Pensions - should I? Advice welcome...

littleangel

I'm 31 with no pension. I just can't bring myself to contribute to a pension scheme that means I have to buy an annuity with 75% of it (unless I have a sex change and start smoking at 65 in which case it starts looking like good value). I like the idea of being in control of my money and this doesn't do it - despite the obvious tax benefits of contributing. It just seems outside my control and I don't like that, investment-wise.

I've contracted out of SERPS for the same reason (that, and the fact that if you retire to certain countries, your second pension doesn't increase with inflation - which over 20-30 years makes a big difference! And I've always fancied retiring to Australia, which is one of those countries. Though that may change. But so may the list of countries so I'm playing safe.)

Any suggestions / advice?

P.S. I own half a flat (the bank owns the other half) so I've made a start on being a responsible grownup...

dunstonh

Depending on your tax situation, you could effectively get upto 77% tax relief by making pension contributions (assuming all tax allowances which pensions can influence).

If you put £200 into an ISA or £200 net into a pension, the final maturity value on the pension will be higher. You may be forced to buy an annuity (under current rules) with 75% of the final value but that value would be higher with a pension. Depending on your tax relief, it could be more than double that of the ISA.

If it concerns you that much, you could always look at pension drawdown (assuming your fund is high enough and it still exists then). That could be one way to delay full commencement.

In reality, contributing to ISAs and pensions is a good thing. Indeed, contributing into anything is better than nothing. At age 31 you have some catching up to do.

DavidLaGuardia

77%?
Through Salary Sacrifice I make it:
65% increase for a basic rate tax payer (£100 loss from net becomes £165 into pension so this is relief of 39.4% on the gross)
and
90% increase for a higher rate tax payer (£100 loss from net becomes £190.17 so this is relief of 47.4% on the gross)

If I have missed something please put me straight!
Are you inlcuding something like working tax credit?

dunstonh

Tax credits can bring it up to 77%.

Pal

You are 31 and have at least 34 years to go until you retire. Not making a long term saving decision based on the current financial rules and annuity rates is a bit short sighted. The world has changed a lot over the last 34 years and will change even more over the next 34 years.

Annuity rates are historically low but they still represent one of the better savings options for risk adverse savers (and most retired people should be risk adverse with their basic level of retirement income). By the time you reach retirement the rules may have changed and/or annuity rates may be significantly better.

littleangel

Thanks guys. I knew there were tax benefits, I just didn't realise quite how much they were!

Please don't get me wrong, I'm perfectly happy to accept responsibility for funding my retirement, and am working on that, but am concerned (rather than reassured) by the fact that the rules could well change - and given the aging population, are likely to! I understand that the government made retrospective changes to pension rules this year for the first time ever, which makes things even less certain.

It's a combination of not liking to be told what to do with my money (i.e. "thou shalt purchase an annuity") - why can't I make my own investment decisions? - and being concerned about not being a UK resident in my retirement. UK retirees who are no longer resident in the EU are treated less well for state pension purposes already (depending on the country, the state pension is not indexed).

I guess I just need to make a decision - do the tax benefits of contributing to a pension now outweigh the risk that those benefits may well be eroded due to future unpredictable-yet-retrospective changes to pension rules that (a) are required to deal with an aging population, (b) are likely to favour those retirees who live in the EU, or (c) place greater restrictions on accessing pension funds.

Milarky

There's a new kid on the block [or should that be 'blocks'?] called an Alternatively Secured Pension. It's one of those 'best kept secrets' in the current Pensions Bill and has been introduced because certain groups with religious beliefs or other convictions do not believe in annuities [Something to do with 'taking a bet' on life expectency] ::)

[And if you could combine tax relief, tax credits and a salary sacrifice you could probably get your pension for free after taking the lump sum into account]

margaretclare

Hi Milarky

I'm interested in this. Although I'm 69 and I've got annuities already (from my working life) I'm still paying into a stakeholder plan because I reckon that by the time I'm 75 I might need a bit extra income. I did like the thought of taking 25% of this as a tax-free lump sum.

Quote from the article: "Under ASP rules, when you die after age 75, the remaining fund must be used to provide a retirement income for a surviving spouse or dependent children, either in the form of an annuity or as an income via ASP"

I'd like to leave this to my spouse if he survives me.

I think I need a bit more info about this.

BTW I agree with the above posts saying that no one knows the changes that will come about over the next 38 years and I would underline DD's comment that doing something is better than doing nothing. It's no use sitting around bleating that you can't make a decision because you don't know the future. None of us do, and none of us ever did! I couldn't possibly have foreseen, 38 years ago when I was a working mum with a young family, what would happen over those years. I'd certainly have made some different decisions if I had known!!! You may move to the other side of the world, you may not! Choices may be forced on you. You may all be running for the high ground by then....or building a boat like Noah... :'(

Best wishes to all

Margaret

Pal

It's a combination of not liking to be told what to do with my money (i.e. "thou shalt purchase an annuity") - why can't I make my own investment decisions?....

Think of it another way. The Government is not telling you to do anything, but if you choose to use a pension to save, they are willing to provide you with some pretty valuable tax breaks in return for your being willing to purchase an annuity by the time you are 75 years old. It is up to you whether you accept this deal or not.

- and being concerned about not being a UK resident in my retirement.  UK retirees who are no longer resident in the EU are treated less well for state pension purposes already (depending on the country, the state pension is not indexed).

This is more of a concern, and only you can make up your mind on it.

I guess I just need to make a decision - do the tax benefits of contributing to a pension now outweigh the risk that those benefits may well be eroded due to future unpredictable-yet-retrospective changes to pension rules that (a) are required to deal with an aging population, (b) are likely to favour those retirees who live in the EU, or (c) place greater restrictions on accessing pension funds.

The retrospective tax arguments are completely wrong and are being put around by lazy journalists. The new IR rules do not impose any retrospective tax on anyone. All they do is impose tax on any future pension savings or investment returns for a very small number of people who already have massive, tax advantaged pension savings.

I believe that the only retrospective tax that is being introduced will be to tax houses that are given away to avoid inheritance tax, and even that is a subject for debate.

littleangel

Thank you all for your feedback and advice. I really appreciate your concern and have taken on board your comments. In particular, thank you Pal for your alternative perspective on the whole pensions game - that really made the argument a lot clearer.

I do still have concerns about the differences that not being a UK resident in my retirement may have, and I think I've realised that I need to find an IFA that specialises in this area (as the one IFA I've consulted didn't even know things about the state pension that I found out via 10 minutes research on the internet, so I'm not consulting him again...).

But I have decided that my yearly pay rise from January is going to be dedicated to my pension fund - if I do it now, I won't feel like I'm losing anything, and will be making a decent start on my pension fund. I'll keep my usual savings / mortgage overpayments regime up as well so hopefully I'll be covering all bases?