Investments instead of a pension - anyone worked it out yet?

noblelord

Hi,

First post, so hello all

I've reached the ripe old age of 41 (nearly 42) and have had a lot of jobs in the technology sector. As such, I've ended up with 4 pensions that are collectively worth... not much! At 42, it seems pointless to try and build up a good pension now, so am considering a sort of 'blended' savings strategy with a mix of low and medium risk.

I'm lucky enough to be a reasonably high earner and could afford to put away at least 1500 pounds a month with an additional annual lump of 10K from a bonus. I have a few quid in an old cash ISA, a shed load of cash in the bank offsetting my mortgage and no debts to speak of, other than the mortgage... obviously

So what should I do? I have a handful of VCT's that I was advised to buy 6 years ago and all have been an unmitigated disaster, in one way or another. OK, they have tax advantages, but after 6 years, all are worth less than I put in and one of them is worth 30% of my initial investment!!! I was thinking of a monthly payment into a S&S ISA, maybe a lump into a cash ISA (but they don't seem to perform very well these days either!), and that's about as far as I got.

I do have a financial advisor I've used in the past, but he got me into the VCT's and everything else he's touched seems to have gone the same way

What do you think? Am I being daft trying to 'go it alone'? Should I just bite the bullet and put my life in the hands of a pension provider? Should I buy some property/bonds/etc... put cash into offshore accounts?

Thanks in advance...

NL

bendix

Why is it pointless to build up a pension from 42, particularly when your other options seem to be long term investments in stocks and shares too, yet foregoing the tax benefits that you would enjoy as a high earner?

Doesnt make sense.

noblelord

bendix wrote: »

Why is it pointless to build up a pension from 42, particularly when your other options seem to be long term investments in stocks and shares too, yet foregoing the tax benefits that you would enjoy as a high earner?

Doesnt make sense.

You're right about the tax benefits, but isn't that going to change soon for high rate tax payers? I guess I'm wary of being tied into something that I have no control over, and from what I've read, it's going to take a lot of cash to build anything half decent.

Excuse my ignorance, but would I still be forced to buy an annuity at the end of my term or are there options to take the cash and do what you want with it?

NL

Pachira

You've 25 years til you reach state retirement age - that's still ample time to save for a decent pension!

You can also use drawdown instead of annuity purchase:
http://www.pensionsadvisoryservice.org.uk/personal--stakeholder-pensions/income-drawdown-plans

And if your pension income exceeds £20k p.a. then you could benefit from new flexible drawdown:
http://www.investorschronicle.co.uk/InvestmentGuides/Pensions/article/20110111/a3eb130a-1d9a-11e0-a809-00144f2af8e8/Flexible-drawdown-too-good-to-be-true.jsp

Stochasticity

noblelord wrote: »

You're right about the tax benefits, but isn't that going to change soon for high rate tax payers? I guess I'm wary of being tied into something that I have no control over, and from what I've read, it's going to take a lot of cash to build anything half decent.

Excuse my ignorance, but would I still be forced to buy an annuity at the end of my term or are there options to take the cash and do what you want with it?

NL

As a higher rate taxpayer, you get tax relief at 40% on your pension contributions. That is, for every £60 you pay into your pension, the government will top it up to £100.

You can take 25% of your pension fund value tax-free. Your pension fund probably won't be large enough to pay you a pension that would leave you taxable at 40%, so you'll be a basic rate taxpayer in retirement. You'll also benefit from your tax-free personal allowance.

Pensions therefore are massively tax advantageous for you as a higher rate taxpayer, much more so than saving for your retirement within a S&S ISA.

You're mistaken that you can't have any control over your pension. A pension is just a tax wrapper, just like a S&S ISA is just a tax wrapper. You can often hold the exact same underlying investments within either a pension or a S&S ISA.

Yes, you can leave the investment choice to your pension provider, in which case you will have little control. But you can also invest in a personal pension and have much more input into selecting the funds in which you're invested, and if you want to be in even more control you can invest in a SIPP.

When it comes to drawing your pension, you are not obliged to take an annuity. An alternative is income drawdown - your pension remains invested and you can withdraw money from your pension fund slowly over time subject to a number of restrictions.

I'd recommend having a read of this book to get your head around things - http://www.amazon.co.uk/Financial-Times-Pensions-Wealth-Retirement/dp/0273727850/ref=sr_1_1?ie=UTF8&qid=1298570413&sr=8-1 - or find an IFA that specialises in retirement planning.

calypso_rhapsody

I agree - a pension would seem the obvious choice ... either personal or SIPP depending on whether you want more investment freedom than choosing from the pension providers range of funds offered ....

Given the amount you have available each year to invest, ISAs will only provide a tax shelter for part of it. If i were you, i'd put what i regard as my retirement savings into a pension and let the taxman boost my savings via tax relief and use ISAs to protect long term savings that i might want to get access to before retirement (eg moving house, paying for daughter's wedding etc ...)

I don't know the book that has been recommended but certainly some reading/research is well worthwhile - even if in the end you do use an ISA you'll be able to understand their advice. Also keep an eye on any changes in the budget each year!

dunstonh

so am considering a sort of 'blended' savings strategy with a mix of low and medium risk.

