Advice for financial future

wisper

I am looking for a little bit of advice.

I am the director of my own company. The company is a new business and I am not taking a wage from the business yet.

I live with my partner and she is in full time employment. We both live on her wage. She is a primary school teacher and pays a considerable amount into a pension.

We own our house and both have a life insurance policy.

What else should I be doing to secure our financial future?

I spoke to the bank last year about pensions and stuff. They mentioned a pension package where the government pay something towards it too. When I retire the money saved is turned into an income. If I die the money is lost. I don't really fancy paying into something for 40 years to only live a few years of retirement and loose it all.

Should I instead use an ISA package for my pension? I plan to buy property in the next few years too.

Any advice would be appreciated.

cheers

ReportInvestor

There's no way that you will get the advice you seek on this forum.

dunstonh

You need to see a financial advisor with the depth you are looking at. One thing you should not do though is seek advice from a bank. They operate tied salesforces. Bank products tend to be expensive, poor value and poor quality, often with limited features as well (for example LTSB sell Scottish Widows products but they are cut down versions of the full Scottish Widows products available to IFAs).

You should seek advice from an IFA. A database of IFAs is available at www.unbiased.co.uk and you can post code search to find your nearest one.

jem16

dunstonh wrote:

One thing you should do though is seek advice from a bank

This doesn't sound like you? A typo?

dunstonh

Thanks Jem. If you are going to make a typo, its probably best not to leave the most important word out!

EdInvestor

wisper wrote:

Should I instead use an ISA package for my pension? I plan to buy property in the next few years too.

IMHO ISAs are better for those who don't have a company pension with employer's contribution (as your partner does) and who don't pay higher rate tax (as you don't.) This is because unless you pay higher rate tax, the tax perks available with private pensions are not good enough to outweigh the very severe restictions on what happens to the money ( as you have discovered).

In addition, the rules are changing shortly which will mean that annual tax allowances for pensions will be abolished in favour of a lifetime allowances which can be accessed right up to retirement, so you can still get the tax perk later if you find it appropriate.

Whereas ISA tax allowances are "use it or lose it" on an annual basis.

Given that you have your own company there might be one advantage to having some money in a pension though: money in pensions is not touched in a bankruptcy and nor does it affect entitlement to benefits, unlike ISA money.

dunstonh

Unlike Ed, who believes that people shouldnt use pensions, I disagree. It is not as clear cut as that. Like most things, there is no 100% answer to what is best.

Whilst Ed is right that the decision to use ISAs is going to be more common than before, there are still some advantages to pensions over ISAs for basic rate taxpayers.

Such as
1 - payments into pensions can increase your working/childrens tax credits - ISAs do not.
2 - Pension funds are not liable to inheritance tax on death.
3 - Many people need the tie in that pensions offer as they cannot trust themselves with the accessibilty that ISAs offer.
4 - ISAs are treated as investments and where are benefits are concerned, they could reduce the amounts involved. With pensions, only the pension income would be considered. Not the value in the ISA.
5 - If you are made redundant or become unable to work through illness, you will not be able to pay more than £3600 into a pension. So, if deferring it a later time, you may find yourself unable to do so.
6 - Each and every person has a tax free allowance. At age 65 that is currently £7090. You should aim to use that up with pension income rather than ISAs. The ISA would not pay as much as the pension as far as income is concerned. You also get £2090 at 10% tax which would be best used up with a pension as well.
7 - Pension annuities provide a higher income than ISAs. You may pay tax above your personal allowances but the income is still higher.

If you want income, pensions are still best. If you want capital, then ISAs are still best. In reality, most should be doing both.

cheerfulcat

dunstonh wrote:

Each and every person has a tax free allowance. At age 65 that is currently £7090. You should aim to use that up with pension income rather than ISAs. The ISA would not pay as much as the pension as far as income is concerned. You also get £2090 at 10% tax which would be best used up with a pension as well.

But the income from an ISA is tax-free anyway so it doesn't affect the allowance, does it?



wisper, as it happens, I too think that both pensions and ISAs should be used. Ed makes a very good point about pensions being untouchable by creditors in the event of bankruptcy, a serious consideration for a company director. FWIW I'm with dh on this; see an IFA.

Deemy

wisper wrote:

Should I instead use an ISA package for my pension? I plan to buy property in the next few years too.

Any advice would be appreciated.

cheers

Yes do that. Use Cash and Shares ISa's for your pension, as likely after 2010 some new tax free wrapper will come along to continue this excellant savings / investing vehicle.

Deemy

EdInvestor wrote:

bankruptcy and nor does it affect entitlement to benefits, unlike ISA money.

Money in ISA's and interest / gains thereof are excluded from tax credits

dunstonh

But the income from an ISA is tax-free anyway so it doesn't affect the allowance, does it?

It is currently. However, you may as well get the tax relief on the contributions, increasing your fund by 22% more than the ISA. Both have two free growth and then in retirement, upto the personal allowance, both are tax free.

That is why I usually go for pensions upto the £7k each personal allowance but then ISAs for any income that may be required above that. Best of both worlds then.