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[MSE Archna]

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Pension MoneySaving: Buy a different way to boost returns Article

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[dunstonh]

Comments on article

Many stakeholders have less choice of investments than personal plans, but the differences are closing.

I would have said the opposite with personal pensions getting an increasing number of funds all the time with the average stakeholder only offering a dozen or so and some only offering 3. When the NPSS is introduced, that will almost certainly make stakeholder pensions obsolete but you will still see personal pensions and SIPPs exist for people who care where their money is invested (after all, it is an investment).

(watch for a new article on the cheapest Sipps soon).

Hope you include hybrid SIPPs which can be cheaper than the cheapest SIPPs out there.

Put £200 a month into a Norwich Union stakeholder pension over thirty years, assuming 5% annual growth, and the fund would be £136,000;

To comply with FSA rules, you must use the intermediate growth rate when one rate alone is to be used. That means 7% p.a. and not 5%. If you choose to use 5% (which you can) then you must use 9% as well. The rules on this are around COB 6.38 (or thereabouts).

Also, Norwich Union changed their contract at the end of April 2006 and 30 years of £200pm would now be £132,000 at 5%. They have gone from being a good stakeholder provider to being an expensive one now.

[cheerfulcat]

I think that it should be pointed out that tax is only deferred; income from a pension is taxable. I would also suggest that someone in their twenties now should think very long and hard before contributing to a personal pension; unless they find it very difficult to keep their paws off their savings, an ISA might be a better place to start.

I also wouldn't describe the cash fund option as " safe ", because it isn't. You are nearly guaranteed to lose money to inflation over the long term.

[kittie]

This article covers only a few companies and some of the available options. It is not an independent and unbiased article and could lead people into making the wrong decisions

[MSE Martin]

I've read the comments above and am slightly disappointed, but was expected them. I sometimes think those who congregate around some of these boards forget that the niche audience discussion pensions here is not the same as the main site.

Getting people even to think about pensions is the prime challenge, and some of the arguements above don't do too much to help that. Let me answer some of the points.

• Why I chose 5% as an example? I know where you're coming from, but please remember this is an example of the difference using a broker makes not how much a pension would grow. I choose the lowest of the 3 example bases as I'm free to do. The FSA regulations are irrelevant, this is a journalistic article not a product pitch, I deliberately chose to assume the lowest growth still rather a high figure. The reason I chose it was so not to accentuate the - higher growth would've accentuated the performance of the discounters, and i preferred to keep it moderate.
• Pension Tax. Tax is not deferred, the tax on a pension is complex, as we well know - to start with 25% of the fund is tax free and people tend to pay a higher rate when working than on receiving pension income. The pension tax benefits tend to substantially outweigh ISA benefits these days, as a number of studies have shown. Having said that, as the article states, it isn't an either or situation - the best plan is a mix of assets and products. This site has many articles on ISAs, far more than pensions, the ISA articles are also substantially better read - however it is crucial there is pension help too.
• Cash Fund: Of course it is correct to describe it as safe, this type of point doesn't help anyone. Let's not obfuscate the concept of risk, there is no risk of losing your money. It's dangerous to start confusing risk with 'opportunity cost. Risk of not beating inflation is not the definition of investment risk. Yes of course its an important concept. Yet please remember the context of the note about cash funds - it is to explain to people petrified by pensions that you don't by definition risk losing all of your money. As an aside actually I disagree with the speciac too - many cash funds pay more than inflation.
• Not independent and unbiased. I find that comment slightly offensive and very confusing How on earth to you come to the conclusion it isn't independent or unbiased? Where is the bias? Who is it not independent from? If what you're trying to say is 'i dont agree with the pick of products' then you're entitled to that view. I picked two IFAs to give their view. If I picked more IFAs then there would've been different views. Yet this article is about pension discounters, quite deliberately it isn't an article about 'which pension fund is correct'? The aim is to show people one way to get a stakeholder pension, the way that minimises commission.

