Transferring a pension

EdInvestor

Given no company contribution and basic rate taxpayer I would go for the investment maxi ISA, 7k a year or mini ISA 4k a year. Choose a discount broker as your ISA provider,depending on what you think you might want to invest in.Funds or shares?

https://www.selftrade.co.uk
https://www.hargreaveslansdown.co.uk
https://www.chartwell-investment.co.uk/
https://www.bestinvest.co.uk

are all worth a look as ISAproviders. They have no annual fee, will rebate the initial charges on any funds you want to invest in and /or have low charges if you want to buy shares.

dunstonh

Although if you do direct, you will have to do everything yourself. No advice, no-one recommending your funds. Its all DIY. If you can handle that, then fine. If not, an IFA can make recommendations and do the paperwork.

...just concerned that given your difficulties with DIY and CIS, are you ready to go stock picking yourself with an equity ISA.

Tirian

Given that I don't know anything about funds or shares, I'm not keen on the idea of choosing for myself when I've not really any idea even of the criteria that I would be choosing on. I'm sure that kind of thing is fine and well for people who already know what they're doing, but that isn't me.

I'm kind of going off the whole idea of pensions to be honest. Given what has been said so far, it seems frankly little better than a gamble whatever way I do it. If my 'tax free' pension contributions are going to get taxed at the other end anyway, the whole thing sounds like a bit of a scam.

Presumably the benefit of it is supposed to be that using the untaxed funds mean you have a larger capital to invest and can therefore get bigger returns? In which case, wouldn't ISA investments have to perform amazingly better in order to achieve a better return? And if not, then what exactly is the point of pension funds at all?

I'm beginning to think that maybe I'm just better off saving that money up to deposit on a house.

Depressed and confused :huh:

Tirian

EdInvestor

Presumably the benefit of it is supposed to be that using the untaxed funds mean you have a larger capital to invest and can therefore get bigger returns?

No, there is no benefit from this because the returns are taxed at the other end.There is a benefit if you get tax relief at the higher rate of 40% and then are a basic rate taxpayer in retirement at 22%.And of course there is the 25% tax free cash. However under the new rules you can put large lump sums into a pension later in your life and attract this tax relief - there is no need to lock away money now.

In which case, wouldn't ISA investments have to perform amazingly better in order to achieve a better return?

No, as above.Also ISAs often attract lower charges. And it's a "use it or lose it" tax allowance.

And if not, then what exactly is the point of pension funds at all?

As we've said for basic rate taxpayers, ISAs are better at present, unless free money is available from an employer in a pension.

There are a few people who want to lock money away in a pension as they can't trust themselves not to spend it if it's in an ISA.Also, a pension isn't touched if you go bankrupt and it's not counted for benefits (because you can't get it out).

But the fact you can never access the capital and have to put up with severe restrictions on the income after 50 are quite serious downsides if there are no other incentives, as in your case.

I'm beginning to think that maybe I'm just better off saving that money up to deposit on a house.

If you're not willing to learn anything about investment or see an IFA, this is probably the way to go.

dunstonh

There is no difference between pension and ISA charges or performance in a number of products available today. In some cases the charges will be lower in pensions and in other cases they may be higher. However, there isnt enough difference to worry about.

You need to look at this a little differently to what you are.

You want to save for retirement to make sure you have enough money to provide your income and capital requirements when you retire. What you have done is jump to one solution in the pension. However, it isnt the only solution as we have equity ISAs and pensions. You either get an IFA or do the research yourself to decide which is best. Since the 6th April this year, ISAs have generally taken over as the better product for basic rate taxpayers to invest for their retirment (a few exceptions exist).

So, back to planning for your retirement. You probably have worked out how much you want as an income in retirement and how much you need to have invested at that point to provide that income (if not, most decent IFAs have software to work that out for you). Knowing how much you need will tell you how much you need to put aside each month.

Once you have found out how much you need and/or how much you are willing to put aside, you then work out which is the best way to do it and this is where you get the ISA vs Pension comparison.

Once you have decided whether its ISA or pension you can then pick your range of investment funds to suit your risk profile. As exactly the same investment funds are on ISAs as they are on pensions, there is no difference on that front.

Investing towards your retirement doesnt automatically mean pension. However, many think that way because its just got into the mindset.

Tirian

EdInvestor wrote:

No, there is no benefit from this because the returns are taxed at the other end.There is a benefit if you get tax relief at the higher rate of 40% and then are a basic rate taxpayer in retirement at 22%.And of course there is the 25% tax free cash.

OK, I was beginning to think that I understood some of this, but what is this '25% tax free cash' all about?

However under the new rules you can put large lump sums into a pension later in your life and attract this tax relief - there is no need to lock away money now.

Right, well that makes sense. Although I do wonder whether I locking it away might be better for me I am generally good at saving when I put my mind to it, but I think it would be tempting for me to dip into a big cash pool if it was there especially if I was having a tough time. When I know I have to live on what I've got, I make it happen.

But the fact you can never access the capital and have to put up with severe restrictions on the income after 50 are quite serious downsides if there are no other incentives, as in your case.

