Pensions 'v' other savings

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
41 replies 3K views
KGKG Forumite
333 Posts
I am a little dubious about pensions given the bad press they have been getting recently.

My feeling is that not only do I not know what my own situation will be in 35 years time, but I also don't know what pensions are going to 'look' like. I can't see the current model being sustained forever and am worried that any investment that I put in now may well be worthless in the future (don't say it can't happen - it already has for many people).

So, until now I have been saving, but not in a pension.

I currently have £7000 of savings split between an ISA and a high interest savings account (both procured with advice from this site).

From my very vague knowledge of savings and pensions, the advantages that I can see this gives me is:

1) if some crisis occurs and I really need that money now (and I mean a real emergency like having to pay for life-saving treatment in th US...) I can get at the money, it's not tied up in a pension.

2) If get told I have 12 months to live in at the age of 40 I can spend my savings on making that last 12 months the best ever, rather than losing it all in a pension.

(Yes I am morbid aren't I ;))

I am aware of disadvantages of not having a pension such as not benefitting from employer contributions in an employer scheme, but my concerns are still nagging in the background. (I have also worked on fixed-term contracts for all of my working life and never stay with one organisation for more than a couple of years and I imagine having lots of little 'pots' of money would be a nightmare).

I read the stuff about 'pension v ISA'. etc, but was wondering if there are any other options out there for people like me who like low risk (stuffing it under the matress won't work - the house might burn down...).

I am presuming that I will be able to pay a lump sum into a pension at a later date if I change my mind.

Are there any things I should be aware of if I decide to steer clear of pensions for now?

KG
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Replies

  • dunstonhdunstonh Forumite
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    Lets assume stakeholder/personal pensions and Maxi ISAs here.

    Most of the pension bad press isnt about the personal/stakeholder pension. Its about the lack of commitment by people to make contributions and the shortfall that is going to take place when you get to retirement.

    SHPs/PPPs are just an investment wrapper in the same way that an ISA is an investment wrapper. The differences are not the funds as they have identical tax treatment. The differences are in the product design, the tax treatment of the contributions paid and the way they mature.

    A pension gets tax relief on the contributions. If you include tax credits, you are potentially able to get upto 72% tax relief on your contributions. The minimum tax relief is 22%. Lets assume 22% from now on to keep it easy.

    So for every £1 you pay in, with an ISA £1 goes in but £1.28 with pension. That gives the pension a nice headstart. The investment inside the ISA and pension are treated the same for tax purposes. Charges are now lower on most modern pensions than an ISA so the pension wins again.

    Eventually, you get to retirement and your work income stops. You need a new income to replace it.

    Your ISA fund value will be lower than the pension fund value but the whole ISA fund will be available whereas only 25% currently will be avaible on the pension.

    However, its income you need to live on so your ISA needs to generate an income. Most funds have the income taxed at 20% within the fund before you get it. However, the income your receive has no further liability.

    The pension income is supplied by an annuity. Annuity rates vary depending on the options you want. i did one this morning with a number of options and got 6.2%. This income is taxable but you can earn £6830 with no tax at 65 and then you have the 10% band for the next £2020. You then enter 22%.

    Sensible retirement planning will have your pensions split between you and your partner so you utilise both zero rate and 10% tax bands.

    Yes, you cant draw the money if you need it before retirment but that isnt the point of it. It is not your emergency fund it is your retirement fund.

    As a rough rule, pensions are better than isas the further away you are from retirement. The closer you get, the advantages of lower charges and better tax treatment get less.

    In the next 30 years there are likely to be many changes in the pensions legislation. Sometimes the older products offer better terms. Sometimes the newer ones offer worse terms. That isnt an issue as the products are generally transferrable. ie Section 226 (the plans before personal pensions) can be maintained by those that have them and you can carry on paying into them. Many of them have features you cannot get on modern plans. However, some are not as good. Those that are not as good can be transferred or stopped. Those that are good can be maintained. We are nearly 20 years since the last major change. The next major change is in 2006 but it isnt going to affect the average person much, it at all.

    You can look at it another way. You have to make your biggest purchase/investment of your life when you retire to provide an income in retirement. The goal is to have the money by the time you get to that point to allow you to do that. Now, how do you achieve that goal. Pension is one way, ISA is another. Money under bed is also a way. Each method has its pros and cons.

    Once you understand that you need to save for your retirement then you can look at what method is best. At the moment, you have an emergency fund but nothing else. Hopefully you are in your low 20s and your contributions (by whatever method) will be relatively low. If you are in your 30s, its going to be harder for you.

    The Govt has a choice. Either bring back supertax and increase taxation to more than twice what it is now for everyone to keep the state pension going or dont pay out as much in the future in state pension/benefits. A good guess is to expect it to be something in between.

    So, do nothing and expect to have a poor standard of living in the future.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • KGKG Forumite
    333 Posts
    Huh?? ??? ??? Find some of this difficult to follow but will print it out and take another look.

    No offence to DD, because i really appreciate the time you've taken to reply, but it's stuff like this that really puts me off pensions.

