Pension Planning

keith_45

I'm 33, earning approx. £45k p.a. and am yet to start planning for retirement.

Now is the time, so I'd really appreciate some advice.

The 45k is made up of 27 basic and rest in an annual bonus. I'm currently putting a lot of the bonus into paying off my mortgage (offset tracker account)

At the moment, I want to invest £100-150/month into a retirement fund + £1k lump sum. I'll increase this later in life but this is what I want to invest today

It looks like there are 3 options available for this money
a) cash ISA
b) stocks and shares ISA
c) "pension fund". A conventional pension

I get no contribution from my employer. Maybe in the futute I may add a different type of retirement saving option, but any advice as to what to start with would be much appreciated.

I've done some reading on here and i keep deciding on an option, then I read something else which changes my mind, so I thought I'd clearly set out my circumstances and hopefully get some appropriate advice

Thanks

MikeJones_2

Hi Keith,

keith_45 wrote: »

I get no contribution from my employer.

For your information, and so that you might wish to draw to your employer's attention, in 2012 the Government intends to introduce Personal Accounts. This will mean that employers who do not presently provide (access) to a pension arrangement, will have to provide a work based pension provision for employees at least to a minimum level.

Employees will be automatically enrolled but will have the option to opt-out. Key to this issue is that employees and employers will have to pay minimum contributions.

So, in 2012, if your employer hasn't offered to pay pension contributions for you, it will have to then. See:

Key facts about employer duties (Personal Accounts Delivery Authority website)

keith_45 wrote: »

I've done some reading on here and i keep deciding on an option, then I read something else which changes my mind, so I thought I'd clearly set out my circumstances and hopefully get some appropriate advice.

I guess then that you'll already know that the sensible action would be to see an IFA who will look at your complete circumstances and make recommendations about planning your retirement provision accordingly.

Kind regards,

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

EdInvestor

Use a pension to invest an amount of money which will convert you into a basic rate taxpayer.

You will then receive 40% tax releief up front in the pension, and pay 20% tax on the income in retirement.

keith_45

Yep, I could go and see and IFA. (couldn't you say that about 80% of the posts on here?)

However, I'm not convinced by them. I changed my mortgage and went to see two IFAs and the mortgage I found myself was far better than anything they could offer

jem16

keith_45 wrote: »

Yep, I could go and see and IFA. (couldn't you say that about 80% of the posts on here?)

However, I'm not convinced by them. I changed my mortgage and went to see two IFAs and the mortgage I found myself was far better than anything they could offer

A mortgage is totally different to investing in a pension. With a mortgage all you need to do is work out the total cost over the term and it's easy to compare. Recently a lot of mortgages were available direct from the provider that weren't available to brokers and a lot at better deals.

A pension is totally different. You have to consider the investments within the pension as that is what makes or loses money so you have to have the knowledge to do this. There are also many different charging procedures that going direct to the provider will often mean you paying more than you would if you used an IFA even taking full commission.

Do you have the investment knowledge to go DIY?

Use a pension to invest an amount of money which will convert you into a basic rate taxpayer.

You will then receive 40% tax releief up front in the pension, and pay 20% tax on the income in retirement.

Depends if the annual bonus will count as pensionable income with regards to pension tax relief. Some are not and only basic salary counts.

shaunrc

Hi Keith

Firstly I am an IFA but please do not take this posting as advice as this has a specific meaning for a regulated person like me.

There are various issues to address in a pension.

First is why do it? There is the gain of tax relief which you get. As a 40% payer this is valuable but not only for the reason Ed says. For some 25% of your money at the end you can take tax free. Secondly your contributions go in tax free so you get growth on gross contributions which is also valuable. With the state of investment markets right now it is easy to undervalue this last factor. Over time assets usually rise often by quite a lot although one has to be careful as stock markets have mostly trod water over the last decade. At 33 you are looking at a very long timescale.

2. There is a lot of choice in pensions. This site obsesses on costs and they are important but so is investment choice. It is possible to get a lot of the latter for low costs. In the end getting good investment performance is usually more important.

3. I am sorry you have seen poor IFAs but in terms of investments,contributions and choice of scheme there is a lot to discuss which is very hard to do yourself.

Good Luck

dunstonh

However, I'm not convinced by them. I changed my mortgage and went to see two IFAs and the mortgage I found myself was far better than anything they could offer

I read recently that most IFAs are no longer transacting mortgages. I gave up mortgages nearly a decade ago. I know a few IFAs that still do it but two of those are now planning to drop IFA status and become mortgage only as that is their focus. Most of the time its mortgage advisers now that do mortgages. They maybe linked to IFAs a lot of the time but dont mix them up.

As Jem says, its very different with investments to mortgages. Mortgage brokers used to have access to deals which the branches didnt. So they used to easily beat the banks own distribution network. However, when the banks decided to cut back on lending, the easiest way was to make the broker deals less attractive. That way if forced you to the bank and for the majority that gave the bank cross sale opportunities as well. I have been told by my mortgage adviser that the deals are starting to equal out again and brokers are starting to see broker only deals re-appear slowly.

With investments and pensions though its a different matter. The whole of market product is the starting point. Direct and tied offerings tend to be cut down versions of the IFA product. Mainly due to simplicity and partly due to compliance (tied advisers tend not to have the ability to portfolio plan which IFAs should have).

This is highlighted by the fact that say you were aged 30 and doing £100pm. An IFA taking full commission on a pension can come in cheaper than you doing your own stakeholder on nil commission basis. See an IFA on an agreed fee basis and it can be cheaper still.

There are also not the research tools available to the public to research pension providers and most pension providers dont retail direct to public (so wouldnt appear on a research site) and those that do tend to have pretty poor products or focus on the specialist side of things. For example, the Virgin stakeholder pension is priced with the same charges as a maximum commission stakeholder with a better fund range and lower charges. Supermarket offerings tend to be an insurance company pension with less options. Tesco for example, retail the Norwich Union stakeholder but with only a fraction of the investment choice.

The main thing though is that pensions are just a tax wrapper which contain investments. There are multiple pensions and there are multiple ways to save for retirement. You are focusing on getting a pension. Your focus should be on retirement provision. You should work backwards, not forwards. i.e. what do you want in retirement, how much is going to cost, how am I going to pay for that, what is the best way to build up what I need.

EdInvestor

shaunrc wrote: »

Secondly your contributions go in tax free so you get growth on gross contributions which is also valuable.

A common error though a bit unusual to see an IFA perpetuating it.
There is no extra growth on the tax relief.

dunstonh

As shaun has written it, there is no error. If he had said compounding then that would be an error. However, growth applies to the whole contribution. Not just the net amount.

EdInvestor

dunstonh wrote: »

However, growth applies to the whole contribution.

As does the tax you pay when you take the pension which claws back the upfront relief (and the growth on it).

jamesd

Shaun was correct for the person who asked this question, a higher rate tax payer with little existing pension provision.

Higher rate: so higher tax relief now than tax in retirement. Little existing provision: no tax at all likely on some of the money due to higher personal allowance over 65, only basic above that into the 20k+ range.

And for almost everyone else Shaun was also correct, because you get the 25% tax free sum free of tax, so even basic rate now and basic rate in retirement is gaining by that much.