Pension need to knows Official MSE Guide Discussi...

[MSE Guy]

This discussion's specifically to discuss the new MSE Pension Need to Knows Guide.

Click Reply below to discuss it

[kidmugsy]

I'm going to study "THE CHEAPEST FIRMS" section with great interest.

[mania112]

Originally Posted by kidmugsy

I'm going to study "THE CHEAPEST FIRMS" section with great interest.

It's not right, they're not the cheapest.

Buying a PP via Cavendish offers an AMC of 0.70% (Aviva directly is 1.00%) - according to the link.

Our firm have negotiated an AMC of 0.25% for Aviva's platform (which is essentially the same as a PP, in fact platforms are supposedly better than a PP because they offer more features).

The fact that cavendish don't charge commission is irrelevant. That's an additional/different service.

I'm not trying to self-promote - we don't like to do too many start-up's, just trying to prove a point.

[sossij]

I earn £45,000 before tax p.a. My current contribution is 8% and my employer,s is 5%

According to the pension calculator:

"Costs & contributions

What contribution costs you/month:£300
What's added to pension (contribution + tax relief): £462.67
Employer contribution: £187.50
Your savings

Monthly: A reduction of £300 from your pay packet adds £650 to your pension
Annually: A reduction of £3600 from your pay packet adds £7800 to your pension"


The monthly contribution I see going into my pension is £487.50 i.e. £300 (me) + £187.50 (employer). The widget states that "A reduction of £300 from your pay packet adds £650 to your pension"... but not £487.50.

As the £45,000 is my salary "before tax" and both contributions are taken before tax... how is £650 figure arrived at? And more worryingly why isn't it going into my pension each month?

[bilbo51]

Originally Posted by sossij

I earn £45,000 before tax p.a. My current contribution is 8% and my employer,s is 5%

According to the pension calculator:

"Costs & contributions

What contribution costs you/month:£300
What's added to pension (contribution + tax relief): £462.67
Employer contribution: £187.50
Your savings

Monthly: A reduction of £300 from your pay packet adds £650 to your pension
Annually: A reduction of £3600 from your pay packet adds £7800 to your pension"


The monthly contribution I see going into my pension is £487.50 i.e. £300 (me) + £187.50 (employer). The widget states that "A reduction of £300 from your pay packet adds £650 to your pension"... but not £487.50.

As the £45,000 is my salary "before tax" and both contributions are taken before tax... how is £650 figure arrived at? And more worryingly why isn't it going into my pension each month?

Your £300 has already got tax relief included as it's taken from your pre-tax salary. The calculator contribution figure is post tax - ie what it costs you out of your take home pay - called your "pay packet" above.

[sossij]

Originally Posted by bilbo51

Your £300 has already got tax relief included as it's taken from your pre-tax salary. The calculator contribution figure is post tax - ie what it costs you out of your take home pay - called your "pay packet" above.

Hi Bilbo,

Many thanks for your quick reply.

Sorry for being thick...

Yes I understand that the £300 will have tax relief on it as it is deducted from my pre-tax salary. To this I add my Employers contribution of £187.50.. which gives me £487.50, which is what I see going into my Pension each month. Yet the widget clearly states:

"Monthly: A reduction of £300 from your pay packet adds £650 to your pension"

I do not see this £650 "added" into my pension each month... where does this £650 figure come from?

Many thanks

[bilbo51]

Originally Posted by sossij

Hi Bilbo,

Many thanks for your quick reply.

Sorry for being thick...

Yes I understand that the £300 will have tax relief on it as it is deducted from my pre-tax salary. To this I add my Employers contribution of £187.50.. which gives me £487.50, which is what I see going into my Pension each month. Yet the widget clearly states:

"Monthly: A reduction of £300 from your pay packet adds £650 to your pension"

I do not see this £650 "added" into my pension each month... where does this £650 figure come from?

Many thanks

Your contributions are correct and you don't need to worry. You are contributing £300 and your employer is contributing £187.50. The £300 already includes the "taxman's contribution". ie you are getting tax relief at whatever your marginal rate is because you aren't paying tax on the £300.