You do realise that you would do the same in a pension?

The investment options are the same regardless of whether you use a tax wrapper or not. So, if the pension tax wrapper is best, then use it. If the ISA tax wrapper is best, use that. If neither are best then go unwrapped.

I have a handful of VCT's that I was advised to buy 6 years ago and all have been an unmitigated disaster, in one way or another.

High risk specialist investments. Potential to make a fortune if they pay off but can end up really poor if they don't. That is very much nature of the beast.

OK, they have tax advantages, but after 6 years, all are worth less than I put in and one of them is worth 30% of my initial investment!!!

30% loss on a VCT is no big deal.

I do have a financial advisor I've used in the past, but he got me into the VCT's and everything else he's touched seems to have gone the same way

When did you start investing with this adviser? If its not a long term relationship then that may explain your poor perception of returns. After all, we have had a 45% stockmarket crash and it wouldnt have mattered if you DIY or use an IFA if you invest in the same places. If you cant handle a simple 30% loss on paper then the issue is more about your risk profile and your lack of understanding.

Should I just bite the bullet and put my life in the hands of a pension provider?

The pension provider will ask you how you want to invest or tell you to get an IFA.

Should I buy some property/bonds/etc... put cash into offshore accounts?

what objectives would they meet?

and from what I've read, it's going to take a lot of cash to build anything half decent.

Correct. However, that has nothing to do with the tax wrapper. The fact is that nothing beats a pension for income provision out of the conventional tax wrappers. If you only have peanuts in your pension you will only get peanuts as income. Same with ISA or any other tax wrapper or bank account for that matter. These things are only as good as the amount you pay in.

I think at the moment, your problem is one of a lack of understanding of how and why. You dont need to know specifics (unless you DIY) but it would help to know a little as at the moment you are a bit scattergun in what you are saying and its clear you really dont know the subject. So, making any decisions of importance without knowing what you are doing is only going to hurt you.

noblelord

dunstonh wrote: »

You do realise that you would do the same in a pension?

The investment options are the same regardless of whether you use a tax wrapper or not. So, if the pension tax wrapper is best, then use it. If the ISA tax wrapper is best, use that. If neither are best then go unwrapped.



High risk specialist investments. Potential to make a fortune if they pay off but can end up really poor if they don't. That is very much nature of the beast.


30% loss on a VCT is no big deal.


When did you start investing with this adviser? If its not a long term relationship then that may explain your poor perception of returns. After all, we have had a 45% stockmarket crash and it wouldnt have mattered if you DIY or use an IFA if you invest in the same places. If you cant handle a simple 30% loss on paper then the issue is more about your risk profile and your lack of understanding.



The pension provider will ask you how you want to invest or tell you to get an IFA.


what objectives would they meet?



Correct. However, that has nothing to do with the tax wrapper. The fact is that nothing beats a pension for income provision out of the conventional tax wrappers. If you only have peanuts in your pension you will only get peanuts as income. Same with ISA or any other tax wrapper or bank account for that matter. These things are only as good as the amount you pay in.

I think at the moment, your problem is one of a lack of understanding of how and why. You dont need to know specifics (unless you DIY) but it would help to know a little as at the moment you are a bit scattergun in what you are saying and its clear you really dont know the subject. So, making any decisions of importance without knowing what you are doing is only going to hurt you.

Thanks to all of you for the comments... It certainly has made me think again about my options!

A couple of things dunstonh; the VCT I refer to is worth 30% of my initial investment, not 70%. Either way, I accept that they're high risk and I should have given them more thought before taking the plunge.

You're right... I don't know the subject, so the advice on here has been a good starting point for me. The IFA I refer to has been advising me on and off for 20+ years. To be fair, I think I may just have been unlucky in my timing, but this is a more key decision for me now as I'm married with kids and need to start taking my finances seriously.

I guess one of the issues that I didn't mention in my op was the one of control. If my retirement planning is all in ISA's, bonds, etc, I sort of feel more in control in that, should I ever need to, I could cash in and get access to funds. The pension route feels more 'terminal' in that, as far as I'm aware, the funds are pretty much tied up until I retire.

I guess I need to understand the pension products a little better before I make any moves. At the end of the day, I have somewhere in the region of 35-40k across the 4 pensions I do have, so maybe consolidating them into one pot to start with might make sense.

Thanks,
NL

dunstonh

If my retirement planning is all in ISA's, bonds, etc, I sort of feel more in control in that

Yes. However, the fact is that it will product a lot less income in retirement than the pension. Especially as a higher rate taxpayer.

£100k in a pension has cost you £60,000. 60k in an ISA has cost you £60k. If both pay an income of 5% then the you get £5000 in the pension and £3000 on the ISA. ISA is tax free. Pension is not but if its all taxable then its still £4000 net (but you get your personal allowance which with a husband and wife with split planning means you can earn £20k a year at 65 tax free, so it could all be tax free with good planning). Plus, you can take 25% of the pension out tax free and then put it into tax efficient investments in retirement (such as using your ISA allowance with the pension lump sum).

