[STUDY GROUP] The Richest Man in Babylon

[PKFFW]

Originally Posted by pilotbob

What do you mean? Most retirement funds are tax free in the US too.

Harry didn't really man that the UK contributes to the fund.... although it did sound like he was saying that, I'm sure that's not what he meant.

BOb

I get what he meant. If you are paying 40% tax then each dollar you put into a fund "pre-tax" is sort of like the government giving you 40 cents.

I'm in Australia though. Here in Australia it isn't tax free, only a reduced rate. We still pay 15% tax on contributions, even the compulsory contributions made by the employer I think.

Since I pay around 30% tax it would be an advantage to put some dollars into a fund "pre-tax" and only pay 15% tax on those dollars. The downside is not being able to get the money again for 30 years, paying big "management fees" and the fact that the Aussie government seems to continually change the rules on retirement funds. All that means, for me personally, I don't see the advantage of paying 15% less tax as offsetting all those negatives.

Cheers,
PKFFW

[HarryT]

Originally Posted by pilotbob

What do you mean? Most retirement funds are tax free in the US too.

Harry didn't really man that the UK contributes to the fund.... although it did sound like he was saying that, I'm sure that's not what he meant.

BOb

I meant exactly what I said, Bob . When you pay money into a private pension fund here in the UK, the fund claims back from the inland revenue (the tax department of the government) tax equivalent to the maximum rate of income tax that person pays, and adds it to the fund. That means that for a higher-rate tax payer, if you pay £1000 into the pension fund yourself, the fund claims another £400 from the government, and you end up with £1400 in your fund.

[Ea]

Do you pay tax on the money put into the fund, Harry?

[HarryT]

Yes, but much less than the government gives you back. That's what's so good about it .

[PKFFW]

Nice!

[=X=]

Wow! A 40% ROI is awesome people not taking advantage of this are insane. Unless they can generate more elsewhere.

Question do you pay tax when you withdraw. Do you also control what you pull out or is the payout controlled by the government

[pilotbob]

Originally Posted by =X=

Wow! A 40% ROI is awesome people not taking advantage of this are insane. Unless they can generate more elsewhere.

Question do you pay tax when you withdraw. Do you also control what you pull out or is the payout controlled by the government

I found this online:

A major incentive for people to save through pension plans, rather than other types of savings plans, is the tax relief they receive. This means that if someone is a taxpayer and they make payments into a pension scheme, the government repays the amount of tax originally deducted from the amount being saved. This repayment also goes into the pension scheme.

So if a person in the UK is on a salary of, say, £30,000 a year, they will be paying tax at 20%. If they make a monthly payment into their pension scheme of £80, the government will refund £20 in tax, bringing the total being saved to £100. That's because when the person was paid £100 by their employer, 20% or £20 was originally deducted in tax.
If a person is a higher-rate taxpayer, paying tax at 40%, they would have £53.33 refunded.


While pension contributions tax relief is a major incentive to save for a pension, the income from a pension is taxable. So at some point in the future, tax will be paid on at least some of the income generated by the savings.

Although Harry says they will pay more in than you had withheld... I guess I don't understand that math. But, he is the guy that lives here.

In the US you would usually contribute pre-tax $'s. So, the result is basically the same. If you earn $30k and you deposit 10% or $3,000... you will not have any tax withheld on that $3,000 that you deferred.

Of course, in the US we also have the Roth IRA, which is a bit different. In a Roth IRA you put after tax $'s into a fund. However, with the Roth 100% of the payouts are tax free... so if you get a really good return it may be a better tax savings than investing pre-tax $'s which you then have to pay tax on when you withdraw them.

I think the most important information in this book are:

1. Pay yourself first, 10%. So, it is pretty easy if you have access to a 401k... just elect 10%.

2. Don't buy stuff you can't afford. All debt is bad. The sorter the term the worst. The less secured the worst. Which means, while a mortgage is probably acceptable buying a TV with your credit card, not such a good idea.

BOb

[PKFFW]

I would say the most important advice is the following two....

1: Pay yourself first. 10% is a good number to aim for and should be achievable unless you are really one of the modern day slaves or "working poor" and barely subsisting. By that I mean the truly poor and not the "I can't afford two cars and the big screen tv "poor".

2: Make your money work for you. So many people miss this part. Instead they stick their money into a bank account earning 1% or less with account keeping fees that eat most of that up and then tax on any profit eating up the rest and think they are doing good because they aren't in debt. You really need to learn to make wise investments.

Cheers,
PKFFW

[=X=]

Originally Posted by pilotbob

I found this online:



Although Harry says they will pay more in than you had withheld... I guess I don't understand that math. But, he is the guy that lives here.

In the US you would usually contribute pre-tax $'s. So, the result is basically the same. If you earn $30k and you deposit 10% or $3,000... you will not have any tax withheld on that $3,000 that you deferred.

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.

I think you and PKFFW captured the
1. Pay yourself first, 10%. So, it is pretty easy if you have access to a 401k... just elect 10%.

2. Compound your savings --make your money work for you. Make your money work for you. So many people miss this part. Instead they stick their money into a bank account earning 1% or less with account keeping fees that eat most of that up and then tax on any profit eating up the rest and think they are doing good because they aren't in debt. You really need to learn to make wise investments.

3. Live within your means: Don't buy stuff you can't afford. All debt is bad. The sorter the term the worst. The less secured the worst. Which means, while a mortgage is probably acceptable buying a TV with your credit card, not such a good idea.


PKFFW[/QUOTE]

Yeah I agree with you both. In fact I belive you guys have listed 3 of the "7 cures to a lean purse". I've added my spin to each one of your points.

One thing I'll add to your #3 bob is that the author is not against debit, but only believes they are a good idea if they will increase your wealth. So in your example a house typically gains 10% a year in value over time a TV set will lost most of it's value over time.

=X=

[HarryT]

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.

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.