Hmm, well I don't forsee taking anything out as early as 50. That would seem to me kind of counter to the whole point of it, unless of course I've put in such an enormous amount of money that I can afford to retire early. Which doesn't seem likely.

If you're not willing to learn anything about investment or see an IFA, this is probably the way to go.

I'm not unwilling to see an IFA. I am somewhat disillusioned that a unless you happen to already be rich enough to be paying higher rate tax, there appears to be no great benefit to pension funds at all. Surely if the government were serious about encouraging people to take up pensions, the incentives are kind of upside down here? Still, whatever ... that's a different discussion.

dunstonh wrote:

You probably have worked out how much you want as an income in retirement and how much you need to have invested at that point to provide that income (if not, most decent IFAs have software to work that out for you). Knowing how much you need will tell you how much you need to put aside each month.

Hmm, once again, I think you have overestimated my knowledge in this arena. I know nothing about it, and have had no advice other than what I've scanned from a few newspaper columns. The full extent of my knowledge is that I don't believe I can depend on a state pension existing by the time I retire - or certainly not one adequate to live from, and that therefore I need to make some kind of other arrangement. Having read in a newspaper advice column that a good rule of thumb was to contribute a percentage equivalent to half your age, I rounded up slightly and got 15%. Seems better to err over rather than under!

Anyway, at present it seems that I could either save towards retirement, or towards a property. With my current salary, location and property market conditions it looks pretty much impossible to do both. I thought, erroneously it seems, that there were significant advantages to saving into a pension. As far as I can determine from what has been said, there is no particular advantage to this over saving towards anything else.

Oh well. I will have to rethink a little. Thanks for the explanations, apologies if I am coming across as a bit dim. I promise you I am not - I have a degree in maths for one thing!! Like I said before, I'm not sure why the govt / FSA etc. constantly act so surprised that young people are not saving for retirement when there's so little incentive, so much misinformation around, and such a lack of provision of readily available advice or clear information ... thanks for straightening some of it out for me.

Tirian

dunstonh

I am somewhat disillusioned that a unless you happen to already be rich enough to be paying higher rate tax, there appears to be no great benefit to pension funds at all.

You have grasped the concept fine if you understand that. You have to remember that before PEPs and ISAs, pensions were the only way to get tax free growth and tax relief which was over 30% for basic rate taxpayers when it started. We then had PEPs which later evolved into ISAs and the Govt watered down the tax benefits of pensions (you may remember bits about Gordon Brown raiding pension for £5 billion a year in indirect taxation). Basically, ISAs overtook pensions.

It doesnt meant you shouldnt invest at all. It just means you should be using a different tax wrapper (the term used for covering different investment products).

OK, I was beginning to think that I understood some of this, but what is this '25% tax free cash' all about?

Pensions currently allow a 25% tax free lump sum withdrawal on retirement with the remainding 75% going to purchase an annuity (sticking with mainstream options here for clarity). I dont think it would be safe to bank on that 25% tax free being there when you get to retirement. The Govt recently renamed "tax free cash" to "pension commencement lump sum". Perhaps an indication that it may not remain tax free in future? There is also no mention of a lump sum withdrawal in the early proposals for the new national pensions savings scheme (new product for 6 years time).

You have the right idea about putting money aside which is great. Dont let the pension product put you off. Look to the iSA product for your funds.

EdInvestor

Anyway, at present it seems that I could either save towards retirement, or towards a property.

If it's an either/or matter for a young basic rate taxpayer, IMHO the property wins every time.This is because you already have a head start with the two (compulsory) state pensions.

It takes 25 years to pay off a mortgage, so there's quite a few years after that when you can concentrate on the retirment savings pot.

If you have a fully owned property at retirement, and have not been able to save on top of that, it's very likely you will be able to top up your state pensions with a lump sum from an equity release lifetime mortgage on your home (which is only repaid after you die).

This is why I think everybody needs to start their pension planning by getting a state pension retirement forecast, so you know what your bottom line is.The idea that there will be no state pension when you retire is misconceived.

Apply here for a state pension forecast

Do let us know the result.

dunstonh

It takes 25 years to pay off a mortgage, so there's quite a few years after that when you can concentrate on the retirment savings pot.

increasingingly first time buyers are going to 40 years on their mortgage now. That leaves virtually no time at the end to have a rapid saving session to make up for lost years. There is always something else you "have" to spend your money on. Enjoyment, then house, then wedding, then children then oops, you are 55 and have hardly anytime left to do anything about your retirement.

If you have a fully owned property at retirement, and have not been able to save on top of that, it's very likely you will be able to top up your state pensions with a lump sum from an equity release lifetime mortgage on your home (which is only repaid after you die).

Which is a great fall back option to have but it isnt something you should be planning for. Especially as there is no guarantee that it would be a good enough option in its own right.

EdInvestor

Just trying to be realistic DH.

After all, with annuity rates so low, these days you have to save up 100,000 quid simply to buy the equivalent of the basic state pension that everyone thinks is so meagre and worthless.

You might as well get some extra value out of all this hard saving - such as by living in the asset at the same time and saving on rent.