As to whether the calculator is correct or not, I can't comment. When I try to use it it asks me just to use numbers (ie no commas in amounts etc) even when I'm just using numbers. I think it's a bit buggy.

EDIT: They seem to have fixed the numbers only issue. I can't see how they get the £462.67. Your marginal tax rate would have to be 54% to achieve this!!!!!

Now I know it's buggy.

[sossij]

Originally Posted by bilbo51

Your contributions are correct and you don't need to worry. You are contributing £300 and your employer is contributing £187.50. The £300 already includes the "taxman's contribution". ie you are getting tax relief at whatever your marginal rate is because you aren't paying tax on the £300.

As to whether the calculator is correct or not, I can't comment. When I try to use it it asks me just to use numbers (ie no commas in amounts etc) even when I'm just using numbers. I think it's a bit buggy.

Thanks again Bilbo, yes I'm just using numbers too

What appears to be going on is that the widget is adding tax relief twice:

"What contribution costs you/month:£300
What's added to pension (contribution + tax relief): £462.67
Employer contribution: £187.50"

As you state the £300 already has tax relief on it, to which they add another "tax relief" from somewhere to get £462.67 and then add the employer contribution of £187.50. That is £462.67 + £187.50 = £650.17.

This is the only way I can get to the £650 figure.. which I believe is wrong as the original £300 already has tax relief on it.

Can anyone from MSE confirm the above?

[dunstonh]

I have to agree. The cheapest pensions section is wrong. It should say they are they are the cheapest pensions from companies that MSE promotes.

[fairleads]

Originally Posted by sossij

Thanks again Bilbo, yes I'm just using numbers too

What appears to be going on is that the widget is adding tax relief twice:

"What contribution costs you/month:£300
What's added to pension (contribution + tax relief): £462.67
Employer contribution: £187.50"

As you state the £300 already has tax relief on it, to which they add another "tax relief" from somewhere to get £462.67 and then add the employer contribution of £187.50. That is £462.67 + £187.50 = £650.17.

This is the only way I can get to the £650 figure.. which I believe is wrong as the original £300 already has tax relief on it.

Can anyone from MSE confirm the above?

The clue to using the calculator and obtaining the correct result is in the terminology.
i.e. your 300 contribution costs you 180, ( hr taxpayer) which is the figure to be used in the calculator. Enter 4.8% as your contribution and then check the result.

[sossij]

Originally Posted by fairleads

The clue to using the calculator and obtaining the correct result is in the terminology.
i.e. your 300 contribution costs you 180, ( hr taxpayer) which is the figure to be used in the calculator.

So why does the first text edit box clearly ask you to enter your pre-tax annual salary?

The subsequent calculations are incorrect.

[ej8113]

Pensions - great idea but what about if I cannot afford to buy a home of my own and I am stuck with being a renter all my life? All that saving into a pension will just be to pay a landlord rent until I die "pointless" I'll still be eating baked beans and frightened to put the heating on yet saved a fortune into a pension. Even a modest rent in retirement paid until death would require a pension pot of £168,000 - better the government started removing all the inflation from the economy like massively over-priced housing, too high rents, council tax, energy costs, travel (petrol) car insurance ect ... also strikes me if the government starting reducing the inflation they'd automatically be paying a lot less in income support, child benefit, tax credits, housing benefit, council tax benefit of which the vast majority of payments are to subsidise incomes employers either can't pay or won't pay - too much propaganda covering up government incompetence !

[fairleads]

Originally Posted by sossij

So why does the first text edit box clearly ask you to enter your pre-tax annual salary?

The subsequent calculations are incorrect.

A) Because it uses the gross amount to work out your marginal tax rate.
B) they appear correct to me

ps. Why no input from our regular multi posters?

[dunstonh]

Pensions - great idea but what about if I cannot afford to buy a home of my own and I am stuck with being a renter all my life?

Owning a home is not a right. Renting is an alternative. Neither should affect your retirement planning.

All that saving into a pension will just be to pay a landlord rent until I die "pointless"

The alternative not having the pension income to pay the rent and the landlord evicting you.

