Half of UK have no pension

Carmen_Queasy

davidjohn wrote: »

So, you cannot afford to put money into a pension,does anyone know the minimum amount one can put in.Do you smoke ,drink on a regular basis or gamble,if so stop one ,there thats your pension sorted.

Well my work's pension is about £25 a month minimum if you're part time, about £40-£50 if you're full time. Might not be a lot to some people but it is to me- atm I'm on minimum wage with two people and two animals to support. I'm teetotal, an ex-smoker and only buy a lottery ticket very occasionally once or twice a month :Aso there's nowhere else I can "find" the money.

Aegis

donstermonster wrote: »

A VERY bold statement , are you sure ?

Try telling that to the hundreds of thousands of people who have no or reduced pension pots

This simply demonstrates why lifestyling is important: i.e. the reduction in risk as you approach retirement age. If people currently have reduced pension pots (myself included) but are still a fair way from retirement and buying units, this represents no problem at all. Someone nearer retirement who has been reviewing their pension regularly would probably have a fairly large chunk in cash and bonds at the moment, which might actually have represented a capital gain during the recent turmoil.

Essentially what this means is that the pension is only the wrapper, it's the investments within the pension that generate the pot itself. Within the wrapper, though, investments can grow more or less free of most taxes. This can make a huge difference when it comes to retirement time simply because 18% capital gains tax (or whetever the government sets it at by the time some of us come to retire) will not apply on disposal of assets.

On top of that, 25% of the pot can be taken as a tax-free lump sum, which is excellent value when you couple it with the tax free growth and the tax relief for the original deposit into the wrapper. Even assuming 5% growth per year, a basic rate taxpayer could have £2036 if a lump sum of £1000 was invested in a pension for 10 years. The equivalent in an ISA at the same rate would be worth £1629. That extra £400 on a £1000 investment comes purely from the type of wrapper used, and the effect only magnifies with larger amounts and longer investment periods.

Yes, the flexibility can be an issue for some people, but as a pension is designed to provide an income in retirement rather than a lump sum, this tax relief and the tax-efficient growth makes it the best vehicle for providing that income.

Now you pay NO tax on money going into a pension but do pay tax on it coming out , you would hope that the money coming out is far more than going in so tax relief should be the other way round !!!!

You generally get taxed on income regardless of source after allowances are accounted for. Effectively what the tax relief allows is for much higher returns to be made at the cost of paying some income tax on the proceeds after the tax free lump sum is taken. If your earnings are still fairly low, you'll only pay a small amount of income tax on that pension income. If your earnings are higher, chances are you took advantage of the higher rate tax relief when funding the pension and still make a good profit on the way the relief works.

It would be nice if pensions were paid tax-free, but I doubt we'll see that any time soon, and I suspect it would cause uproar if MPs announced that their pensions (along with such stars of recent times as Fred Goodwin) were going to receive their pensions free of all taxes.

Also i get to 57 and having saved for 40 years into a pension get cancer or some other terminal illness so would like to take my several hundered thousand pound pot and enjoy my last few months , can i ? NO i cannot

Yes, you can, see the link already posted.

Sounds like the WORST "investment" ever

I strongly disagree with your sweeping statment , but i am happy to be convinced other wise

PS - I am not arguing or being offensive i just feel your statement is flawed and not researched

I don't think it's fair to say that a professional working in the financial advice industry hasn't researched the products that he advises his clients on daily... I'm sure Dunston would be more than happy to engage in civil discussion about it with you, but it might not look very civil if you assume from the get-go that he doesn't know what he's talking about when he does his job.

jem16

donstermonster wrote: »

Now you pay NO tax on money going into a pension but do pay tax on it coming out , you would hope that the money coming out is far more than going in so tax relief should be the other way round !!!!

You would be worse off that way.

Let's take the basic calculation of £800 lump sum and a basic rate taxpayer.

In an ISA no tax relief going in so your £800 stays that way. After 20 years at 5% growth you have £2123. No tax coming out so stays at £2123

In a pension you will pay in £800 with tax relief and it will be increased to £1000. After 20 years assuming 5% growth that would come to £2653. If you took the whole 20% tax on it then it would bring it down to £2122.40.