    Last year I watched a TV programme where a pensions expert (could it have been Martin??) went round and looked at four very different people and their pension situation.

    In one of the cases (single parent on a low wage) the pensions expert advised that her best option wasn't to have a pension, but to save in other ways. Just trying to find out if that would be a better way forward for me. It;s the scare mongering of what will happen to you if you don't have a pension that really puts me off I guess.

    I also don't get the bit about 'Its about the lack of commitment by people to make contributions and the shortfall that is going to take place when you get to retirement.'

    I am not sure whether that is the individual's lack of commitment effecting the individual's pension, or the general public's lack of commitment effecting everyone. If it's the latter that scares me off pensions even more.

    KG
  • margaretclaremargaretclare Forumite
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    Hi

    You asked 'whether save in a pension scheme, or save some other way'. DD explained the pros and cons of both. But from my perspective, as a non-expert but a fairly savvy retired person, I think you need both.

    With a pension, you can't use it as an emergency fund. It has advantages - the taxman's contribution, for instance. And when you finally decide to draw it, any age from late 50s to 75 - you can take 25% of it as a tax-free lump sum. Nice!

    With other savings, you CAN build up an emergency fund. And everyone needs one of those. Whether you're saving for a deposit on a house, a 'rainy day' fund for those things that happen that we can't forecast, like some major appliance breaking down, the boiler packing up in the middle of winter, whatever it might be.

    FWIW I'm still saving in a stakeholder AND in a cash ISA. The cash ISA is mainly because I know we'll need to replace the car in a couple of years time, and also other unforeseen things can hit just when you're least prepared. The stakeholder is because I reckon that at age 75 I might be glad of a bit extra (as well as the 25% tax-free!)

    As a non-expert, I think you need 3 things. (1) If you're young, have dependents, kids etc then you need life assurance. I no longer need it. (2) You need some kind of pension provision,whatever kind that is. (3) You need some savings, for reasons outlined above.

    Does that help?

    Margaret
    [FONT=Times New Roman, serif]Æ[/FONT]r ic wisdom funde, [FONT=Times New Roman, serif]æ[/FONT]r wear[FONT=Times New Roman, serif]ð[/FONT] ic eald.
    Before I found wisdom, I became old.
  • dunstonhdunstonh Forumite
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    It;s the scare mongering of what will happen to you if you don't have a pension that really puts me off I guess.

    What scaremongering? Lets stick to fact.

    If you you dont save, you wont get any additional income beyond what the state gives you.

    If nothing was to change from now until 2030 then the state will not be in a position to give you anything. So you will have no income in retirement.

    Its that simple.

    The current system has a pension credit which increases the benefits to a certain standard of living. However, that cannot be maintained long term as the country just cannot afford it.
    In one of the cases (single parent on a low wage) the pensions expert advised that her best option wasn't to have a pension, but to save in other ways.

    This makes it difficult to give advice as small premiums can prevent you from getting the full amount of credit. For those closer to retirement now, it may not be beneficial to commence a pension. It depends on what other assets are held. Also, the rules changed earlier this year and small pension funds will not penalise you. Those further away from retirement can get away with a small premium and still get a relatively decent fund from it. So relying on a tv programme from last year is not a good idea.

    Also, do you really want to be relying on state benefits which may or may not be available when you get to retirement? Could you live on £105.45 a week for yourself or £160.95 if there are two of you?
    I also don't get the bit about 'Its about the lack of commitment by people to make contributions and the shortfall that is going to take place when you get to retirement.'

    I am not sure whether that is the individual's lack of commitment effecting the individual's pension, or the general public's lack of commitment effecting everyone. If it's the latter that scares me off pensions even more.

    There is a lack of commitment from many people to do any form of saving. Let alone retirement planning.

    There is also ignorance of the system, which is often due to the complicated nature of some of the products. However, many people use that as an excuse and it isnt the real reason. Its because retirement planning takes saving and the UK population isnt very good at saving. It prefers to be given money without working for it.

    You have an ISA. Why didnt you take a bond or unit trust or an OEIC or one of the many hundreds of other variations of savings products? Was it because you knew what you wanted this money to do for you and chose the product to match?

    The same applies for pensions. You need an income in retirement. How much income do you want? when do you want to retire? Now what products are the most suitable to get you there?

    That is the order to think about it. However, you appear to be thinking in reverse.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • Aren't you all missing the point that a pension is not a tax-saving device, it's a tax deferal device. Apart from the 25% tax free lump sum, you'll have to pay tax on the income that a pension provides. Thus it only makes sense to use a pension if you expect to pay more tax when you're working than when you're retired.

