To pension or not to pension? (comments appreciated)

12tonelizzie

To pension or not to pension? (comments appreciated)

dunstonh

1. Simpler. I don't have to research or set up a pension, or worry about whether I've got the right kind. (The ISA and/or CGT concerns don't count as a complication since I'll have to deal with them anyway.)

Pensions are just a tax wrapper like ISAs. So, the same investments for ISAs are available in pensions. No more complicated than ISAs.

2. There must be costs to the pension route (IFA? extra AMCs?) that I've not included above.

No different to ISAs.

3. I have the freedom to blow the money early in retirement if that seems like the right thing to do when the time comes.

That is why you still have savings and other investments.

atush

There is also perhaps an employers contribution. From a lowly 2-3% to the 20% some get. Free money beats no free money anyday lol.

Loughton_Monkey

Your OP is generally correct, with the possible exception that there is virtually no difference in 'setting up' or 'fund research' as between Pension and ISA. You'd go for pretty much the same funds under either wouldn't you? Absolutely no logic in doing otherwise.

So the Pension 'scores' on a technical basis by supplying 6.25% more money. The 'cost' of this is purely to do with flexibility and access to the funds. I know of no significant cost difference between setting up and maintaining a pension as opposed to an ISA.

I would add another point. You could use ISA funds to buy a 'purchased annuity', but this is extremely rare and so let's forget that. With a pension, it is [generally speaking] normal to use the remaining 75% of proceeds to buy an annuity. Hence it provides a form of 'insurance' for longevity - something a cash fund cannot do. Some people find this 'hits the spot'. Others put no vale on it. But it needs to be taken into account as a factor when deciding.

For 90% of us (I'm guessing) pensions are generally the favoured route. This is (a) because of the 6.25% more money, and (b) because the general objective of living in retirement is to 'spread' your 'fixed' resources over your remaining lifetime. A pension does this extremely well [or at least the annuity does!], but also provides the 25% cash [and you generally have other cash savings around] that give you sufficient 'freedom to blow' - as you eloquently put it.

kidmugsy

If income tax rates go up, your ISA is unaffected but your pension is hit. In these post-Brown years, do you really want to bet that tax rates won't increase?

An ISA effectively freezes your income tax rate at its present level.

hugheskevi

Saving such amounts and not benefitting from things such as higher rate relief, employer contributions or salary sacrifice, you can keep options open by saving into an ISA, and later on moving it to a pension - keeping freedom and the rewards of pension saving (hopefully getting more, as money can go into the pension when some of the things that make pensions attractive apply).

jamesd

It hasn't been necessary to buy an annuity within a pension since Alternatively Secured Pension drawdown was introduced in 2006. That's now been renamed to capped drawdown with some rule changes. You can take income as you would from an ISA, except that the maximum you can take out each year is capped by the GAD limit calculation. The way to get a higher than GAD amount out is to take benefits from the pension before you plan to take it and reinvest the money outside the pension. Then you can draw on the reinvested money later.

Places like Hargreaves Lansdown and Skandia show how close pensions and ISAs are, allowing both on the same platform. Skandia is cheaper long term of for larger amounts but requires paying an IFA some money to set it up. There are plenty of alternative options out there.

The ISA method has advantages if you will be a higher rate tax payer in the future. You may be able to get higher rate tax relief then instead of basic rate now, by moving the money from ISA to pension at higher rate. If you don't have a salary sacrifice pension scheme available now there might be a similar benefit in waiting, because of the NI saving on pension contributions via salary sacrifice.

jamesd

There are at least four different charges involved in pensions and ISAs:

1. Setup and annual subscription charges, usually explicit and clearly disclosed.
2. Adviser commission, typically about 0.5% of the pot value a year, charged pro-rate monthly by the funds you select and passed on to the adviser. This is intended to pay an IFA for ongoing servicing. HL doesn't provide the ongoing servicing but still takes the 0.5% in the SIPP. In the ISA or fund and share account it returns part of it. Buying Skandia or other products via an IFA for a fee lets you eliminate the ongoing 0.5% cost.
3. Platform charge. Like the IFA part is charged by the fund and rebated to the platform that lets you buy and manage your funds, typically 0.2-0.3%. This is the cut that platforms like Skandia and Hargreaves Lansdown normally are expected to keep. Some unbundled platforms like Transact don't keep this either but instead have an explicit charge for their service.
4. Fund management charge. The remainder of the fund management charge is kept by the fund management company and used to run the fund.

If I was to have all of my investments with Hargreaves Lansdown I'd be paying them many hundreds of Pounds a year in IFA fee that I can avoid by buying elsewhere via an IFA. The saving depends on the value of your investments so it's not so significant at lower pot sizes.

Skandia has an annual charge and that means the minimum size that makes sense at Skandia compared to HL is likely to be around £14,000 even before the IFA charge to set it up is allowed for. That IFA charge to get rid of the 0.5% pays off long term for larger amounts.