However you won't pay the whole 20% tax as you are entitled to 25% tax-free lump sum.

Then you will have your tax-free personal allowance which could be around £10k so even less of it to be taxed.

There is also the advantage of the higher rate taxpayer getting 40% tax relief on the way into the pension and only being a 20% taxpayer on the way out.

dunstonh

A VERY bold statement , are you sure ?

Yes. The tax relief and tax free growth mean that for income purposes, the pension will provide the highest income of conventional means.

Try telling that to the hundreds of thousands of people who have no or reduced pension pots

If they have no pension pots then it doesnt matter. Short term fluctuations in values dont really matter either unless you are coming up to retirement. In which case you should have reduced your risk as you get closer and therefore avoided any short term fluctuations. Those that are further away are now buying investments much cheaper and this pound cost averaging at lower investment prices will be beneficial in the long run.

Now you pay NO tax on money going into a pension but do pay tax on it coming out , you would hope that the money coming out is far more than going in so tax relief should be the other way round !!!!

You get tax relief on your contribution and tax free growth. Some of the income may be subject to tax on maturity but then thats the case with most options. If you were to use an ISA to replace the pension, you may not pay tax on the income but the pot will be lower due to lack of tax relief and the income provided will still be lower than the net amount paid by the pension.

Sounds like the WORST "investment" ever

Pensions are not an investment. They are a tax wrapper. You put investments into the pension. Pensions dont make or lose money. The investments do that.

I strongly disagree with your sweeping statment , but i am happy to be convinced other wise ,<snip> i just feel your statement is flawed and not researched

Its not a sweeping statement and it is researched. Figures have been posted here a number of times but I will do it again for you.

Lets use £100pm contribution for 40 years. The two best options to consider are ISA and pension. Unwrapped Unit trusts and investment trusts will not be as good as those as they dont have the tax free status. So, we know they will get a little less. The investment options with an ISA and pension are virtually identical. So, rate of return will be exactly the same.

ISA:
£100pm x 40 years @6% p.a.= £250,053

Pension
£125pm x 40 years @6%p.a.= £312,567

£312,567 x 5% income rate = £15,628
£250,053 x 5% income rate = £12,502

Now, if the whole amount of the pension income was subject to tax then it would equal the ISA. However we have personal allowances which each year personal allowances go up. So, some of that income provided by the pension is likely to be untaxed. I will ignore those increases as we dont know what they will be. Although of course, each increase benefits the pension more than the ISA as it means more income can be paid without tax deducted. Typical state pensions average is around £7000 a year. So, using todays 65 age allowance will give you £3k income with no tax. Plus, you can take 25% from the pension tax free (and feed into ISA or over the following years feed back into pensions at £3600 a year gross). So, the 25% can be used tax efficiently to provide a "net" income of 5%

So, from an income provision point of view, the pensions beat ISA (and other conventional options).

The best way to plan these things is to use both ISAs and Pensions. Ideally get you and your spouse to aim to use up all your personal allowance with the pension and then use the ISAs for the amounts above that. That takes planning and reviewing but will result in the most tax efficient option.

davidjohn_2

Carmen_Queasy wrote: »

Well my work's pension is about £25 a month minimum if you're part time, about £40-£50 if you're full time. Might not be a lot to some people but it is to me- atm I'm on minimum wage with two people and two animals to support. I'm teetotal, an ex-smoker and only buy a lottery ticket very occasionally once or twice a month so there's nowhere:A else I can "find" the money.

When you retire you will not have much money,where will you be able to FIND it

butterfly72

Do you think one of the main reasons people don't bother with pensions is because they don't understand them? I do have a pension and have tried to make sense of it but to be honest I just don't really understand the language and consquence of doing this or that or not. I really would like to understand it more.

My pension is an NHS pension and I'm buying extra years at over £200 a month. I haven't a clue if i'm doing the right thing. How do you know? Also, they are going to give us the option of moving to the new April 2008 scheme - a lack of understanding will probably make most people do nothing! The OH was offered a final salary pension when he started at his company but turned it down. We just didn't know that a final salary pension was the one to have. He has since asked if he can change but the scheme is closed. He's a higher rate tax payer.. should he stay in the company scheme or use some other method such as a SIPP? We just don't know! I suspect many people dont know whats best for them.

dunstonh wrote: »

The best way to plan these things is to use both ISAs and Pensions. Ideally get you and your spouse to aim to use up all your personal allowance with the pension and then use the ISAs for the amounts above that. That takes planning and reviewing but will result in the most tax efficient option.

