Pension panic

Friendly_Bob

Hello :wave:

I've been avoiding thinking about the inevitable for some time now, but recently I managed to scare myself enough to finally start planning for my retirement. I must admit that I'm finding the process quite daunting, and so I'd appreciate any advice that this forum may have to offer.

Rather than list a whole bunch of information about my circumstances (which may not even be relevant) I'll just mention a few key facts, and if more info is subsequently required then I'll provide it as necessary.

I am a 42 year old self-employed single male with no children or any other dependents. I've been on low to very low income for most of my life, and this has meant that I have never been in a position to pay into a pension up until now (so I have no existing contributions). For reasons that I won't get into here (not health related) I would really like to be in a position to retire sooner rather than later (ideally 55 - 57 if possible).

I've started seeing IFAs, but to be honest I'm already out of my depth.

The first IFA I saw was very much in favour of fees over commission. He was happy to talk in general about pensions during our first free meeting, but he said that he would not provide any 'illustrations' or other specific details until I had signed up with him. He did say that he would be prepared to do a simple calculation that would show me how much I might have to contribute in order to achieve a particular income in retirement. However, that was 10 days ago and I've not received any information from him as yet. I'm not sure how I can go about deciding whether to use him or not because I won't be getting much info to work with up front.

The second IFA was very strongly pushing commission over fees. He was happy to provide full report (including 'illustrations' and a stack of other info) before I made any commitment. I received the report 3 days after our meeting, but I can't really undertsand it.

I suppose my first issue relates to the charges.

Dunstonh has said in another post: "Best clue to cost is look at the illustration and near the back there will be a reduction in yield figure. Something along the lines of charges reducing the returns from 7% to 5.9%". 5.9% is your typical 1% annual management charge contract. 6.3% is around the mark of your good discounts. 5.3% is where unit trust funds tend to come in. Anything lower than 5.3% and you are looking expensive."

In my report it says: this would have the same effect as bringing the investment growth from 7.0% a year down to 4.2%.

Given what Dunstonh has said above, would I be paying over the odds with only 4.2% invetment growth, or are there other factors that I am not taking into consideration?

The charges relate to a managed PPP "wrap account" (at least I think that's what it's called) using Transact.

Myrmidon_J

Hi, welcome to the boards!

I am a 42 year old self-employed single male...

I have never been in a position to pay into a pension up until now (so I have no existing contributions)...

I would really like to be in a position to retire sooner rather than later (ideally 55 - 57 if possible).

The main purpose of a pension is to provide an income in retirement (obviously).

If you have no existing (private) provision and are aged 42, in my opinion it is extremely unlikely that you will be able to retire at 55 - unless you are willing to retire on a very low income.

You can reasonably expect to live to 80. You therefore have 13 years to contribute enough to last for 25 years - and to try to combat the effects of inflation over those 25 years.

Questions to consider:

What is your existing state provision? (Have you paid national insurance contributions in the years that you've been self-employed?)

What level of income do you require in retirement? What can you realistically afford to contribute in your current employment?

As regards the product choice, I would stay well away from Transact. The reduction in yield (7.0% to 4.2%) is staggering, though this may also be to do with adviser charges... How much was the commission chap taking?

(Also - please ignore me if you already knew this; it's really not meant to be patronising - the 7.0% (or 4.2%) investment growth quoted is in no way guaranteed. It may be higher than this, or significantly lower. The actual rate of return depends on many factors including choice of funds, etc. You do, however, have some control over charges; therefore, it is best to seek good value contracts!)

I've started seeing IFAs, but to be honest I'm already out of my depth.

I would suggest not signing up for anything until you're fully comfortable with what it is. I think it's very important that clients feel they can trust their IFA - if he (or she) isn't making sense, or is explaining things poorly, then say so!

Good luck.

EdInvestor

Step one is to check your likely income from the 2 state pensions.As a low earner you will benefit from recent changes.Get a forecast here:

https://www.thepensionservice.gov.uk

Once you know what the basics are you can look at how much extra you might need and how much you require to 'fund the gap' between your planned retirement age and state pension age.

