Shall I put redundancy into pension fund

jackieblue

Hi,
I have just been made redundant. I am 47 with a dreadful pension because I worked abroad until 15 years ago and spent it all. I have worked part-time since my first child was born and am a lower rate tax payer. I have two young children 6 and 9.

I have :

Scottish Equitable - haven't put anything into it since 1994. £35k
Equitable Life - £5k !
Friends Provident Stakeholder with current employer £10k. 100% Managed.

Not a lot I know.

My question is can I put all of my redundancy payment into my pension ?
If so, should I ?
If I should, which of the two funds should I put it into.
Should I pay missing State Pension contributions first (I read that somewhere but can't find it now).

I also lose my Death in Service benefit which was 10 times annual salary.

I currently pay £67 per month critical illness insurance for £80k protection. I can't remember why it is so much higher than I earn. I started this when a colleague's husband started working for a financial services company. I'd really like to stop paying it but it's one thing never starting a critical illness policy, but it's quite scary deciding to stop paying it.

My husband is a higher rate tax payer and we aren't currently poor, but provision for my future is really inadequate.

Any advice on what I could best do with my redundancy payment would be much appreciated. When I leave (end August), I probably won't work again this tax year as I've been a bit spoilt with my hours and working from home so I'm nervous about job hunting.

Many thanks
Jackie

dunstonh

We cannot give investment advice on the forums as it is regulated and your post is nowhere near enough to give proper advice anyway. We can discuss things for information purposes though but you should remember it is not advice.

My question is can I put all of my redundancy payment into my pension ?

You can put upto 215,000 a year into a pension but only get tax relief on 100% of your earnings.

If so, should I ?

There are pros and cons of making pension contributions over other methods of investing (ISAs, Unit Trusts etc). It may be a case of mix and match with some pension and some investment required.

If I should, which of the two funds should I put it into.

Neither. They are both rubbish.

Should I pay missing State Pension contributions first (I read that somewhere but can't find it now).

If the amount you need to contribute gives you a good amount, then it could be worthwhile.

I think you should see an IFA (that means an independent financial adviser and not a bank adviser or other tied salesman). A pension is an investment and one of your pensions is invested poorly and the other you dont mention where it is invested. There may be some options on the EL pension as well.

You also need to review the pros and cons of the investment options as to suit your goals. For example, do you want to kiss goodbye to your capital (which is basically what you are doing with a pension)?

EdInvestor

Basic rate taxpayers should save for retirement in ISAs or directly, not in the pension wrapper. It is worth buying up missing state pension years though bear in mind that soon you should be able to get the full state pension with 30 years contributions.But if well under that, top up if allowed.

A 1994 plan should probably be moved because it will have high charges.Ask for a transfer value, consider moving it to the FP stakeholder. Consider trying to choose some better funds at FP. The Equitable plan could be moved there too (is it in With profits?) But that's probably enough pensions.

You can put 7k a year into a maxi ISA, start with that.Try a discount broker like https://www.hargreaveslansdown.co.uk which will rebate charges and offer the best funds.

dunstonh

EdInvestor wrote:

You can put 7k a year into a maxi ISA, start with that.Try a discount broker like www.hargreaveslansdown.co.uk which will rebate charges and offer the best funds.

Is that really a good idea? After all, jackieblue chose the FP managed fund for her pension. That indicates no investment knowledge (nothing to be ashamed about - most dont). So, going DIY may save a tiny amount in charges but if it gets invested poorly then the money saved is wasted.

There is nothing wrong with experienced investors going DIY but inexperienced investors can make a right mess of it if they dont know what they are doing.

jackieblue

Thank you both.

Dunstonh - does that mean the redundancy payment is classed as earnings for pension purposes.

Ed Investor - Why would you suggest basic rate taxpayers doing ISAs over Pensions ? Why is the advice different depending on the type of taxpayer if they're both tax free ? My ISAs only earn 4.5% ish and I've always assumed that the pension fund managers do better than that. Even if I went for a maxi ISA with shares I probably couldn't choose better than a professional pension fund manager who knows better than I do.

As I receive the amount tax free, does that mean the state tops it up if I put it in a pension as though it's money I've already paid tax on ? Would that happen even if the employer put it in directly ?

My Equitable Life is unit-linked and hasn't been topped up since 2002 ish when my employer changed scheme.

I'll find out more about the Scottish Equitable charges. The Scottish Equitable just seems to be called Mixed - is that the name of where it's invested or is it enough to tell you whether it's any good.

Friends Provident is my employer's scheme. Is it "rubbish" generally or just because I have it 100% Managed. Is there a better fund I could change to within the scheme ? Even ignoring the redundancy payment, when I leave my employer I don't have to stay with that pension scheme. If they're both rubbish do I need another scheme (that'll be my fourth) to put them all into. There's no point in staying there if I'm not linked to the employer and its "rubbish".

Thanks again.
Jackie

jackieblue

Oh dear Dunstonh, you posted while I was writing. You kind of confirmed one of my questions - I'm not a good judge of investments - I'd be worried about making any choices.

EdInvestor

a tiny amount

Not so tiny when you realise a 1.5% charge will eat up 25% of your total fund over 25 years.

I'd be worried about making any choices.

Why don't you consult an IFA then?One assumes that people who post here are looking for helpful info with a view to learning how to invest themselves and get a better result than being in the managed fund and also save money by not paying charges.

At the moment the OP has the worst of both worlds, rubbish funds and high charges.

