Pensions advice - what to do?

georgiasmum

Ok, I am 33 and have cleared over £30000 worth of debt. I have a mortgage that I am going to overpay this month for the first time (debts cleared last week!!!) and I contribute to the Teachers pension scheme which is final salary. I also pay £25 a month to the Prudential AVC's. I also have a pension in Australia from when I was a teenager/student worth about $15000 (AUD)

My priorities are cash savings as a buffer zone then investments. Should I be doing anything else to shore up my retirement income? I would like to retire before I am 65!! Should I seek financial advice from an investment person?????

jamesd

georgiasmum, excellent work!

Do remember to compare your mortgage interest rate with the best rates you can get in savings accounts and cash ISAs - one of those, from Ruffler Bank, pays 5.75% with not tax payable and that's even a better deal than paying more off the mortgage. Does require a minimum of 3000 so you may not be able to use it immediately.

First thing to know is that for a basic rate tax payer, an equity ISA is likely to be your best option for long term investing, not more pension. You can move the money from that into a pension or withdraw it but if you put it into a pension 75% of the money must be used to purchase an annuity, so it's pretty thoroughly locked up. This applies to general (personal, stakeholder) pensions, the Teachers pension has its own rules.

If you want to look after your money yourself, best thing is to read a lot about ISAs, asset allocation and how to select funds. Asset allocation and regular rebalancing to keep the desired percentage allocations, is the proved way to make money from the stock markets over the long term. You still see the usual unpredictable increases and decreases over the years, though- that's just the way the stock market works.

For a smallish buffer zone of up to a thousand or two pounds, using a bank account that pays 4% or more on the balance is a good idea. Something like the Alliance and Leicester Premier Plus or the Lloyds TSB one (but not one of theirs that charges a fee!). This is for day to day money, regular unplannable bigger bills and a safety margin of say a month's total after tax income to avoid overdraft charges and immediate problems with standing orders and direct debits if you have to change job. Gives you a month to work on getting a new job, knowing that all the bills will still be paid, without you having to juggle money around.

For a long term emergency fund that you plan not to touch but might need, you might consider a cash ISA and say 3000 before you start using an equity ISA.

To build up these funds you might consider the Alliance and Leicester regular saver that pays 12% on up to 250 a month, the same unchanging amount from start to finish, for one year. Or the Lloyds TSB one that pays 8% on up to 250, can change at any time, for up to two years. If you're a basic rate tax payer both of these are going to earn you more in interest initially than the ISA will. You can withdraw from either at any time, though only by closing the A&L one.

A_Nice_Englishman

I would get professional advice. The Teachers' Pension Scheme is an excellent one and at the moment the retirement age is 60. The income is guaranteed for life, of course. (useful if you live to be 103 like my grandmother!) The teachers unions are very powerful so it is likely to remain one of the best.It may be possible to transfer your Australian pension into it. That might be a good idea of you are not going to return to Australia.

I would agree with jamesd that equity ISA's are a good place for your additional savings.

georgiasmum

Thank you thankyou to the folks who replied. Your advice is useful. I will overpay slightly, build up a cash buffer zone and invest. Thanks for your help!:beer: :beer: :beer:

clairehi

I would be interested to know whether anyone can shed any light on the OPs options regarding her AVCs?

If she is eligible to buy added years, I would think that these may in the long term provide better value than AVCs and have the benefit of being guaranteed. Can you just stop contributing to AVCs, and is it possible to transfer the existing pot to buy added years if you so wish? However once you start buying added years you cant stop later (so I believe) so you have to be careful you can afford it.

In any case the OP should ask her scheme administrator for a forecast of benefits at retirement age, and should also get a state pension forecast to help assess whether she is putting enough money aside for retirement.

georgiasmum

Useful advice. I've made maximum contributions since 1996 but only paid into the AVC since 1998, stopped and restarted in 2003. I will contact the Pru!

gillsfan_2

Hi Just joined - first post.

