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Originally Posted by =X=
Okay that makes a lot more sence than the government just paying in 40%.
If this is how GB handles the pension plan this is quite a brilliant marketing move by the government.
1) They make their citizens feel like they are getting a payment when in fact it was their money all along.
2) <More Importantly> The government gets the money before the citizen, which means they get to put the money to work before the citizen. I don't know how the payouts work but if this is done on a yearly basis that means the citizens contribution was not put to work for a whole year.
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It's better than that, though.
You see, we have a "progressive" income tax system in the UK, with different amounts being taxed at different rates. Everybody gets a certain amount of tax-free earnings, then you get so many thousands taxed at the "standard" rate of tax (23%), and everything above that taxed at the "higher rate" of 40%.
Let's suppose someone earns £40,000 a year - that would be a fairly typical professional salary, and would probably just put someone in the 40% tax bracket for a small amount of their income.
Now, suppose that person pays £5000 a year into a private pension fund. They'll probably have paid around 20-25% income tax on that money, balancing out the various rates of tax and what have you. But, the point is, you get added to your pension fund an amount of money equal to the
highest rate of tax that you pay, so even though you might only have paid 20% income tax on your £5000 (which is £1250), the government will repay the fund 40% on £5000, or £3333, so you've got £2083 "for free" from the government.
It really is an excellent incentive to pay money into a pension fund! Standard rate tax payers do less well out of it, but everybody will gain something.