Martin

[dunstonh]

I agree kittie. How many times have we seen people mention that Martins article recommends NU just because it gets a mention in there.

L&G have awful service. Standard Life are on the decline. Scottish Widows have an excellent personal pension but offer no fund based discounts and the PPP is far better than the SHP. No mention of Friends Provident who are recognised as having the best waiver of premium contract to attach to pensions and some of the best low risk funds available within the 1% regime. Plus they have fund based discounts. There are others to consider as well.

ISAs should have a greater coverage as a retirement option.

edit following Martin's post made at same time...

What about correcting the NU information? That is now factually incorrect and we all know how the media loves to be accurate

Martin, you must remember that you carry a lot of weight on what you say. We have had people post in this forum before saying that they are going with NU because that is the company you have in your article. They havent realised that its just an example to show the differences. They have taken it as a recommendation. Don't underestimate the power of your articles.

[MSE Martin]

I'm surprised by that Dunstonh, Norwich Union is an example and stated as one, but if you don't read it that way it needs a change. So I have addedto the table

Warning: This is simply an example to show the impact of using a discount broker on a fund, the choice of Norwich Union is random rather than a recommendation.


And amended the IFA recommendations note to


When choosing a provider fund choice, charges and institutional safety are the keys. MoneySaving’s not investing, so to help with some pension ideas I’ve asked two top IFA’s to pick their top providers, though as always the case with products where there's no right or wrong, they're just opinions not answers, it always depends on your circumstances.

PS (it'll take half an hour before those amendments can be seen)

[homersimpson]

Take the age you start your pension and halve it.
Put this percentage of your salary aside each year until you retire.

20% of gross or net salary?

When the NPSS is introduced, that will almost certainly make stakeholder pensions obsolete but you will still see personal pensions and SIPPs exist for people who care where their money is invested (after all, it is an investment).

what is NPSS and why will it make stakeholder pensions obsolete?

Understand the point about FSA rules and Martin's response but what growth rate is more realistic- 5%, 7%, 9%? If you had to choose which one would you choose and why?

The pension tax benefits tend to substantially outweigh ISA benefits these days, as a number of studies have shown

what studies?

As an aside actually I disagree with the speciac too - many cash funds pay more than inflation.[/

which ones?

the PPP is far better than the SHP. No mention of Friends Provident who are recognised as having the best waiver of premium contract to attach to pensions and some of the best low risk funds available within the 1% regime. Plus they have fund based discounts. There are others to consider as well.

what is PPP and SHP? What do you mean by 'best waiver of premium contract to attach to pensions'. Who else should be considered and why are they good?

[dunstonh]

what is NPSS and why will it make stakeholder pensions obsolete?

Its basically a low cost retirement scheme replacing stakeholders in 2012. It is expected to be even more limited in fund choice than stakeholder but apart from that, not much more is known about it apart from compulsary opt-ins.

Understand the point about FSA rules and Martin's response but what growth rate is more realistic- 5%, 7%, 9%? If you had to choose which one would you choose and why?

If you choose stakeholder, I would go 5%, if you choose personal pension or SIPP and utilise a decent fund range I would go 7% to 9%. I know it depends on the funds but the limited fund selection of stakeholders doenst allow for full potential.

what studies?

I dont know. More and more financial articles are promoting ISAs first and defering the decision to utilise the pensions until later in life.

what is PPP and SHP?

Personal Pension Plan. Stakeholder Pension plan.

What do you mean by 'best waiver of premium contract to attach to pensions'.

Different providers have different levels of cover with regards to waiver of premium protection. They are not all equal.

Who else should be considered and why are they good?

Primarily, where you want to invest and how you want it spread should be the first choice. Then you see if you can achieve that within a stakeholder, personal pension, hybrid/full SIPP and compare the charges between them.

For example, A scottish Life Personal pension paying commission to the adviser can beat a Cavendish arranged stakeholder on charges. Commission doesnt always equal charges.

