If you happen to be a higher rate tax payer then your saving in the first instance is 40% not 20%.
The compound growth of the pension investment is being enjoyed on the higher (gross) amount, as opposed to say an ISA which would be compounding on the lower (after tax) initial investment.
As already pointed out, you save NICs on the initial pension contribution if its done via salary sacrifice.
Not sure what you mean by "leave the 25% tax free lump sum where it is". This is definitely a benefit as, even ignoring the above two points, means your net tax charge would be 15% rather than 20%. In case you aren't aware, if you don't take the lump sum, you enjoy 25% of all pension withdrawals tax free thereafter.
In my own case, I'm paying a marginal tax rate of 40% (actually Scotland so 42% but ignore that), plus NICs on my salary. When I start drawing my pension I expect to be a basic rate tax payer, so my tax saving will be 25% (40% saved on my salary, minus 15% at withdrawal)
Reply With Quote