Death benefits on a pension are now much better. You get hit for a tax on death after retirement but it only equates to the Govt taking back tax relief and you not paying any IHT on it.

For most people a combination of things is best. There is no perfect one product/tax wrapper that does everything. Rule out pensions at your own cost. Go 100% into pensions at your own cost.

You're right... I don't know the subject, so the advice on here has been a good starting point for me. The IFA I refer to has been advising me on and off for 20+ years. To be fair, I think I may just have been unlucky in my timing, but this is a more key decision for me now as I'm married with kids and need to start taking my finances seriously.

Timing is the most common reason for losing money in the short term. Not who you use. If you invested in 2007 then in 2009 you would have suffered around a 45% loss with equities. If you invested in 2009 then you could be 70% up. If you used an adviser for the first and DIY on the second you would think the adviser is rubbish. If you DIY on the first and used an adviser on the second you would think you found the best adviser going. The most important thing is to know what is available, know your risk profile, know your objectives and the best way to achieve them. Even if you use an IFA you should always try and understand at least the basics. That means investing some time as well as your money.

noblelord

dunstonh wrote: »

Yes. However, the fact is that it will product a lot less income in retirement than the pension. Especially as a higher rate taxpayer.

£100k in a pension has cost you £60,000. 60k in an ISA has cost you £60k. If both pay an income of 5% then the you get £5000 in the pension and £3000 on the ISA. ISA is tax free. Pension is not but if its all taxable then its still £4000 net (but you get your personal allowance which with a husband and wife with split planning means you can earn £20k a year at 65 tax free, so it could all be tax free with good planning). Plus, you can take 25% of the pension out tax free and then put it into tax efficient investments in retirement (such as using your ISA allowance with the pension lump sum).

Death benefits on a pension are now much better. You get hit for a tax on death after retirement but it only equates to the Govt taking back tax relief and you not paying any IHT on it.

For most people a combination of things is best. There is no perfect one product/tax wrapper that does everything. Rule out pensions at your own cost. Go 100% into pensions at your own cost.



Timing is the most common reason for losing money in the short term. Not who you use. If you invested in 2007 then in 2009 you would have suffered around a 45% loss with equities. If you invested in 2009 then you could be 70% up. If you used an adviser for the first and DIY on the second you would think the adviser is rubbish. If you DIY on the first and used an adviser on the second you would think you found the best adviser going. The most important thing is to know what is available, know your risk profile, know your objectives and the best way to achieve them. Even if you use an IFA you should always try and understand at least the basics. That means investing some time as well as your money.

Thanks dunstonh... good advice.

Do you (or anyone come to that) happen to know if there's some sort of online pension calculator which will give me some sort of indication of how much I'd need to pay into a pension over 25 years to get an income at the end of X in today's money? I know there are many variables in this due to the nature of the stock market, but some trend data must be around to make this possible.

Another question; what happens to my pension pot if I die before reaching retirement age? Is there some way of ensuring my family benefit from it? I guess it's next to irrelevant after 2-5 years, but mighty important after 20+ years if I've been ploughing cash into it!

Lastly, and on a totally different subject, does anyone know if you can offset income from a rental property against the mortgage/running costs? I'm also considering buying our 'retirement cottage' now and trying to run it so that, come retirement, we have a mortgage free house that we can move into after selling our main home thus banking some cash towards our retirement fund. I assume that, by selling our primary residence in this scenario, we wouldn't have to pay CGT on it?

Thanks,
NL

dunstonh

Do you (or anyone come to that) happen to know if there's some sort of online pension calculator which will give me some sort of indication of how much I'd need to pay into a pension over 25 years to get an income at the end of X in today's money? I know there are many variables in this due to the nature of the stock market, but some trend data must be around to make this possible.

There are a few free ones but you need to be careful the assumptions used are sensible and your understand the assumptions. Some give some really poor figures out when they leave off things like indexation or inflation. I dont use any of the free ones as the software ones IFAs have are more detailed and accurate (as much as projections taking into account unknown inflation and unknown investment returns can be!)

Another question; what happens to my pension pot if I die before reaching retirement age? Is there some way of ensuring my family benefit from it? I guess it's next to irrelevant after 2-5 years, but mighty important after 20+ years if I've been ploughing cash into it!

If you die before retirement, the full fund value is paid to your nominated beneficiary (outside of estate for IHT purposes and no tax payable). If you die after retirement and assuming you went unsecured pension option, the remaining fund value can provide a pension for spouse for the rest of her life or taken as a lump sum in one go with a 55% tax charge. On her death the remaining value can go to children minus a 55% tax charge. 55% sounds high but remember you have had 40% relief going in. Years of tax free growth. 25% tax free out when you get there and a continuation of tax free investments and you avoid paying IHT on it as well. So, when you factor all that in, 55% can actually be very good value for money and better than an ISA potentially.

Lastly, and on a totally different subject, does anyone know if you can offset income from a rental property against the mortgage/running costs?

Some things would be offset against capital. Some things against income. The mortgage interest is offset against income.