Another thing to note are some of the features. Are you likely to be a fund switcher, if so, look for low or zero switching costs. Do you require annual automatic increases in premiums, then look for a plan that allows that. The latter is quite important as you wouldnt believe that number of people that started with say £20 - £50pm 15 years ago and are still paying that amount despite the real terms value not being the same.

[EdInvestor]

I think that it's now a pretty broadly-held view in these forums that if there is no pension option with a company contribution, basic rate taxpayers should almost always prefer the ISA tax wrapper to the pension.

This is because

1)The ISA tax allowance is 'use it or lose it' on an annual basis whereas pension tax relief can now be accessed right up until retirement for large lump sums under the new rules.

2)For basic rate taxpayers, mostly the pension is just tax deferred, only 25% of the fund is tax relieved.

3)The restrictions on the pension are onerous, including loss of access to 75 % of the capital forever, inability to access the other 25% until 55, rigid restrictions on the amount of income that can be taken out, rigid restrictions and high taxes on the inheritance of any remaining capital. ISAs have no restrictions and are not subject to any taxes on withdrawal of capital or income.

4) Many people will be forced to use their pension fund to buy an annuity and annuity rates are very poor. A purchase of an annuity (if one is desired) from an ISA fund will attract better tax treatment and a higher income.

5)In general, higher quality investment options are obtainable for ISAs at lower cost, (although this is changing with the advent of low cost Sipps.)

*Pensions may still offer some attractions for higher rate taxpers, who obtain genuine tax relief ( as opposed to simply deferment) in the form of an 18% rebate, cash in hand, with no requirement to put it in the restrictive pension wrapper.

[cheerfulcat]

Cash Fund: Of course it is correct to describe it as safe, this type of point doesn't help anyone. Let's not obfuscate the concept of risk, there is no risk of losing your money. It's dangerous to start confusing risk with 'opportunity cost. Risk of not beating inflation is not the definition of investment risk. Yes of course its an important concept. Yet please remember the context of the note about cash funds - it is to explain to people petrified by pensions that you don't by definition risk losing all of your money. As an aside actually I disagree with the speciac too - many cash funds pay more than inflation.

No, I'm sorry, Martin, cash is not a safe asset for the long term if you need to increase your capital ( which most people do ). There may be no risk of losing money in nominal terms but cash does not and will not keep up with inflation ( do not be misled by official inflation figures ). It cannot be, and is not, said often enough; if you need capital growth you need to invest in equities [ Edit: or, as Ed says, other appreciating assets ]. You are not doing anyone any favours by taking the " cash is safe " line. It may have only been a throwaway remark in the article but it props up that kind of thinking in people who don't know any better.

IMHO you are coming perilously close to giving advice; I think that the article should have less emphasis on the pros and a little more on the cons of pensions.

[EdInvestor]

Investing a pension in cash will usually not be very effective because of the charges, and the dearth of high interest rate vehicles designed for the pension wrapper.

There are of course lower risk options for pensions investment, involving bonds and property rather than equities, which will suit those with a more cautious profile.

[dunstonh]

Using Lipper as the data source, the top performing cash fund grew by 6.41% p.a. before charges over the last 5 years (a fund not available to stakeholders as it happens).

The sector average was 3.68%. Take off 1.5% and you are left with a below inflation rate of return which makes cash funds unsuitable for long term retirement planning.

[EdInvestor]

It's possible to do a bit better in some Sipps - for instance Sippdeal has no annual fee and will give you 3.5%,but only for 20k or more.

But this more reasonable rate is not really designed for investment, but rather for people using the Sipp for pensions in drawdown mode,who want to keep a year's income in the cash account to pay themselves their pension every month.

Overall, pensions are not really set up for cash at all.

[MSE Martin]

I find the argument over cash funds quite bizarre. Please re-read the context of the comment. There is no suggestion of using cash funds for long term planning, instead it is used in the context of illustrating that it is not the pension that is implicity risk, but the underlying investment!

[cheerfulcat]

I, for one, am arguing with your use of the word " safe " when referring to cash as a home for long-term money. It doesn't matter that it's only for illustration, it isn't safe.