GAD is the Government Actuary's Department. When you are taking pension income from investments instead of an annuity there is a calculation that limits how much of your pension pot you can take out each year. This is normally called the GAD limit. The limit calculation based on life expectancy and the interest rate for 15 year duration UK government bonds (gilts). The calculation has to be done once when starting up then every three years until you reach 75, annually after that.

There are limits to how much money you are allowed to pay into a pension or ISA each year. An excess fund repayment charge is a charge by the pension or ISA provider for handling returning the excess to you. There's typically more than a small amount of work to detect and manage this, involving dealing with HMRC as well as you.

If you want to buy an annuity you have the usual ways to pay for the service of finding the best deal, commission or fee. The place you buy the annuity via should tell you how they are being paid at the start of the transaction, before you make any purchase decision. For annuities it's common to make a point of saying that there is no up front cost, just commission. But that commission can be a larger amount than a fee. So it can make sense to pay a fee instead and get a rebate of the commission or larger annuity payment. The same applies if you're buying an annuity with an ISA pot.

The delaying of paying money into a pension until later is mostly just for salaried people. The pension contribution limits are:

• No more than £50,000 a year (allowances unused from the past three years can be carried forward and used later)
• No more than your taxable income.
• Even if not enough taxable income, up to £3,600 a year gross can be paid in and will get basic rate tax relief.

You're right, salary sacrifice is a thing for employees or the self-employed. It means making a payment direct from the employer/self employed business into the pension instead of using PAYE. This saves the employee and employer NI.

Dave101t

exactly. pensions are complicated. which is why the government is setting up a national compulsory company pension scheme.
let them deal with it.
what do you think happens to those with no pension? the same thing that happens to those with no job...they get money regardless.

hugheskevi

Ah. So if I decide to shift a £40k lump into a SIPP at retirement, the taxman will still add on £10k and let me take £12.5k tax free? (I was under the impression that the sooner I started shifting money into a pension the better, so that I can get an annual tax relief allowance. Or is that just for normal salaried people?)

Yes, that's right.

There is no benefit from making annual contributions vs making a large lump sum contribution assuming everything else stays equal and you are disciplined (ie there is no higher rate tax, salary sacrifice, employer contribution and income tax rates remain constant). There are a few things to be careful amount, mainly making sure you have enough earnings toward the end of your life to feed enough into the pension.

This is because the advantage of a pension is tax relief, and if you put the money in an ISA, it (hopefully) grows, so when you move it into a pension you get more tax relief than you would otherwise have got if you put the original amount in a pension. That ends up being equal to having put it in a pension immediately, and having a higher amount to grow.

exactly. pensions are complicated. which is why the government is setting up a national compulsory company pension scheme.
let them deal with it.
what do you think happens to those with no pension? the same thing that happens to those with no job...they get money regardless.

Pensions are more complicated than they should be, but even so they aren't infathomable. The Govt. is setting up a compulsory scheme to counter the low numbers saving into a pension, but it won't be fully up and running until 2017.

The Govt. minimums will be very low, and the means-tested money given out is about £135 p/w for a single person (plus council tax benefit and possibly housing benefit).

That might be enough for some, but most would want a better standard of living, and pensions are likely to play a role in providing that.

dunstonh

My H-L ISA didn't cost me anything to set up. https://www.direct.gov.uk says to check "how much does the pension provider charge you for setting up your pension and for administration?" Cavendish charge £35 for starters and they're meant to be cheap. Are you saying I can get one without any charges?

You are not comparing like for like. The pension can be bought on an old style insurance contract (just like the ISA if you buy direct from the fund house) or it can be bought as a tax wrapper on a platform just as your ISA is.

Or are you talking about SIPPs? H-L claim their SIPP is free to set up; so how is Skandia even cheaper when they make you pay an IFA to set it up?

HL rebates a little trail commission on the ISAs and but none of their SIPP. You can pay an IFA to set a pension up where the trail is fully rebated. So, whilst you have an initial hit in setting it up, you will be better off every year thereafter.

Re complexity, SIPPs seem to have lots of factors that ISAs don't, like this on the H-L website. What's a GAD? What's an excess fund repayment?? How do I know if I want to commit myself to an annuity purchased via H-L or fork out £150 + VAT for someone else's? (The web is full of warnings against buying the wrong annuity, so presumably it's not straightforward.) Setting up my H-L ISA was FAR less complicated.

ISAs have limits. Pensions have limits. There are obviously going to be differences on tax wrapper rules as there are with all tax wrappers. If you look at the other tax wrappers, they all have variances in rules but you can invest in exactly the same funds.

If you want retirement planning to be simple, it can be. If you want retirement planning to be more advanced it can be. There are contracts to cater for both types.