Stakeholder Pensions

Lally

What is the general opinion on them? I have 1 year and 5 years built up in final salary OPS's (non contributory), and now my new employer only offeres a stakeholder. Im swaying towards not joining. I dont imagine me being with this employer for a long time, and will also be starting a family soon. So i think that just a couple of years cont's will be a waste. But I am also conscious of the need to plan for retirement. I am 30 and married, my husband is in a good OPS. Any ideas? ISA perhaps?

dunstonh

What is the general opinion on them?

They serve their purpose.

So i think that just a couple of years cont's will be a waste.

Why?

Also, I have come across clients many a time who said they would only be there a year or two and 10-20 years later are still there.

But I am also conscious of the need to plan for retirement. I am 30 and married, my husband is in a good OPS. Any ideas? ISA perhaps?

ISAs have advantages over pensions and vice versa. A combination of the two can make sense. However, that often depends on how much of your personal allowance you are targetted to use up from your existing pension provision (including state pension).

If the employer pays into the stakeholder, then its free money and you would be foolish to miss out on that. If your own contributions can be done as salary sacrifice then you would gain more than just tax relief as your NI contributions would be lower. If you have children/working tax credits, any pension contribution can increase those. An ISA cannot.

If you want things simple. Do a pension. If you want to make sure you go with the best option, then it would depend on your circumstances.

Lally

My employer will contribute 11%. I need to have my decision returned by 6th January.

I thought that maybe a couple of years conts would be eaten up in charges, and the annual income from it at retirement (assuming it is only a couple of years....) would be very small. At least if it was in an ISA then I could just withdraw it all.

Sorry for any questions or statements that seem foolish! I have not worked for over 2 years and am trying to get back in the swing of all things financial again.

dunstonh

My employer will contribute 11%. I need to have my decision returned by 6th January.

11% of salary as free money. Thats a very good contribution.

Say you are on 15k a year, thats £1650 of free money a year.

I thought that maybe a couple of years conts would be eaten up in charges,

Pensions and ISAs have very similar charges. In fact, with many pension funds, they can beat the equivalent ISA fund. The charge will be a 1% annual management charge. So, if the fund grows at 8%, you will see 7%.

and the annual income from it at retirement (assuming it is only a couple of years....) would be very small.

It maybe if you dont use that stakeholder again. However, what stops you from using it after you leave or transferring it into another scheme?

At least if it was in an ISA then I could just withdraw it all.

It wouldnt be much use for retirement if you did that.

Lets say you stay with this employer for 2 years and lets stick with 15k income (you can do the math to convert to your own income easily enough).

£3300 will be paid into a pension from your employer. They will pay zero into an ISA.

So, do you want £3300 of free money or nothing?

YorkshireBoy

Lally wrote:

My employer will contribute 11%. I need to have my decision returned by 6th January.

I'm not a financial advisor, but to me this is a no-brainer!! Take it!!

My employer pays only 4.5%, and I've turned £5K net personal contributions into a £15K stakeholder pension fund in 2 years 5 months.

Ian_W

Agree totally with dunstonh and YorkshireBoy that you'd have to be totally barking to turn down an 11% contribution from your employer!! Turn down free money? What kinda money saver are you?
Also anything you contribute is enhanced by 22% by the government as you pay it in pre-tax. That's got to be win/win, surely?

YorkshireBoy

Ian_W wrote:

Also anything you contribute is enhanced by 22% by the government as you pay it in pre-tax.

It's just over 28% Ian - isn't it?

EdInvestor

Hi Lally

Lally wrote:

My employer will contribute 11%.

Now this is not to be sneezed at, but let's not get carried away.Much of what you say is absolutely right.

I thought that maybe a couple of years conts would be eaten up in charges...

This could certainly happen if you don't pay attention to this pension later.If it is a company stakeholder, it probably has quite low charges (ask how much). But what would happen if you left the company? Would the charges change?To what? One third of a pension is eaten away by charges at only 1%.You are right to be concerned.

.. and the annual income from it at retirement (assuming it is only a couple of years....) would be very small.

This depends partly on how the funds you choose within the pension wrapper perform (as well as whether or not you pay into it later).So you should ask what funds are available? What is their track record so far? [And you also may need to check if the funds have internal additional charges which could reduce performance, they call that the "Reduction in Yield".]

At least if it was in an ISA then I could just withdraw it all.

Quite so. Not something you can do with a pension.

11% is a big contribution which is worth having. If the contribution was 3%,say, it would be very borderline, particularly if you are a basic rate taxpayer. Tax relief is given on only 25% of the total pension.

But if you leave the company, and the stakeholder charges then rocket and the funds it offers perform poorly, then by the time you retire, that 11% will be pretty worthless, as you say.

So you need to know rather more about this pension IMHO before deciding,

eg:

Company it's with
Charges now and later
Funds offered and their performance track record.

And you need to be willing to devote some time to monitoring the pension long term( not necessary with F/S pensions of course),

It's really not nearly as simple as some people would like you to believe.

dunstonh

This could certainly happen if you don't pay attention to this pension later.If it is a company stakeholder, it probably has quite low charges (ask how much). But what would happen if you left the company? Would the charges change?To what? One third of a pension is eaten away by charges at only 1%.You are right to be concerned.

Do not let charges worry you. The margin for the charges is just 1%. That is tiny. Your fund will not be eaten away by charges with just 1%.

Ed is mistaking charges with the effect of charges. 1/3rd of your fund is not eaten away by charges. That is a totally negative and inaccurate spin. The correct wording would be that if no charges were taken, your fund would be higher. Just as your shopping bill would be lower if the supermarkets sold goods at cost. Just as savings account rates would be higher if there were no implicit charges.

Charges need to be there. You shouldnt expect to get these things for free. However, at 1%, the margin is tiny when compared to say supermarkets that run at 10-15%.

If your money grows by an average of 7%, then you will get 6%. In that case, your capital is never going to be eroded away.

11% is a big contribution which is worth having. If the contribution was 3%,say, it would be very borderline, particularly if you are a basic rate taxpayer. Tax relief is given on only 25% of the total pension.

Free money is free money. You never turn it down.

So you need to know rather more about this pension IMHO before deciding,

There is nothing more needed to know. Its a stakeholder. So we know the charges are going to be fine and its going to offer unit linked funds.

It's really not nearly as simple as some people would like you to believe.

Yes it is.

Do you want 11% of your salary put into a pension or nothing put into an ISA?

Pal

Also note that Stakeholder Pension charges can NEVER be changed just because you leave your employer or stop contributing. That is just EdInvestor desperately misguided attempts at negative spin.

Lally

thank you for your opinions everyone!