I probably couldn't choose better than a professional pension fund manager who knows better than I do.

A professional fund manager is more interested in making money for his fund management company than for you.

dunstonh

Not so tiny when you realise a 1.5% charge will eat up 25% of your total fund over 25 years.

Please support with facts. An initial 1.5% charge will not eat up 25% of your fund over 25 years.

If you cannot invest yourself due to lack of knowledge and end up in a bog standard managed fund or a tracker fund well above your risk profile, then you stand to lose a lot more than a one off 1.5% initial charge.

Dunstonh - does that mean the redundancy payment is classed as earnings for pension purposes.

Only if the redundancy (in part/full) is being treated as earned income for income tax purposes.

Why would you suggest basic rate taxpayers doing ISAs over Pensions ?

It isnt 100% accurate as things like childrens/working tax credits could get increased due to pension contributions and result in a higher tax relief. However, pensions are not very flexible and the tax advantages are not what they used to be and under rules that started April 2006, it has made pensions less attractive than equity ISAs.

Why is the advice different depending on the type of taxpayer if they're both tax free ?

tax relief is based on your personal tax status. Higher rate taxpayers can get upto 40% (or 72% if children/working tax credits involved). Basic rate taxpayers can get 22% relief (or a little higher is tax credits involved). With 22% relief going in and being taxed at 22% coming out, there seems little reason to tie your money into a pension.

My ISAs only earn 4.5% ish and I've always assumed that the pension fund managers do better than that.

You are talking about a Cash ISA. You wouldnt use a cash isa for retirement planning. You would use an equity ISA.

Even if I went for a maxi ISA with shares I probably couldn't choose better than a professional pension fund manager who knows better than I do.

Exactly the same investment funds are available in ISAs as they are in pensions. An ISA and a pension is just a product. We refer to them as tax wrappers. They have certain rules and tax advantages but where they invest can be exactly the same. You can even get the rather poor Friends Provident managed fund in an ISA if you really really wanted to (argh).

As I receive the amount tax free, does that mean the state tops it up if I put it in a pension as though it's money I've already paid tax on

Yes. Although dont let that tax relief fool you into thinking it is free money. You pay 22% tax at the other end on the income.

Would that happen even if the employer put it in directly ?

From a monetary point of view, no difference.

The Scottish Equitable just seems to be called Mixed - is that the name of where it's invested or is it enough to tell you whether it's any good.

I wouldnt have it and I wouldnt recommend it. However, you could have done a lot worse.

Is it "rubbish" generally or just because I have it 100% Managed. Is there a better fund I could change to within the scheme ?

Managed funds try to be something for everyone and that handicaps performance. There should be better funds available within the range. A selection across the sectors with percentages averaged out to suit your risk profile is a better way of investing.

If they're both rubbish do I need another scheme (that'll be my fourth) to put them all into. There's no point in staying there if I'm not linked to the employer and its "rubbish".

FP and Scot Eq do have larger fund ranges available and it may just be a case of fund switching. Alternatively, you may be able to benefit from combining them into a single arrangement and get lower charges and/or a better fund range.

At the moment the OP has the worst of both worlds, rubbish funds and high charges.

I cannot see any reference to charges so cannot comment on whether the charges are lower or higher. You should never assume old contracts have higher charges. They will on many occassions but it is an unsafe assumption (like many assumptions without fact are).

A professional fund manager is more interested in making money for his fund management company than for you.

A Doctor is more interested in making money than your health but it doesnt stop him doing his job.

Debt_Free_Chick

jackieblue wrote:

Thank you both.

Dunstonh - does that mean the redundancy payment is classed as earnings for pension purposes.

Definitely "no". Redundancy payment is effectively compensation, rather than money you earned doing your job.

As I receive the amount tax free, does that mean the state tops it up if I put it in a pension as though it's money I've already paid tax on ?

A good question and I think the answer is yes, provided the total contributions paid to a pension this year do not exceed £215,000

Would that happen even if the employer put it in directly ?

No, as it would be classed as the employer's contribution, not yours.

I'll find out more about the Scottish Equitable charges. The Scottish Equitable just seems to be called Mixed - is that the name of where it's invested or is it enough to tell you whether it's any good.

It sounds like a "balanced" managed fund. The name "balanced" is a little misleading but essentially means that the total investments are spread over different asset classes e.g. equities, fixed interest (bonds/gilts), cash and possibly some property. Click herefor a brief factsheet (on that page, click on Mixed).

HTH

Debt_Free_Chick

Ah, I've just seen Dunstanh's reply re the redundancy pay ... he is right, if some of the redundancy is a PILON - a payment in lieu of notice.

jackieblue

I have contacted Scottish Equitable and have been unpleasantly surprised by the info on charges.

Charges are (if I've understood it properly) :

1% Annual Management Charge on total value of fund
0.75% Admin Charge (it's version 4) (I think on the value of the fund)
£38.88 Annual Policy Charge
5% "bid over spread" would apply if I made contributions but I don't currently.

I have apparently selected 100% Mixed.

I am a little surprised as I did employ an IFA last year and all he seems to have done is changed the details of the previous middle man who set it up to his company name. He did undertake to do a review, but inadvertently then archived my paperwork. When I chased him 6 months' later I was so annoyed I told him not to bother with the review. It's my fault for not following up since but can see I probably do need to do something.

If I try to find an IFA do you think it's important that an he/she is physically local or do you think these days IFA's can work successfully over the phone and email ?

Your thoughts would again be appreciated.

Many thanks.