[EdInvestor]

Actually the idea of using cash as part of a retirement investment asset allocation is a lot less silly than it used to be. It's long been regarded as quite normal to use low risk bonds ( gilts and corporate bonds) as part of a pension fund, but these days the difference between the return on cash and on gilts is very little - not enough to justify the additional risk involved in the gilt/bond investment, many people believe.

But this only really applies to a retirement fund in an ISA wrapper, not in a pension wrapper, for the reasons mentioned above, primarily charges and lack of competitive cash products.

[kittie]

A quote from cheerfulcat

"IMHO you are coming perilously close to giving advice; "

Whether meant as advice or not, this is how it will look to the public and I would have thought that some disclaimer would be necessary, ie to consult an IFA

ref cash: it would be important to spell out risk/reward in various model portflios. Cash at 4.5% less tax would potentially lead to capital erosion. Long-term gilts at 2.5% yield will lead to capital erosion etc. This is a big subject and the reader, as an individual, should be made aware of ALL options by someone qualified to give advice and regulated by the FSA. It would then be up to the individual to take the advice or not but I would say that seeing an IFA has to be the first step rather than taking what has to be seen as `advice` from a guru running a magazine style BB

Martin, I honestly admire you greatly for what you have achieved and how you have been instrumental in turning people`s lives around. I think that the article under discussion is a step too far but that is only an opinion.

[homersimpson]

I find the argument over cash funds quite bizarre.

I don't- I totally understand it. I know lots of people who suffered because of endownment crisis, made a complaint, won, scrimped on everything and paid off mortgage. These people have a company pension (final salary)and want to take out a personal pension to get free 22% of government. They don't trust financial advisors whatsoever and want no risk (understandable). Their isas are full. They are looking at cash funds because of the security element. They want cash funds which pays as much as highest interest building society account so money doesn't erode, they get 22% free of govt and they have total security.

[dunstonh]

I don't- I totally understand it. I know lots of people who suffered because of endowment crisis, made a complaint, won, scrimped on everything and paid off mortgage. These people have a company pension (final salary)and want to take out a personal pension to get free 22% of government.

Taking out a pension to get 22% tax relief is not a reason to do it. Its a feature of a pension. That's all. The way the proceeds are paid is far more important.

They are looking at cash funds because of the security element. They want cash funds which pays as much as highest interest building society account so money doesn't erode, they get 22% free of govt and they have total security.

homer, cash funds contain the risk of inflation. You say the money doesn't erode but it does in spending power. Its been a while since I last saw any inflation stats but the last batch showed that £1000 would have reduced in spending power to around £790 over 10 years. If the rate of return doesn't beat inflation, then the capital is being eroded in real terms. Just try and think back 10-15 years and remember how much a tank of petrol cost you. Try and find penny sweets now.

Until recent times, cash deposits paid less than inflation. That situation could return.

There is also the misconception that you have a choice of cash or stock-market and nothing in between and that you have to put all your money in one or the other.

They don't trust financial advisers whatsoever and want no risk (understandable).

That is not a realistic position for the majority of the public. It has never been safer to seek financial advice with the amount of consumer protection that exists and the number of mis-sales to the proportion of transactions that takes place is tiny. Historically, confidence always takes a bashing after a stock-market crash.

People who need advice often don't seek it and lose out far more. How many couples have the retirement planning in pensions all in one name and not split across both them? That costs you a thousand pounds a year extra tax in retirement due to bad planning. It can also cost the surviving spouse all their income on the death of the partner.

Retirement planning is about providing enough money for you to live on in retirement. That is the number one issue. Too many people jump in with "i must have a pension" as the number one priority and that is not the way to do things.

The people coming to this website and contributing to the forums can be "put right" on the pros and cons of ISAs vs Pensions. However, people reading Martin's articles on pensions and acting upon them need protection from their own naivety. Yes, DIY may save them £500 in commission being paid to an adviser but that's nothing compared to paying over £1000 a year extra in tax for 25 years.