pension advice needed - we dont have a clue!!

aliyah

Hello,

wondered if any of you experts could provide some suggestions.....

my husband needs a personal pension plan as his employer does not have a scheme. he already has a fund of around £4K from a previous employer to start it with.

he is 38, in full time work and we have 5 children aged between 10 and 17.

we have a mortgage (£55K)

on earnings of around £1200 pm, he is hoping to pay around £100 with a view to increase once the mortgage is paid off in around 5 years time

dont want anything risky...

any ideas?

thanks, aliyah

dunstonh

Why does he need a pension?

dont want anything risky...

What does risky mean?

These are serious questions because you are looking at this back to front. You, as a couple, need an income in retirement for both of you to be present whilst you are both alive and when one of you dies. Now that means making an investment towards your retirement. This could be in a pension or an ISA depending on your tax position, requirements and whether you can trust yourself or not.

Also, you need to define risk more. Every day you drive a car you take a risk but you still do it. If you put money in a bank account you take a risk as the interest rate is likely to be lower than inflation over the long term. Every time you invest money you take a risk with volatility. Its how much risk that is acceptable that matters and you need to consider that on a sliding scale and not just an "on" or "off" situation.

aliyah

Oh...this seems a lot more complicated than I thought!

I see what you are saying. Of course there is an element of risk -

We are both tax payers (although I pay a pittance) . My husband has an ISA already holding about £6K.

I always assumed that property couold provide a pension as such. That is where we have been trying to pay off the mortgage asap - but now Im not even sure if this means much in terms of 'pension age income'

Sorry to frustrate you with my dumbness - but I would really appreciate further advice or at least a push in the right direction.....

With thanks

EdInvestor

First of all I suggest that both of you apply for a forecast so that you can see what you will be getting from the state pensions.

You may be surprised at how much pension you already have;) Be sure to get your own forecast updated to include any years when you were at home looking after the kids, and bear in mind that the Govt is about to change the rules to reduce the number of years needed to get the full basic pension to 30

Is hubby a basic rate taxpayer?

If so I suggest that he should open an investment ISA ( mini or maxi) rather than a pension at present, as the ISA is much more flexible and the income is tax free at the other end (pension income is taxable and your allowance will already be used up by the state pensions).

Have a look at this website:

https://www.hargreaveslansdown.co.uk

It is a discount broker which will rebate the charges of investment to you, very important.There is quite a lot of useful info about funds, and how to manage risk as well.

You might get a few ideas there about what to put in the ISA.

dunstonh

Oh...this seems a lot more complicated than I thought!

It doesnt have to be complicated. The simple option is to pick a stakeholder pension and pick a couple of funds and go from there. However, that doesnt mean its the best option. And it rarely is.

I always assumed that property couold provide a pension as such. That is where we have been trying to pay off the mortgage asap - but now Im not even sure if this means much in terms of 'pension age income'

Your property doesnt provide you with an income. It is something you live in. As a last resort you can fall back on the property by giving up some of the equity in the home but that should only be viewed as a last resort and not planned for.

Sorry to frustrate you with my dumbness - but I would really appreciate further advice or at least a push in the right direction.....

Dont apologise. You are showing interest in doing something and that is great. If people knew what to do, then there would be no place for advisers and I would have no livelihood.

If the "pensions" are all in your husbands name, then on death, the income will die with him. Leaving you with nothing. You can get joint life annuities or an annuity with a reduced spouses benefit but these give less income than single life. So it is important to know that your retirement planning is split equally between you otherwise you can end up paying over a £1000 a year in extra tax and on death, the surviving spouse can end up with no income other than state.

ISAs are an annual allowance of upto £7000 currently. Basic rate taxpayers are often best using those instead of a pension. Higher rate taxpayers still get a decent level of tax relief on pensions although utilising the ISA can still be the best option if you wish to retain your capital.

Also, this is an investment. A pension or ISA is just a tax wrapper. It doesnt make or lose money. Its where you invest it that does that. Pensions and ISAs can invest in identical areas so there is no difference on that front and both have tax free growth. It is important that you invest the pension correctly. Whilst Ed suggests HL as a cheap option, which it is you will be expected to do the investment selection. If you have the ability to pick a correct sector allocated range of funds to match your risk profile then that is fine. If not and you get it wrong, it can cost you significantly more. I took on a case earlier in the year from someone that thought they could do it themselves and for 4 years had put it cheap tracker funds and earned virtually nothing in that time. A more expensive but sector allocated portfolio using only the sector average (so not picking best with hindsight) had acheived over 11% a year after charges. So, going down the advice route would have earned him at least 11% a year more than DIY.

aliyah

Thanks dunstonh and Ed for your excellent, sound advice.

hubby and I need to get together at the weekend and plough through this

WARNING:: I may be online asking more pertinent questions then!!

Much appreciated,

clear_blu

dunstonh wrote:

ISAs are an annual allowance of upto £7000 currently. Basic rate taxpayers are often best using those instead of a pension.

I am interested as to why you suggest an ISA as opposed to a pension, surely pension premiums are grossed up so the initial investment is larger. As you state both can be invested in the same things so why not start with a vehicle that allows more input for a given sum????

dunstonh

There is no compounding of tax relief over the years. If you pick the same funds and get the same charges then at the end of the day a the pension fund will only be higher by the 22% tax relief regardless of the length of time.

Post A day, you can build up that pot in an ISA over the years and wait until you are a higher rate taxpayer or wait until your final year and then decide if you want that tax relief of not but be stuck with an annuity or keep it in the ISA tax free and use that to provide a regular income.

EdInvestor

the pension fund will only be higher by the 22% tax relief regardless of the length of time.

And that will then be taken back when you are charged 22% tax on the pension income after you retire.

Thus the only net benefit to BRTs is the 25% tax free cash, for which they give up their capital and face severe restriction on when and how much income they can take.

Higher rate taxpayers get a much better deal and it may be worth them considering some pension investment.

Paul_Herring

clear_blu wrote:

I am interested as to why you suggest an ISA as opposed to a pension, surely pension premiums are grossed up so the initial investment is larger. As you state both can be invested in the same things so why not start with a vehicle that allows more input for a given sum????

The maths doesn't bear this out. See Are pensions worth it?

III wrote:

Take two investors who both have £7,000 to invest. One puts it in an ISA, the other puts it in a pension. If the investor is a higher rate tax payer, then the £7,000 he has put into a pension is immediately equivalent to a grossed up contribution of £11,666.

Let's assume that both the pension and the ISA pot double in value to £23,333 and £14,000. When the funds are liquidated, 25% of the pension can be spent in tax free cash (£5,833), but the rest is taxable at the investor's highest rate and so, assuming 5% is drawn down, income after tax would be £525.

For the ISA client, the full value of the fund (£14,000) can be taken tax free, and at any time. If, for the sake of comparison, you subtract and put aside a sum equivalent to the 25% cash allowed under the pension, then a 5% drawdown from the remaining ISA fund is - lo and behold - £525. Identical amounts, but the pension regime is fraught with restrictions, both on the investments allowed and how the proceeds can eventually be taken.

The example is oversimplified, but not by much.[...]

dunstonh

I will add that upto your personal allowance, they are worth it. However, you need to include state pension in there as well.

So, a self employed individual who will get £4381 state pension will still have £2899 of tax free earnings and a further £2150 at 10%. Upto that point, the pension is still good value. However, once your income gets into basic rate territory it is no longer worth it.