Sorry it's a long one but it is a subject close to my heart.

I joined because I'm researching the new pension tax rules that came into force this year and I this forum looks a good one.. Still finding my way around the site but I'm surprised I havn't found any 'stickys' on this.

Anyone ineterested in making this a sticky? How do you go about arranging that?

georgiasmum - seems to me that if you want to build up a cash lump sum, you need to check out the new rules.

As I understand it, you can now take up to 25% of your total pension(s) value as cash. Gordon gives a value to a final salary scheme as 20 x annual pension. Therefore, if you expect to retire on, say £20k pa, 20 x 20 = £400,000. If you can take 25% as cash and you don't want to touch your company scheme value (therefore the £400,000 is 75%) divide by 3 to get how much you can build up with tax free savings. This is £133,333. (your total pension(s) value is now £533,333). If you get a cash lump sum on your retirement, it counts towards the total value and towards the 25%.

If you are a basic rate tax payer, you can put spare cash into any number of schemes. For every 78p of your own money you put in, Gordon contributes 22p - that's an instant return of 28%. It gets better if you are a 40% payer. For every 60p you put in, Gordon gives you 40p - a 67% instant return!.

One of the previous replies suggested you would have to use 75% of the value of an AVC to buy an annuity - this is an important point. I don't see it that way. As I understand it, you can build up any number of 'pots' and when you retire, you can take up to 25% of the total of all the pots added together . Therefore, you can look at it as a high return savings scheme - the only downside i can see is that when people catch on to this and start piling their spare cash in, Gordon might get worried about the loss of tax revenue.

I'm quite exited about this as I see it as an opportunity to move tax that i would pay now into my own pocket for later. I've done a fair amount of research but I am looking for like-minded souls to discuss this with to test understanding of the new rules - there's not much in the way of decent info out there.

The more I look into this the more questions and potential opportunities arise. For anyone who is within a few years of retirement, the kids have flown, the mortgage paid off this seems to be a wonderful opportunity to make yourself cash rich on retirement - all at the expense of Gordon. It's made me think seriously about how I spend my money now - I now think in terms of everything costing 68% more than the price tag because of the lost opportunity.


gillsfan

EdInvestor

Hi gillsfan

I trust you do realise that pensions are taxable when you take the income on retirement, and that the only advantage to basic rate taxpayers is the 25% tax free cash (which may or may not still exist by the time you retire.)

To get that, you lose control and effectively ownership of your capital forever, cannot access any of your money before the age of 55, can then only extract 25%,with strict limits on the annual income you can take from the rest for the rest of your life.

Unless you are given free money by your employer, or are a higher rate taxpayer (they get an extra 18% on top) most of us don't think the benefits make it worthwhile putting up with these onerous restrictions.

We prefer to max out out ISA allowances instead, where we have taxfree access to all the income and the capital whenever we like.

dunstonh

The 25% pension commencement lump sum (as it is now called) is not guaranteed and could be removed. It has had press coverage saying it may be removed. Obviously that doesnt mean it will but it is an important fact that if you put your funds into a pension, they are stuck there until you retire. For reference, the NPSS coming in 2012 makes no reference to a lump sum benefit in the early draft proposals.

Utilising pensions up to your personal allowance and 10p band (at retirement) is sensible but beyond that, ISAs appear more attractive.

EdInvestor

Utilising pensions up to your personal allowance and 10p band (at retirement) is sensible but beyond that, ISAs appear more attractive.

Be sure to allow for the two state pensions in calculating the amount of taxable pension income you want.They will often use up most of the personal allowances.

gillsfan_2

Thanks for the advice.

I must admit, I am a bit puzzled why the new tax rules (and my employers scheme administrators) would highlight the fact that you can now take a 25% cash sum at retirement when there are already, within a few months of it's introduction, moves to do away with the facility.

Does anyone have references on this that I could look up?