I'll still be eating baked beans and frightened to put the heating on yet saved a fortune into a pension.

What is your definition of a fortune?

better the government started removing all the inflation from the economy like massively over-priced housing, too high rents, council tax, energy costs, travel (petrol) car insurance ect

Most of which are outside of the control of the Govt. However, they are reducing benefits for people who choose to be poor. Hoipeully returning to the more affordable position that the govt helps those who cannot help themselves. Not those that choose not to help themselves.

[sossij]

Originally Posted by ej8113

Pensions - great idea but what about if I cannot afford to buy a home of my own and I am stuck with being a renter all my life? All that saving into a pension will just be to pay a landlord rent until I die "pointless" I'll still be eating baked beans and frightened to put the heating on yet saved a fortune into a pension. Even a modest rent in retirement paid until death would require a pension pot of £168,000 - better the government started removing all the inflation from the economy like massively over-priced housing, too high rents, council tax, energy costs, travel (petrol) car insurance ect ... also strikes me if the government starting reducing the inflation they'd automatically be paying a lot less in income support, child benefit, tax credits, housing benefit, council tax benefit of which the vast majority of payments are to subsidise incomes employers either can't pay or won't pay - too much propaganda covering up government incompetence !

Because the governemnt of the day (especially this one) don't want to help the common person, they represent the rentier class. Sadly we are cattle to be milked to keep their kind in clover.

[sossij]

Originally Posted by fairleads

A) Because it uses the gross amount to work out your marginal tax rate.
B) they appear correct to me

ps. Why no input from our regular multi posters?

A) it may well do but it applies the tax relief again after already taking into account the tax free contribution - this seems incorrect, see my example at 10:59.

B) Please can you show your working?

Thanks

[sossij]

Originally Posted by fairleads

The clue to using the calculator and obtaining the correct result is in the terminology.
i.e. your 300 contribution costs you 180, ( hr taxpayer) which is the figure to be used in the calculator. Enter 4.8% as your contribution and then check the result.

Hi, sorry just saw your edit. Many thanks for the update

Why do I need to enter 4.8% of gross salary as my contribution? My contribution is 8%, my employer's contribution is 5%

Its not a very good calculator if you have to pre-calculale your inputs. It should state that you have to do that first, otherwise it is at best misleading or simply wrong.

[Zent]

For a moneysavingexpert article, this worries me.It appears to have too much input from those in the pensions industrywith a vested interest.

Just four examples: -

Pension contributions, and any interest earned,are NOT tax-free. They are TAX-DEFERRED. When you get back yoursavings, and any accrued interest, as an annuity, you will be taxedon them then. If you fall into the Age Allowance band, you will endup paying more tax than if you had been taxed on your incomeoriginally. Similarly, in earlier years, if you are paying income taxat only 20%, and by the time you retire, your income falls into ahigher tax band, then you will pay more tax.

Secondly, inflation will eat away caustically atany savings you put away, including pension contributions. Inflationcan exceed the interest rate you earn.

Thirdly, the stock market can drop dramatically,affecting investments in pension funds.

Fourthly, the fees charged by those in the pensionindustry will massively reduce any amount you put away in earlyyears. Some companies charge an ANNUAL fee of up to 1.5% of your"pot". So savings contributed at say 25 years of age,subject to 40+ years at 1.5%pa, will have 60% of their value deductedby the provider, in round terms.

Just do a spread sheet taking into account wage(And therefore contribution) inflation, fund management fees,purchasing inflation (As applied to what you will be purchasing inretirement, which will be rather higher than either the RPI or CPIfigures), taxation deferred now, taxation paid when you draw yourpension,



and the con will become obvious.

I would have thought moneysavingexpert would have done this calculation, for 1. Those on the Minimum Wage. 2. Those on the national average wage. 3. Those likely to hit the Age Allowance limit.

[dunstonh]

Pension contributions, and any interest earned,are NOT tax-free. They are TAX-DEFERRED.

That is not correct. It ignores tax free growth, tax free lump sum and personal allowance on retirement.