Do you mean putting into a s&s isa? I am putting £100/m into 2 funds but they are fairly high risk. I hadn't intended that they would supplement my pension - actually I have no investment plan.. just £100 pm spare! Would it be a good idea then to think of the ISA as a second tax effienct method of saving for retirement or am I totally off the mark here? If so, should I be going for less risky funds.

thanks

dunstonh

Do you mean putting into a s&s isa?

Yes. Cash ISAs are not very good for long term planning. Great for short term and rainy day funds and for your cash allocation but not for long term.

I am putting £100/m into 2 funds but they are fairly high risk. I hadn't intended that they would supplement my pension - actually I have no investment plan.. just £100 pm spare!

Thats fine. You know the risk, you are putting the money aside and you have a good pension scheme and buying added years.

Would it be a good idea then to think of the ISA as a second tax effienct method of saving for retirement or am I totally off the mark here? If so, should I be going for less risky funds.

It depends on your overall planning and needs in retirement. Added years is good for boosting the income and tax free cash lump sum will go up with it. ISAs are best for boosting your capital provision. As for fund risk, thats a personal decision. Everyone has different risk tolerances. As you get closer to "maturity" (as in when you need the money) you would expect to reduce your risk. Whether you want to do that in stages or in one go or earlier or later is really a personal thing.

marvin

Why don't I have a pension? Well for 20 years I was a carer then 5 years ago entered the workforce again.

Looked at the stakeholder pension offered by my employer (before the crash) and if I tucked away the max I could and the employer did as well then the most I could invest every month was £150 a month. This would, according to their illustrations, giove a pension c£150 a month on retirement!

So decided to buy my council house instead and this would at least be available to me for free on retirement and would, if I had to rent it, save me more than I would get from the pension for around the same cost over and above the rent now.

dunstonh

looked at the stakeholder pension offered by my employer (before the crash) and if I tucked away the max I could and the employer did as well then the most I could invest every month was £150 a month. This would, according to their illustrations, giove a pension c£150 a month on retirement!

You misread it. Or more likely the illustrations used a lower rate or joint rate and SMPI basis (inflation included) or didnt include the employer contribution or a lower retirement age, shortening the term.

Free money from the employer cannot be beaten. You dont say how much the employer would pay. So, a comparison isnt possible but its common for it to be matched by personal contributions upto a limit.

Lets say £100 from you is matched by £100 from the employer. Thats £200 being paid in. Yet the net cost to you is £80.

What else can turn £80 into £200 overnight? A council house wont. A 25 year mortgage will cost you 2.5-3 times what you borrow. You still need somewhere to live. So renting it out wont be an option for you unless you choose to rent yourself, in which case you incur a cost in having to pay rent.

The council house being bought cheap will certainly be worthwhile but I fear you have totally misread the employer pension option and potentially missed out on something beneficial.

edit:
On the employer contribution front, just did a calc that shows that £150 gross matched by the employer @ 7% p.a. for 15 years would be a pot ot £94,691. You can take £23,672 back as a tax free lump leaving £71,018 to buy an income. @ 5% p.a. that income is £3550 which is £295pm.

So, a net contribution of £120 to you for 15 years would give you £23,672 lump sum and £295pm income. (the 25% tax free cash gives you back more than you paid in let alone the income paid for the rest of your life).

Thats on a low 15 year term. The longer the term, the bigger the difference. You really did mis-read the illustration or it made assumptions that you didnt understand.

FREE MONEY from the employer should never be sniffed at.

Carmen_Queasy

davidjohn wrote: »

When you retire you will not have much money,where will you be able to FIND it

I'll have to continue working past retirement age if a state pension no longer exists I guess! It's not a case that I don't want to, because I would pu money by* if I could, it's that I can't afford to.:(

*If not a pension then an ISA, savings, something....