Least Risk Pension Fund

Froggitt

Been looking at low risk investments for my mother on Hargreaves Landsdowne SIPP site. She's not that concerned about having stella growth, just that the money is still there and maybe worth a bit more in a few years time.

Something like BlackRock Cash Accumulation Units looks low risk, as do the other money market sector funds.......are they? What other low risk pension investments are out there? Maybe half in Cash fund and half in government gilts?

Suggestions welcome.

Annisele

How old is she, and how many years does she have until she retires?

I appreciate that - given that she's the mother of somebody who joined the forums in 2004 - she's unlikely to be 21. However, I'd say that cash is one of the riskiest pension investments there is for a 21 year old; it pretty much guarantees that they'll lose money in real terms.

I'm perhaps overegging things a little with the above, but I reckon that appropriate investments for a 40 year old intending to take benefits in 25 years might be very different to those for a 64 year old intending to buy an annuity in a year or two.

Froggitt

She's 71, and "my advice" to her is to bung an amount equivalent to her taxable earnings this year/next year/year after into a low risk pension fund, and buy an annuity at 75, rather than use the same money to buy an annuity now.

This gives her 20% taxback on her pension contributions, and even if inflation takes a couple of points off (as it would in a bank account), and charges another point or so, she's still in positive territory.

Thanks for your contribution Annisele......does my clarification help you understand my thinking? Is "my advice" good advice?

DavidHayton

Hi Froggitt,

General wisdom is that if you need the money within 5 years (e.g., to buy an annuity in 4 years time) you should stick to cash. You would need to consider the security of institutions in which the money is deposited and the yields after charges . Government gilts are probably not suitable since their capital value is affected by interest rate expectations. You seem to have done your sums regarding the tax advantage of delaying the annuity purchase.

David

Froggitt

consider the security of institutions in which the money is deposited

Indeed. These funds look like they have upto 10% in cash in some of the bigger banks. Are there any funds that have a much smaller exposure to any one bank, or should she spread the money over "loads" of different cash funds eg the Blackrock one, the Aberdeen one etc.

Are these the type of fund that you "should stick to cash" in?

gadgetmind

Froggitt wrote: »

She's 71, and "my advice" to her is to bung an amount equivalent to her taxable earnings this year/next year/year after into a low risk pension fund

Can someone clarify for me which taxable earnings do/don't qualify for tax relief when paid into a pension? Is it just tax on earned income from employment or does income from property rental and/or investment interest and/or pension drawdown count?

If people think this is off topic, I'm happy to start a new thread, but I feel this question may also be relevant to the OP.

Thanks

Froggitt

Thats a great question. Most of her taxable income is from final salary pension income, government pension, annuities, and from savings interest/investment dividend. Is that all allowable for tax relief on pension contribution?

dunstonh

Least risk (ignoring inflation risk and shortfall risk) is getting a real deposit account and using that with the SIPP. Most "real" SIPPs have easy access to savings accounts.

Gilts, whilst low in volatility, are probably about to enter a period that is not attractive to hold them for short term period.

Although at age 71, annuity purchase may be the lowest risk thing as there is now mortality drag. (noting that we dont know the objectives).

gadgetmind

A bit of googling suggests that pension income is treated as earned income, but interest and dividends on investments aren't.

I guess it's obvious that as much cash as possible should be in ISAs. Shares are less of an issue as there is no further tax on dividends for a basic rate tax payer, but shares outside of ISAs are a paperwork/admin hassle even for younger people!

You may also want to research Purchased Life Annuities, as these aren't subject to as much tax as other annuities as some of the payment is deemed to be return of capital. It might make sense to do this with the 25% PCLS (nee Tax Free Lump Sum) rather than using it all the buy a normal annuity.

And yet another complication is the age related personal allowance. Keeping taxable income from "all taxable sources" below that £24k cap is worth it if you can manage it. The margin tax rate if you stray above this is pretty nasty and might blow the doors off the whole plan. The benefit of this allowance is greater after 75, but the cap doesn't change. Nasty!

http://www.hmrc.gov.uk/incometax/personal-allow.htm

Of course, I am not an IFA, and everything I say might be wrong so (DYOR) Do Your Own Research.

westy22

Can someone clarify for me which taxable earnings do/don't qualify for tax relief when paid into a pension? Is it just tax on earned income from employment or does income from property rental and/or investment interest and/or pension drawdown count?

Up to age 75 anyone can put up to £3,600 gross (£2,880 net) into a pension from any (or even no) income source. Above that it must be 'earned' income i.e. salary or self employment profits. Investment income, property rental etc do not count.

gadgetmind

Am I right that pension annuity/drawdown income is also "earned" income? And what about royalty payments?

This stuff is are deeply complicated. I though it was bad enough having to do a VAT return while at university, but the thought of a complex tax return at age 75 is the stuff of nightmares.