Which of two existing pensions to pay into

brianrhill

The company could potentially contribute to employee's pension plans, but the total input into a pension, to recieve tax relief, should not exceed your net relevant UK earnings. You can put in more than your NRE, but you will not obtain tax relief. HMRC's interest may be sparked on large, unusual transactions which could be deemed as being done to evade corporation tax.

Most IFA's will use a risk profiling tool which will give indicative splits between equities, bonds, fixed interest etc dependent upon your current attitude to risk. You can then usually slot this into a band of around 5 types, such as cautious, balanced, aggressive etc.

You should also discuss the options of SIPPs and SSAS type pensions, as these give holders much more flexibility in terms of investment types, although as such the costs and risks of having these plans can be higher in some circumstances. For instance, if you wanted to purchase a commercial property for your business at a later date than you may be able to do so using a SIPP; and SSAS have their own peculiaraties as well.

Your IFA will consider wether it is best sticking with both of the plan, consolidating into one of the existing plans, or consolidating into a new plan. He should specialist use software to do this, not the back of a fag packet.

Ask your IFA for a cost breakdown and the options for remuneration - fees only, commisison only, or a combination of the 2. If you go down the commission only route then the IFA will only get paid if you consolidate all pensions into one new pension. Your IFA will also be able to provide you with clear, informed research to show you what the most appropriate course of action is and why.

A previous poster's comment about having a pension pot that will provide up to £10Kpa and the rest going into ISA's etc should be taken with a pinch of salt as there are no such guidelines laid down to the best of my knowledge. You should, however, diversify between products and providers, to avoid the differing types of risk you could be exposed to, whilst considering liquidity and tax efficiency.

Brian

EdInvestor

brianrhill wrote: »

A previous poster's comment about having a pension pot that will provide up to £10Kpa and the rest going into ISA's etc should be taken with a pinch of salt as there are no such guidelines laid down to the best of my knowledge.

This is a tax planning issue, not likely to be subject to IFA guidelines.

brianrhill

Still disagreeing Ed.................please explain your rationale - I'm very open minded and don't bite!

Brian

jamesd

brianrhill, some people dislike the capital tie-up that comes with pensions. They find it hard to beat tax relief on the way in and zero tax on the way out so instead of saying no pension they say pension only up to 10k income, an approximation for the above 65 personal allowance.

With higher rate income it's not a defensible position in this case: the higher rate relief and the ability to use salary sacrifice in the form of direct contributions to the pension, saving employer and employee NI, make a pension just about unbeatable provided the plan is to retire after 55 and income from the pension plus drawing down the lump sum can meet income needs. Even without the NI gains higher rate contributions deliver 42% of the capital and 17% more income than ISA (up to the point of age allowance reduction).

Add in the ability to use a SSAS to do things like buy commercial property within the pension and rent it back to the business and the ability of the pension to borrow 50% of its current value and there are some additional quite interesting benefits possible from the pension route. Add the SSAS ability to enhance payout rates based on actuarial projections instead of GAD rules. I'm sure you know this, but some others may not and I'm still not greatly familiar with SSAS options.

jem16

brianrhill wrote: »

A previous poster's comment about having a pension pot that will provide up to £10Kpa and the rest going into ISA's etc should be taken with a pinch of salt as there are no such guidelines laid down to the best of my knowledge.

Let's look at an example.

Basic rate taxpayer whilst working with no company contributions towards pension. 20% tax relief on pension contributions, no tax relief into ISA.

Income of £20k in retirement.

£20k pension pa - tax due £2,102 pa
£10k pension plus £10k from ISA - tax due £102 pa

Income of £26k in retirement.

£26k pension pa - tax due £3,612
£10k pension plus £16k ISA - tax due £102

Now which option would you advise your clients to take?

Higher rate taxpayer who will be a basic rate taxpayer in retirement or anyone receiving contributions from employer - no contest, pension wins hands down.

jamesd

jem16, I'd say that your example is bogus. It is giving extra money to the ISA investing that isn't being given to the pension investing. If the net contributions to each were the same the pension would have a higher pre-tax income than the ISA because of the tax relief, which produces a larger pension pot.

Lets take a more realistic example, one I've fully worked and which pays the same net amount of money into pension and ISA. Send me a PM with an email address if you want me to mail you the spreadsheet.

Basic rate working and in retirement, monthly contributions of 300 increasing with inflation of 3%, growth 7% before inflation, after fees. £7,000 of state pensions, £10,000 personal allowance. Pension lump sum taken and invested in ISA (for simplicity assumed done in one year). 5% of capital available as income (drawdown in both cases). Here's how the two options compare for different numbers of investing years:

10 yrs pen  9609	ISA 9087
15 yrs pen 11286	ISA 10469
20 yrs pen 13063	ISA 12141
25 yrs pen 15213	ISA 14165
30 yrs pen 17813	ISA 16613
35 yrs pen 20960	ISA 19574
40 yrs pen 24767	ISA 23157

Clear enough: the after tax income from the pension is higher than from the ISA if you're putting the same amount of after tax income into each.

