Pension savings question

[Jonathan]

I'm from the UK, so my question may have something to do with my ignorance of the US system, or the way the UK pensions taxation works.

How best do I account for a pension in which I get tax rebates on the contributions? That is, if I put in X I get 20% of that added by the government.

Also, since the income from the fund will be from an annunity bought at a fixed rate, how can I best model that? Basically, the savings are decoupled from the income when I retire.

Thanks for any help,

Jonathan

[Jonathan]

Oops - I didn't see the "Dealing with real world problems" board - I see there is a thread that appears to deal with a similar question to mine.

[jimr]

Jonathan,

I'm not sure if we've covered this exact situation before, but I think I'd need to understand more about how the pension works before I can provide a good answer.

In general, the planner doesn't care about income and expenses during the accumulation phase of the retirement plan, only about additions to savings. So the tax implications of deductible contributions aren't really that important. OTOH, if the contributions are increased by a government "add in" contribution, that would be important to add.

If you know ahead of time what your pension income will be or can compute it, it would be best to ignore the contributions during the accumulation phase (pre-retirement) and just include the exact pension income during the retirement years.

Jim

[Guest]

Thanks for your reply.

Here in the UK, if somebody contributes to an official pension scheme (which is the most common way of providing for your retirement), the government will apply a tax rebate of 20%. In my case, I am a "higher rate tax payer" so I can claim an extra 20% rebate on top of that - for every $100 I contribute, the government gives me $40. The income from an annuity bought with the pension on retirement is, however, subject to income tax in the normal way, so it's not completely wonderful.

If I understand you correctly though, I could simulate this by ignoring pension contributions completely during the accumulation phase, and just apply an annual income amount in the retirement phase. The problem would be predicting the size of the eventual fund of course, but I'm OK with estimating that based on a real growth rate of about 4%.

I'll try that.