Secondly, inflation will eat away caustically atany savings you put away, including pension contributions. Inflationcan exceed the interest rate you earn.

Whilst inflation is one of the risks, that applies to any tax wrapper and is mostly aimed at savings rather than investments.

Thirdly, the stock market can drop dramatically,affecting investments in pension funds.

Which is why most people investing dont go 100% into the stockmarket. Plus, the volatility can work for you whilst you are years away from retirement and drops can be a good thing.

Fourthly, the fees charged by those in the pensionindustry will massively reduce any amount you put away in earlyyears. Some companies charge an ANNUAL fee of up to 1.5% of your"pot". So savings contributed at say 25 years of age,subject to 40+ years at 1.5%pa, will have 60% of their value deductedby the provider, in round terms.

That is a flawed calculation as it takes future money terms and presents them in todays terms which is pointless. However, the same would apply to any tax wrapper and indeed savings (which tend to have a higher implicit net interest margin higher than charges on investment funds). Some newspapers embarrassingly went with that previously and it is just lazy journalism to create a headline

[Aegis]

Originally Posted by Zent

For a moneysavingexpert article, this worries me.It appears to have too much input from those in the pensions industrywith a vested interest.

Just four examples: -

Pension contributions, and any interest earned,are NOT tax-free. They are TAX-DEFERRED. When you get back yoursavings, and any accrued interest, as an annuity, you will be taxedon them then. If you fall into the Age Allowance band, you will endup paying more tax than if you had been taxed on your incomeoriginally. Similarly, in earlier years, if you are paying income taxat only 20%, and by the time you retire, your income falls into ahigher tax band, then you will pay more tax.

Of course, with the age allowance disappearing, that's no longer an issue.

As to the tax rates, there are very few people looking to pay higher rate tax in retirement, and those individuals should certainly consider all of their options, however in all likelihood someone earning that much in retirement will be at least a higher rate taxpayer for most of their working life.

Once you factor in the very high probability of paying an equal or lower rate of tax in retirement, you then need to account for the PCLS, which gives up to 25% of the fund as a tax free lump sum at commencement. This sum, coupled with the largely tax exempt growth of assets held within the policy, is where the real tax efficiency of this type of investment comes from.

Secondly, inflation will eat away caustically atany savings you put away, including pension contributions. Inflationcan exceed the interest rate you earn.

Inflation affects everything, so this isn't really a relevant comment for pensions.

Thirdly, the stock market can drop dramatically,affecting investments in pension funds.

Again, not a phenomenon limited to pensions, so not really relevant when assessing the worth of the pension tax wrapper.

Fourthly, the fees charged by those in the pensionindustry will massively reduce any amount you put away in earlyyears. Some companies charge an ANNUAL fee of up to 1.5% of your"pot". So savings contributed at say 25 years of age,subject to 40+ years at 1.5%pa, will have 60% of their value deductedby the provider, in round terms.

That's not how you calculate deductions, and "their value" is totally meaningless without stating whether you mean the contributed value (in real or nominal terms), the maturity value (same distinction), etc.

Ultimately what matters at the end of the day is how much you get in your pot and what the difference in projected value would be compared with something outside a pension.

For example, if you assume 7% growth rates net of all charges but the pension cost (quite high, but not unachievable over the long run) and compare that pension to a cleaner investment with a difference of, say, 0.5% (i.e. net growth rates of 6.5% and 7%), then £1,000 will turn into £14,974 outside the pension and £12,416 inside the pension, a 17% reduction.

Incidentally, a pension wrapper can be had for much less than 0.5%, and most investments can go into it on the same terms as you would hold them outside the wrapper, so this is quite an extreme example.

As it happens, many modern platforms offer identical terms for pensions, ISAs and general investment accounts, so the difference between pension and non-pension investments with such providers is zero.

Just do a spread sheet taking into account wage(And therefore contribution) inflation, fund management fees,purchasing inflation (As applied to what you will be purchasing inretirement, which will be rather higher than either the RPI or CPIfigures), taxation deferred now, taxation paid when you draw yourpension,



and the con will become obvious.

Do please explain the con, if you believe there is one.