Immediate vesting for a stakeholder?

Elaine_Wilson

I've looked at quite a few websites about stakeholder pensions but none of them seem to give much information about when the pension can be taken.

The Chancellor's pre-budget speech in December seems too good to be true so I hope you don't mind me putting this before you knowledgeable guys to see where I'm going wrong.

Firstly, I earn about £10,000 a year and, having cleared my debts (including mortgage) I am now trying to save for retirement by direct investment in the stock market. I am self-employed and have some income from my own company.

If I take out a stakeholder pension with a single premium of £3,600 gross then I see the position as follows.

Firstly, I get 22% relief by only paying £2,808.

Then I effectively get another 37% relief as the contribution reduces my income for Working Tax Credit purposes.;

So, 59% relief so far.

If I then take the pension I can have 25% out tax free (ignoring costs for the moment)

So, 84% relief, or a net cost of 16%.

I will not pay any premium in 2006/07 but the increase in my income will be below £25,000 so my tax credits will not be clawed back. So I effectively get another 37% of the premium as tax relief.

That's 121% ignoring the costs. Plus a pension of £100 odd pounds for life.

Surely this is not right?

What have I missed?

dunstonh

It is correct. Although the Immediate vesting pensions are done with personal pensions not stakeholders. If you are searching under stakeholder, you are unlikely to find much.

Things to note which could scupper you. You need to be aged over 50 to commence a pension. You also need to consider that pension income is classed as an income for tax credits. So it would hit you in later years.

If you dont need to vest the pension, then don't.

Everything you have said has been possible since 2001. It's nothing new.

Elaine_Wilson

Ah, that's why I couldn't find the info. Thanks for replying.

I'm 55 so the pension is no problem.

I realise that immediate vesting has been around for some time but 2006/07 will be the first year that I can effectively get a second tax allowance without putting more money in.

I take your point about the pension affecting the tax credits but it is a small amount. The real reason for this is to get the 25% tax free lump sum.

Thanks for confirming that I'm not mad and this really is free money.

isasmurf

dunstonh wrote:

Although the Immediate vesting pensions are done with personal pensions not stakeholders. If you are searching under stakeholder, you are unlikely to find much.

This surprises me. Some research I read, a while ago now, suggested that immediate vesting was a popular area for Stakeholder Pensions.

Deemy

Elaine_Wilson wrote:

I've looked at quite a few websites about stakeholder pensions but none of them seem to give much information about when the pension can be taken.

The Chancellor's pre-budget speech in December seems too good to be true so I hope you don't mind me putting this before you knowledgeable guys to see where I'm going wrong.

Firstly, I earn about £10,000 a year and, having cleared my debts (including mortgage) I am now trying to save for retirement by direct investment in the stock market. I am self-employed and have some income from my own company.

If I take out a stakeholder pension with a single premium of £3,600 gross then I see the position as follows.

Firstly, I get 22% relief by only paying £2,808.

Then I effectively get another 37% relief as the contribution reduces my income for Working Tax Credit purposes.;

So, 59% relief so far.

If I then take the pension I can have 25% out tax free (ignoring costs for the moment)

So, 84% relief, or a net cost of 16%.

I will not pay any premium in 2006/07 but the increase in my income will be below £25,000 so my tax credits will not be clawed back. So I effectively get another 37% of the premium as tax relief.

That's 121% ignoring the costs. Plus a pension of £100 odd pounds for life.

Surely this is not right?

What have I missed?

That you will need a pension fund of approx £45k in todays money at retirement to negate the MIG or whatever its called these days.

dunstonh

This surprises me. Some research I read, a while ago now, suggested that immediate vesting was a popular area for Stakeholder Pensions.

It doesnt really matter as the pension is only in force for around 24 hours, if that with some companies. As the stakeholder rules do not apply with IVPs, there is little point them being referred to as IVSHPs. Instead they just end up with the tag IVPs or IVPPs.

That you will need a pension fund of approx £45k in todays money at retirement to negate the MIG or whatever its called these days.

Pension credit is the current name. However, any income you do have is not lost in full, unlike the old minimum income guarantee. It does get hit though with a penalty. Pension credit may or may not apply in this case but Deemy is correct in that it should be considered.

EdInvestor

Cavendish has a good deal on the market leading IVP:

Standard Life Immediate Vesting pension

This plan allows investors between 50 and 75 years of age to use the Stakeholder pension rules to invest £2,808.00 into a pension. This receives tax relief at the basic rate increasing it to £3,600.00; the maximum allowed under the stakeholder rules. You then draw the tax-free cash of £900.00 and the remainder buys a fixed annuity* on the purchaser's life. The plan has no flexibility options to vary the type of annuity.
Unlike any other broker in the UK, Cavendish Online will rebate commission of £100.00 back to the investor, having taken our fee of £30.50 from the commission. This is the best deal on this plan in the UK.

*Note that the annuity income is taxable.

margaretclare

Hi Elaine

I'm glad that you've realised it's not too late to start adding to your pension 'pot'. The difference with stakeholders is that you can pay into them from non-earned income. I started one at age 68 and it's due to mature in 2010 when I'll be 75.

I get tax relief on contributions : £156 a month becomes £200, then there's the 25% tax-free lump sum at the end. OK, so the annuity is taxable after that, along with other income - but then, we wrinklies do get a more advantageous personal tax allowance.

Aunty Margaret

dunstonh

The difference with stakeholders is that you can pay into them from non-earned income.

Just to clarify. That is the case with personal pensions and SIPPs as well.

exil

And of course if you have capital, you can put that in as well (as long as the total isn't more than 100% of income or £3600 whichever is lower)