40 and no pension, where do i start?

Harry_Powell

From the information I have read, it seems that a combination of both seems to be best. We all receive a £10k tax free allowance when we retire, with the 2 state pensions paying an average of £6k per annum. It would therefore make sense to use a traditional pension scheme to 'top up' annual income to the £10k tax free limit, with the rest placed into ISAs.

This means that you gain as much as possible from the 20% tax rebate on monies placed into the pension, without having to pay tax on the pension received. The income from ISAs is taxed on the way in, so there is no income tax to pay from monies taken out.

You could realistically have a retirement income of £20k per year that is completely tax free if you play the game to your advantage, which is what MSE is all about.

Addendum:
Given that the OP is 40 and is only starting a pension, and given also that in order to receive a £4kpa income from an annuity you would need to put away at least £80,000, I would suggest that the best course of action would be for the OP to start a traditional pension plan where he/she will receive a 20% rebate on the investment but not have to pay any tax when the pension is paid.

Effectively for every £240pm the OP put away, the government will add a further £60pm, making it a £300pm investment. Regardless of whether you need to 'feel in control' of your money, an immediate return of £60 like that is not to be sniffed at, especially when you're trying to build a decent pension pot in a limited timeframe.

Over a 10 year period, £60pm rebate would equate to £7200 more cash in a pension plan than an ISA, both of which will be tax free in payment due to the age related allowances. I guess it therefore depends if the freedom of an ISA is worth £7200 to the OP?

bendix

Spot on Harry.

For me, the OP should be looking to get close to a pension pot of £100,000 (on the premise that the tax free allowance will likely increase in the next twenty years before he retires.

That is not that hard. Even with no capital gain, that equates to a net contribution of £333 a month which is topped up to £400 by the tax rebate.

Then, I'd be saving hard into ISAs or non-pension wrapped investments to give himself much more flexibility.

Noone is suggesting pensions are the only provision for retirement, but they are an important one. It's all about balance.

jamesd

marklv wrote: »

Interesting, but I assume you can only do that with a personal pension, not an emplyer provided one.

The one I contribute into by salary sacrifice is money purchase and is even content for me to transfer out partial sums up to several times a year if I want to. If it's interesting to you, ask any scheme you're a member of what your transfer options are.

For a final salary scheme the payments are likely to be quite good if you're a member until you retire. If you're earning at higher rate you might want to transfer out to reduce the risk of exceeding the income limit protected by the Pension Protection Scheme. For anyone, if you're no longer a member or the scheme has been frozen for some reason, say after closure, then the payouts are going to be based on contributions and salary at leaving/closure plus index-linking. It's not likely to be challenging for a fairly young person to exceed that result with investments. Younger means under say 50-55, though it depends on a calculation of the critical investment yield and that can be calculated by a pensions-specialist IFA to work out what the investment target is going to be to beat staying in place.

The main issue with income drawdown is that the capital is at risk and things can go wrong if the investment decisions aren't good enough or if something exceptionally bad happens with the chosen investments.

jamesd

Harry, the tax free lump sum gives pension contributions an income advantage even when taxed at the same rate as the original contributions. The income from pension after tax plus investing the lump sum can be expected to produce an income 7% higher than pure ISA use at around £21,000 total income, more below that, less above. The lump sum will be 31.25% of that of the ISA route.

The pension starts to suffer for marginal extra income compared to the ISA once age allowance reduction starts.

For higher rate contributions the pension is going to win at least until higher rate income in retirement is reached. With all higher rate contributions at £19,500 income the pension route would deliver around 16.9% more income than pure ISA use, with 41.67% of the ISA total value as the pension tax free cash amount.

The up to £10,000 in income point is just the easy one where the pension gain is biggest for basic rate contributions if no tax free lump sum is taken.

The ISA wins for a fair bit of the investing it there's any chance of retiring before age 55, since you can retire and live off ISA capital and income until you can start taking the pension income.

Harry_Powell

jamesd wrote: »

Harry, the tax free lump sum gives pension contributions an income advantage even when taxed at the same rate as the original contributions. The income from pension after tax plus investing the lump sum can be expected to produce an income 7% higher than pure ISA use at around £21,000 total income, more below that, less above. The lump sum will be 31.25% of that of the ISA route.

The pension starts to suffer for marginal extra income compared to the ISA once age allowance reduction starts.

For higher rate contributions the pension is going to win at least until higher rate income in retirement is reached. With all higher rate contributions at £19,500 income the pension route would deliver around 16.9% more income than pure ISA use, with 41.67% of the ISA total value as the pension tax free cash amount.

The up to £10,000 in income point is just the easy one where the pension gain is biggest for basic rate contributions if no tax free lump sum is taken.

The ISA wins for a fair bit of the investing it there's any chance of retiring before age 55, since you can retire and live off ISA capital and income until you can start taking the pension income.

It would be interesting to know what the most tax efficient pension pot would be. As you say, it's actually above the level to pay the remaining £4k up to the age related limit because you can withdraw 25% tax free. I guess what I'm saying is the optimal is to have a pot that you can take 25% out and still have enough in there to pay you a £4k annual pension (or more/less depeandant on your state pension income).

Any idea what this would be on today's annuity rates?

bendix

Harry_Powell wrote: »

It would be interesting to know what the most tax efficient pension pot would be. As you say, it's actually above the level to pay the remaining £4k up to the age related limit because you can withdraw 25% tax free. I guess what I'm saying is the optimal is to have a pot that you can take 25% out and still have enough in there to pay you a £4k annual pension (or more/less depeandant on your state pension income).

Any idea what this would be on today's annuity rates?

Given that it's relatively easy to get an annuity worth £6400 per annum for a single man at 60 on a pension pot of £100,000, you'd only need a a pension pot of around £63,000 to generate £4000 per annum.

Hardly a fortune, and certainly not beyond the OP to build up, even if he is 40 and starting from scratch.

Harry_Powell

bendix wrote: »

Given that it's relatively easy to get an annuity worth £6400 per annum for a single man at 60 on a pension pot of £100,000, you'd only need a a pension pot of around £63,000 to generate £4000 per annum.

Hardly a fortune, and certainly not beyond the OP to build up, even if he is 40 and starting from scratch.

He could basically build up a pension pot of anything upto about £85k before paying tax on his income (because he could take any money between £63k and £85k as part of his 25% tax free lump sum).

Even £85k is doable in the space of 26(?) years before the OP retires, given that he's starting when the stock market is still recovering from a correction.

bendix

He could do it in 20 years without a strain, particularly with tax relief.

The notion that he is beyond redemption because he is forty is palpable nonsense.

jamesd

Since annuities vary with age and I prefer drawdown anyway I use a straight 6% of capital as the income calculation. That means a £4,000 income target needs £66,667 after taking the tax free lump sum, £88,889 before. You'd want to target 50% higher than that if you could, since the penalty for undershooting is greater than for going over.

camso69 has a long time to get to these values. £140 a month will give £89,000 after 3% inflation from 7% growth after fees in 26 years. £210 a month for 20 years.

£310 a month for 15 years if there's any desire to try to retire at 55, though it would really take more like £700 a month to get to say £12,000 total pension income because there won't be any state pension at 55.