Do you own your own home?

Re IFA no 2 it is astonishing to think that a low earner is being recommended a pension in a wrap account with Transact with that level of charges.He has seen you coming from the point of view of inexperience.Make sure you watch him walk away asap. :mad:

dunstonh

The charges relate to a managed PPP "wrap account" (at least I think that's what it's called) using Transact.

Transact is expensive on small contributions (regular with no existing fund for example). Its great for large values and is only one of a few personal pensions that allows direct investments as well as funds. Some IFAs business models are such that they put everything on that platform regardless. I tend to find it does nothing that an IFA client wants or needs that cannot be achieved cheaper without loss of quality with other providers. I think in your case, the advice is more a case of this is what they will give you and everyone else regardless of whether its actually the best thing for you or not.

The figures I have given before which you have read remain valid for what you should be looking at. Basic stakeholder 5.9% reduction is your benchmark. Better quality fund selections involving non stakeholder funds will lower that but you shouldnt get less than 5.3% unless the platform (provider) and/or IFA has too heavy charges.

You can get a damned fine portfolio built using unit trust funds without it dropping below 5%.

Think of IFAs as shops retailing advice and products. Some will price themselves based on you paying for the advice (IFA 1 appears to be this as they wont give advice until you commit to pay). Others will price the products and take the money from that. Like any shop, you can find them selling themselves expensively or cheaply. Cheap isnt always best but also expensive isnt either.

reduction to 4.2% is a greedy and unnecessary level of cost in my opinion.

A good IFA should be able to explain the key pros and cons in simple language that you can understand. It may bore you a little at times and you dont need to know the ins and outs of everything. The basics you need to know and be told are 1) cost 2) how the costs compare to stakeholder (mandatory requirement under FSA rule RU64) 3) how the money is going to be invested 4) how much are you looking to get back at a few different example growth rates. There are other things that the adviser has to cover which are important and required but from your point of view they are the key bits.

Its good that you are looking at your retirement planning. Especially as you are self employed and dont qualify for the two state pensions; just the basic (which is £5000 a year currently).

EdInvestor

I'd missed the self employed bit.In that case it's very unlikely to be a good idea to start a pension, as you will receive the same money via the benefits system when you retire anyway.

Friendly_Bob

Thank you so much for your reply Myrmidon_J.

Myrmidon_J wrote: »

Questions to consider:

What is your existing state provision? (Have you paid national insurance contributions in the years that you've been self-employed?)

Yes. All class 2 and class 4 NIC has been paid up to date with no gaps.

Myrmidon_J wrote: »

What level of income do you require in retirement? What can you realistically afford to contribute in your current employment?

I can afford to contribute £25,000 p.a. net. I'm on higher rate tax and the whole amount falls within my 40% range. I'm not sure how much that works out in terms of gross contributions. I got my first ever mortgage 3 years ago and I will have enough saved to pay it off at the end of next year, so at that point I should then be able to contribute more than £25k p.a. to my pension.

Myrmidon_J wrote: »

As regards the product choice, I would stay well away from Transact. The reduction in yield (7.0% to 4.2%) is staggering, though this may also be to do with adviser charges... How much was the commission chap taking?

Is that because Transact is a bad product in general, or just because of the charges? I'm not sure how much he is charging. There are figures mentioned for commission to Transact of 0.56% reducing to 0.42% at end of year 10. So does that mean he takes the rest?

dunstonh

EdInvestor wrote: »

I'd missed the self employed bit.In that case it's very unlikely to be a good idea to start a pension, as you will receive the same money via the benefits system when you retire anyway.

Single person will get around £7k if you include benefits. Around 10k if married. To give up and plan to be poor in retirement from the age of 42 is a bit defeatist.

Its late but its not too late.

Friendly_Bob

EdInvestor wrote: »

Re IFA no 2 it is astonishing to think that a low earner is being recommended a pension in a wrap account with Transact with that level of charges.

Sorry. I didn't make my current income situation very clear in my first post.