    Ergo if you're a 40% tax payer now and expect to be a basic rate tax payer when you retire, then a pension makes a lot of sense. But that might be tricky to achieve. Otherwise, saving in ISA's for now and maybe using that money to buy an annuity when you retire or or dumping it into a pension later after Apr 2006 (when new pension rules come into effect) can make a lot more sense

    Either way though, retirement planing is essential....
  • MilarkyMilarky Forumite
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    paul666 is correct that a pension is a tax deferral device - and in it's way so is an ISA potentially. With an ISA funds are only held in your name. If you have dependants - more to the point a partner - you can only pass the value in an ISA through your estate. ISAs are therefore potentially liable for Inheritance Tax [IHT] in a way that ordinary 'taxable' savings in joint accounts are not - because joint savings by-pass an individual's estate. I'm not saying this is why the govt created ISAs [to trap people's savings into a taxable regime] but it does illustrate the essential truth about taxes and 'free lunches'...

    In addition, of course, the 'disincentive' effects of the new Pension Tax Credit are unsettling and the source of much discussion.

    I too have my doubts sometimes about paying into a pension, but continue to do so out of a conviction that it 'makes sense' and that I can rationalise [i.e. justify to myself] several grounds for doing so.

    However, the ability to save outside a pension potentially after 2006 means that doing so in that way will be largely 'reversible' in terms of swtiching into a pension later on.

    And then there's 'compulsion' [will they - won't they?] DD's remarks about the reluctance of individuals to act until someone effectively decides for them is fair comment until you consider that even the govt doesn't really want to be seen to compel people to save into a pension - which is why they set up the 'independent' Pensions Commission to formally make that recommendation to them.

    So you might as well assume that a 'minimum' level of compulsion will be here in about 5 to 10 years time. But whatever that 'minmum' is it won't be 'enough' in many senses. Australia provides the example of 'compulsion' [but not in the British sense] to make deferred savings - but savings at a level that will not, in themselves be sufficient to provide a 'decent' income. Wouldn't it be 'nice' for many people if we just got told we would have to save 10 percent of our salary into a deferred savings account [i.e. a 'LISA' - 'Lifetime Individual Savings Account]? But I doubt that will be the outcome of the current deliberations....

    Stick in there and keep studying the 'form' - your doubts and feelings will no doubt coalesce around a position which which you feel comfortable. And being 'comfortable' with a decision is really as important as taking one, isn't it?
    .....under construction....
  • margaretclaremargaretclare Forumite
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    Yes, you pay tax but I would rather have an income and pay tax on it than having no income.  
    ......Personally, i utilise ISAs and Pensions as my goal is to have capital and income.

    Yes! Yes! Yes!

    And some of us were brought up with a 'culture of saving', and so feel much more comfortable having some savings than not.

    Margaret
    [FONT=Times New Roman, serif]Æ[/FONT]r ic wisdom funde, [FONT=Times New Roman, serif]æ[/FONT]r wear[FONT=Times New Roman, serif]ð[/FONT] ic eald.
    Before I found wisdom, I became old.
  • PalPal Forumite
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    Ergo if you're a 40% tax payer now and expect to be a basic rate tax payer when you retire, then a pension makes a lot of sense. But that might be tricky to achieve. Otherwise, saving in ISA's for now and maybe using that money to buy an annuity when you retire or  or dumping it into a pension later after Apr 2006 (when new pension rules come into effect) can make a lot more sense

    If you are a 40% taxpayer when working, it is actually very easy to make sure that you only pay 22% instead of 40% tax when you retire. All you do is save less once your projected pension starts hitting around £33k a year.

    In practice most people, even higher rate taxpayers, don't get near the 40% tax bracket after they have retired, especially after they have taken their 25% as a tax free lump sum.

    When I reach the point when my projected pension is in danger of taking me into 40% tax I will start worrying about the disadvantages of saving in pensions compared to ISAs, but for now I'll keep using a pension for my retirement savings.

    The same arguement also applies to basic rate taxpayers although the numbers are smaller and the pension tax credit makes the position unnecessarily complicated.

    That said, if you are aged under 60 the pension tax credit is unlikely to be around when you retire. The rules at that time may be worse or better, but who knows?

    Personally I would rather save for retirement and take the small risk that daft Government policy will cost me money when I come to retire. The alternative is that I don't save anything and GUARANTEE that when I get to give up work I am too poor to enjoy my free time.
  • Robert_Sterling_3Robert_Sterling_3 Forumite
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    It's like seeing that comments that some make about not wanting to earn any more because they will pay higher rate tax.  

    I agree with the point you are making here.

    Throughout my working life my main source of income was enough to get by plus a little bit more.
    I always did other work to get additional money. I never resented paying the tax due on it. All the remaining money was was added to the aforementioned "little bit more" to make it quite a bit more.

    If you earn £100 and £99 goes on essentials you have £1 to play with.
    Earn another £10 pay 40p in the pound tax on it ( ignore NI for simplicity) leaves £6 so now you have got £7 to play with. great.
    ...............................I have put my clock back....... Kcolc ym
  • use up your cash isa allowance while you have them

    Who knows what the tax rate will be when you retire along with the millions of other retirees in say 20-30 years time. The tax burden of all these pensioners will be immense on the exchequer

    At least the isa income is and will be cash free, unlike pensions.

    Now if your unlucky - what with an approaching 50% of the population getting cancer, ahem..... when I'm 65.
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