of us at the mercy of the markets. And the outlook for the markets is miserable.
-
Young investors could bet on NFTs over traditional investmentsOpinion The first batch of child trust funds and Junior Isas are maturing. But young investors could be tempted to bet their proceeds on digital baubles such as NFTs rather than rolling their money over into traditional investments
-
Negative interest rates and the end of free bank accountsOpinion Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK banking system slightly less awful, says Merryn Somerset Webb.
-
Pandemics, politicians and gold-plated pensionsAdvice As more and more people lose their jobs to the pandemic and the lockdowns imposed to deal with it, there’s one bunch of people who won’t have to worry about their future: politicians, with their generous defined-benefits pensions.
-
How the stamp duty holiday is pushing up house pricesOpinion Stamp duty is an awful tax and should be replaced by something better. But its temporary removal is driving up house prices, says Merryn Somerset Webb.
