Ros Altmann said private pensions are not a good idea for many basic rate taxpayers

tobiascurious

http://iball.iii.co.uk/2009/01/30/iball-interviews-dr-ros-altmann

What do you think of her opinions?

rich010273

Agree.

For basic rate taxpayers it isn't a good idea due to ISA's.
Higher rate taxpayers ought to use a pension as per the video.

Paul_Herring

Dunno about her views - I don't have 10 minutes to waste on a video when I could read whatever she had to say in under 3. Sadly the link to the transcript appears to be broken.

Nevertheless, based on the content of title, I'm guessing she's been making broad-brush comments, when they needn't necessarily apply to all (or even most) basic rate tax payers.

rich wrote:

For basic rate taxpayers it isn't a good idea due to ISA's.

ISA's aren't a good idea if you are ever in the situation that you may be means tested (before retirement) since they count towards any 'savings' you have. They may also not suit those who cannot resist spending their pension pot before they retire.

That said, I have both a pension fund and ISAs, and have (for the moment) stopped contributing to my pension in favour of the ISA, since there's little (financial) difference between the two, but the ISA will give me more flexibility. When my company sorts out their salary sacrifice scheme I shall restart contributing to the pension because I'll be getting the employer NI saved put in there as well.

dunstonh

I cant waste time watching a video but its probably too simplistic, right in some areas and wrong in others.

The bottom line is that when using ISAs, pensions or other conventional investment wrappers, the pension is the product that will provide the most income. It wont produce the most capital lump sum but thats not what it is for. A pension is for income in retirement.

If you are capable of managing your financial affairs and have self control, then pension provision to use up both your and your spouses personal allowances in retirement are the best way with ISAs for the income above that. That said, if you are close to means tested benefits, an ISA can do more damage than a pension as lump sums are treated more harshly than income above the threshold.

StevieJ

Paul_Herring wrote: »

ISA's aren't a good idea if you are ever in the situation that you may be means tested (before retirement) since they count towards any 'savings' you have. They may also not suit those who cannot resist spending their pension pot before they retire.

.

But they are not included as income for restricting age allowance which can be useful.

novice-saver

It's a shame you guys are all too busy to spend a coffee break watching the interview.

Dr. Ros Altmann knows about pensions, and has an interesting point to make.

Paul_Herring

StevieJ wrote: »

But they are not included as income for restricting age allowance which can be useful.

I'm thinking of the more mundane situations, like losing your job which isn't entirely uncommon at the moment. They count against you if, for example, you're after JSA.

(They don't affect contributions based JSA, but if you have more than 16K in ISAs then you're not going to be getting any income based JSA until you've spent down to that level. If that 16K+ was in a pension fund instead, you would be eligible for IB JSA from the start.)

jamesd

Here's a summary:

1. Final salary schemes are ending, no more will be started.
2. Pension credit competes with private pensions, so it makes pensions less suitable for the 40% who will qualify for it because they will lose most of the value of their pension because it will reduce pension credit. It's led to the mass means testing of pensioners, now half of pensioners get means tested, which is what is so damaging. A 50:50 chance of a basic rate tax payer now ending up on pension credit makes it hard to come out ahead.
3. FSA makes it easy to sell a £200,000 mortgage loan but hard to sell a pension.
4. Should you stop paying in to a pension?
4a. "If you're a top rate tax payer it's still a very good deal".
4b. If you're only on basic rate tax it becomes much more difficult to decide if a pension is suitable for you and many IFAs would say that it's not suitable for most on basic rate tax. It's easier to decide if close to retiring. It's harder if you're younger and have debts, particularly if you don't own a house, because that lack says you are more likely to suffer the pension credit penalties.
5. If you're not a higher rate tax payer what should you do instead? If there's an employer contribution to a pension it's easier but you still need advice unless you're very savvy financially. The best advice would be to say not yet for a pension. For those without an employer contribution there's much less incentive to put the money into a pension than some other investment like an ISA, with no lockup and some tax benefits.
6. We'd be better off with a system like the US 401(k) product where you can get at the pension money including borrowing secured on it.

My thoughts on this:

It's reasonable for higher rate.

It's reasonable for the poorest working people, say those earning less than £15,000 who will never earn more and are less likely have enough free income over expenses to improve their position beyond pension credit levels under the current system.

For those making over say £20-25,000 on average over their lifetime pensions are likely to make you better off. It misses the big point about being better off below 10,000 of pension income because you get tax relief on the way in and not on the way out, lost in the pension credit effects, I expect.

In between it depends on how determined you are to improve your position. If you're interested in learning about investing well and have employer pension contributions you're likely to do better investing than not. But maybe inside an ISA at first, switching the money into pensions later in life to get the tax breaks.

We already do have a system like 401(k), the ISA. Can't borrow against it, though, must withdraw.

The pension credit and other means testing disincentive is real and some way to gradually rather than totally reduce the gain from pension investing for retirement for those on lower incomes may well help. But how much? Maybe 50% of income below £15,000 kept? £12,000?

dunstonh

Thanks for the summary James.

2. Pension credit competes with private pensions, so it makes pensions less suitable for the 40% who will qualify for it because they will lose most of the value of their pension because it will reduce pension credit. It's led to the mass means testing of pensioners, now half of pensioners get means tested, which is what is so damaging. A 50:50 chance of a basic rate tax payer now ending up on pension credit makes it hard to come out ahead.

Pension credit is only paid to low earners. I would not like to rely on in in retirement. If you plan to be poor in retirement, then fair enough but most people wont want that objective.

3. FSA makes it easy to sell a £200,000 mortgage loan but hard to sell a pension.

Very true. Indeed, the FSA is getting really anal on this now.

6. We'd be better off with a system like the US 401(k) product where you can get at the pension money including borrowing secured on it.

Or known as an ISA in this country without all the silly "borrowing" requirements attached.

There seems to be no reference to childrens/working tax credits. Pension contributions reduce your income and increase your working/childrens tax credits. So, whilst basic rate relief may be 20%, if you get higher tax credits then its more than 20% effectively.

As James comments, no reference to personal allowance in retirement.

There also seems to be no comment on the fact that, like them or hate them, pensions do provide the highest income out of the options normally considered. Even for basic rate taxpayers.

So, I stick with my views that the sticky thread at the top of this forum where all the regulars discuss the pros and cons of pensions and ISAs and which is best, it a better resource for information than this.

jamesd

The borrowing requirements for the 401(k) may be an advantage compared to the ISA if it protects the funds from unemployment and bankruptcy by not making borrowing mandatory, whereas here you have to spend the ISA money. I haven't looked into how the 401(k) is affected by those issues.

nearlyrich

I was a basic taxpayer when I started my pension contributions and I am glad I did it 20 years ago, I work for a company now who don't contribute to a pension but I took that into account when I negotiated my salary, and recently I discovered that they will do a salary sacrifice into my choice of pension scheme and donate their NI saving so I am sacificing around £300 take home and getting about £450 into a pension fund as a HRT. No other savings vehicle comes close and in 7 years I can get 25% back in a lunp sum if I want to. I think people are scared of "pensions" because of the adverse publicity but I don't want to rely on the government topping up my pension I want to be able to afford to travel etc in my later years just as I do now but maybe for longer with no work to get back to...