More detailed version:

10 yrs taxable pen  8956 net+lump income  9609 lump sum is 13043	ISA income is	9087	lump sum	41737
15 yrs taxable pen 10252 net+lump income 11286 lump sum is 21682	ISA income is	10469	lump sum	69383
20 yrs taxable pen 11820 net+lump income 13063 lump sum is 32134	ISA income is	12141	lump sum	102830
25 yrs taxable pen 13717 net+lump income 15213 lump sum is 44780	ISA income is	14165	lump sum	143295
30 yrs taxable pen 16012 net+lump income 17813 lump sum is 60079	ISA income is	16613	lump sum	192253
35 yrs taxable pen 18788 net+lump income 20960 lump sum is 78589	ISA income is	19574	lump sum	251485
40 yrs taxable pen 22148 net+lump income 24767 lump sum is 100983	ISA income is	23157	lump sum	323147

taxable pen: the taxable pension income from the 75% not taken as lump sum and the state pensions.
net+lump income: after tax pension income + ISA income from investing the lump sum. The full after tax income from the pension route.
lump sum is: the pension lump sum that is taken and invested in an ISA.
ISA income is: the ISA income plus the state pensions. The full after tax income from the ISA route.
lump sum: the ISA lump sum from which income is being taken.

jem16

OK - can't say my brain is still awake enough to follow that in its entirety.

jem16, I'd say that your example is bogus. It is giving extra money to the ISA investing that isn't being given to the pension investing. If the net contributions to each were the same the pension would have a higher pre-tax income than the ISA because of the tax relief, which produces a larger pension pot.

True but after tax that pension pot is reduced back to the same level of the ISA pot. Only the 25% tax-free lump sum makes the difference and I had planned to make use of that by having some personal pension provision other than state pension.


A couple of questions for clarification.

1. Your figures seem to assume that it's all pension or it's state pension plus ISA - is that correct?

2. Do your figures take into account the loss of the increased personal allowance after £22,900 ( for this tax year)?

The point I was trying to make, if however badly, was to have both pension (private and state) income and ISA income rather than solely pension income.

The £10k I mentioned was utilising some private pension of around £3k - £5k depending on exact amount of state pension due. This would allow for the tax-free lump sum of 25% which is obviously advantageous.

Contributions would therefore initially be put into a pension (other than state pension) to give a pot big enough to provide for around £3k-£5k plus a lump sum. After that contributions would be switched to the ISA to provide the tax-free income.

As you are much better at crunching numbers than I am, how much of a difference does this make?


Basically what I'm advocating is a mixture of state pension, private pension and ISA and not just an ISA v pension.

jamesd

For the pension the lump sum can be moved into an ISA. That substitutes some tax free income instead of leaving it all taxable. Since that lump sum is one of the big gains of the pension when tax rates are the same it's really necessary to handle it in the calculation.

1. Pension is: ISA from the lump sum, taxable state pensions and taxable 75% pension pot. ISA is: ISA pot, taxable state pensions (but no tax to pay because below allowance). All taxable income has had the right amount of tax deducted to get comparable after tax figures for pension and ISA.

2. The figures stop before the personal allowance reduction starts, so no. The pension lump sum being taken keeps the pension taxable income below it.

Any money that you put into ISA before pension makes you worse off in income terms before age allowance reduction starts.

Where you can gain from the ISA contributions is if you want to retire early. Then you can draw down 100% of the ISA capital to produce a higher income until the state pensions start. See this early retirement example which illustrates how the ISA part lets you take a higher income before state pensions. The ISA money lowers income longer term but its the way to go to boost income for the few years until the state pensions start.

wary

brianrhill wrote: »

The company could potentially contribute to employee's pension plans, but the total input into a pension, to recieve tax relief, should not exceed your net relevant UK earnings. You can put in more than your NRE, but you will not obtain tax relief. HMRC's interest may be sparked on large, unusual transactions which could be deemed as being done to evade corporation tax.

Thanks Brian for the info. Re the point above, I was of the impression that one could also utilise any unused allowance from previous years. If so, please can someone elaborate?

wary

dunstonh wrote: »

No. Fund managers control the assets within the fund. Some funds exist where they have a fund manager controlling the asset allocation that invests into other funds within their range. However, the IFA or you select the funds (tied advisers are mostly not allowed to).

Thanks Dunstonh for the info.

I'm trying to get my head around what exactly constitutes a fund and how one invests in a pension. (These may seem like obvious questions to some and I will use an IFA to help me invest, but I'm also keen to lift myself from a state of complete ignorance.)

From my brief research, it looks like a fund is defined in terms of a percentage of UK Equities, International Equities, Cash & Equiv, UK Corporate Bonds ... (etc).
1) Each pension provider offers a large number of funds; presumably the main difference between them is primarily the relative percentages across these investment types?
2) Are there standard funds (i.e. with the same percentage split) across a number of companies that are known by a common name? Or is the percentage split very much a bespoke thing to the individual providers?
3) If two different companies do offer the same fund, presumably their performance differs because they'll invest in differing stocks for example, even if the percentage of the capital used for stocks is the same?
4) Would the IFA/investor usually instruct the pension provider to invest in a particular sector, in a specific fund or even to specify a bespoke fund in terms of relative percentages of each investment type?
5) Presumably the choice of investments within the constraints of the percentage split (e.g which specific equities for UK Stock) would be down to the skill of the fund manager rather than the IFA? Once bought, would the fund manager periodically review these and perhaps buy/sell within the constraints of the fund percentage make up?
6) What determines the "sector" of a fund, given that it is split across various investment types? Is there any set criteria?