While I have been on low income for most of my life (which is why I have no existing pension contributions) that situation is no longer the case. About 4½ years ago my business took off in a new direction and since then I have been on a good income (which is why I was subsequently able to buy my first ever property and start thinking about pensions).

Seeing as I am so used to living on very little money, I am prepared to make the most of my increased income level by continuing to save very aggressively right up until my retirement (which I hope will go some way to making up for the fact that I have left it so late to start my pension contributions).

Unfortunately, the illustration that I was given by IFA 2 is made all the more confusing by the fact that he got my date of birth wrong (out by 11 years and 2 months) and so the illustration assumes an extra 11 years of payments that won't actually be made.

Friendly_Bob

dunstonh wrote: »

Transact is expensive on small contributions (regular with no existing fund for example). Its great for large values and is only one of a few personal pensions that allows direct investments as well as funds. Some IFAs business models are such that they put everything on that platform regardless.

I do seem to remember that he said that they were moving everyone on their books to Transact.

dunstonh wrote: »

The figures I have given before which you have read remain valid for what you should be looking at. Basic stakeholder 5.9% reduction is your benchmark. Better quality fund selections involving non stakeholder funds will lower that but you shouldnt get less than 5.3% unless the platform (provider) and/or IFA has too heavy charges.

You can get a damned fine portfolio built using unit trust funds without it dropping below 5%.

Thanks. This is very useful to know.

dunstonh wrote: »

A good IFA should be able to explain the key pros and cons in simple language that you can understand. It may bore you a little at times and you dont need to know the ins and outs of everything. The basics you need to know and be told are 1) cost 2) how the costs compare to stakeholder (mandatory requirement under FSA rule RU64) 3) how the money is going to be invested 4) how much are you looking to get back at a few different example growth rates. There are other things that the adviser has to cover which are important and required but from your point of view they are the key bits.

I seem to have most of that info, although I did ask for an idea of what it would cost for fee based as well as commission based payment, but I don't think he has provided that. I also can't find any cost comparisons with stakeholder pensions (that may just be me looking in the wrong place). All I can see is a comment where he says that he belives the personal pension plan would be "at least as suitable as a stakeholder plan".

He does say this in the cover letter: "The charge for Transact is 1% of the amount contributed with a further 1% when the investment is made and an ongoing administration fee of 1% per annum".

Yet in the break down the totals appear to exceed 3%.

dunstonh

He does say this in the cover letter: "The charge for Transact is 1% of the amount contributed with a further 1% when the investment is made and an ongoing administration fee of 1% per annum".

Yet in the break down the totals appear to exceed 3%.

Transact is complicated. They retail the funds with no built in commission. So, lets say the published annual management charge is 1.5% p.a. That would include a 0.5% fund based commission. Transact will charge 1% for the fund, not 1.5% but take a bit for themselves and a bit for the IFA. With small fund values you dont benefit from fund based discounts and that is what makes it more expensive. As you get over £250k (or something like that) the discounts start making the "equivalent" annual management charge cheaper. It is not a platform that is well priced for the new investor.

It appears the business model of this IFA doesnt really have you in mind as the type of client they are looking for. Its a case of this is what we offer, take it or leave it. I think you should leave it.

Fee basis should not turn you off. The adviser can take the fee out of the pension. Therefore you get tax relief on the fee and you dont have to pay a cheque for the advice. The commission rebated into the plan could well exceed the fee making you better off (this is the way it will be by default from 2012 anyway).

It may be worth asking IFA 2 if they will take the fee from the product (most will - You would hope they will as well due to tax efficiency -£1000 fee is £800 in a pension with the Govt paying the other £200 or more if higher rate relief exists). Also ask them what sort of pensions do they recommend. Be honest with them and say that another IFA recommended transact and the reduction in yield was a lot and ask them for an idea of what reduction in yield they would be looking at if you went with them. They may give a you a range as you never know the spread of internal or external funds until you research but you have a good idea. If the reduction in yield is good and you understand what that IFA is saying then you can proceed with more confidence.

EdInvestor

What are their investment proposals for the funds?