Self employed, personal pension

gbgeer43

Hi everyone

I'm 29 and a self-employed IT contractor. Over the past few months I've been really meaning to get a pension sorted as the sooner I start the better. Oh and I do have a student loan still hanging around as well.

I've been reading up on the differences between stakeholders and personal pensions and it seems stakeholders are just the average and "safe" offerings of personal pensions. Because I'm still a fairly long way off from retiring I think it makes sense to do riskier investments earlier, so that any fluctuations in markets have more time to stabilise. So I've been considering going for a personal pension over a stakeholder as I quite like the idea of having more fund options to choose from as well. And I'm sure I don't have the time or knowledge to make good use of a SIPP.

I'd be looking to contribute at least £100 per month of my income. Usually I'd be looking to put £200 in but I'd like the flexibility to vary the amount above a £100 minimum.
1) I understand that stakeholders are much more flexible than that, with the ability to stop/start payments as needed. But is the level of flexibility I've outlined above typically available with personal pensions?

One thing that concerns me are annual charges. With a stakeholder you're guaranteed a maximum annual charge of 1.5% decreasing to 1%.
2) What sort of annual charge rates should I expect from a personal pension?

3) I've read that you can get lower annual charges for stakeholder pensions by going through a discounter. Is that possible with personal pensions as well? That's something that would definitely appeal.

4) Do personal pension providers vary wildly, or is it quite a competitive market... meaning the offerings are all pretty similar?

5) Is anyone aware of any particularly good deals? Or maybe I should say, particularly bad deals that are best avoided?
Or is it a case of just calling round providers and getting quotes?

6) So I believe you get basic tax relief on your pension contributions. But how does that actually work? Is there a box on my self-assesment tax return form where I enter my pension contribution, then that amount is deducted from my taxable income? I just can't remember from filling it in in previous years and my previous paperwork is in a different country.

7) Finally (for the moment) am I right in thinking that stakeholders are going to be deprecated / re-branded or replaced in the next couple of years?

Thanks in advance!
ISA rates are so terrible right now that my partner and I have been overpaying on our mortgage like mad. But I'd like to try and get a pension sorted so I can start contributing to that sooner rather than later.

Cheers, B

CannySaver_2

Hi

A few thoughts:

1. Personal Pension Plans are not pretty much as flexible as Stakeholders in terms of your ability to vary contributions

2. It would be wrong to say Stakeholders are generally cheaper than Personal Pension Plans, there are many PP's which are now cheaper than Stakeholders

3. It would also be wrong to say Stakeholders are 'safe' with the inference that Personal Pensions are not. The 'safety' or investment risk is down to the funds you choose, for example, a Stakeholder investing in a emerging market fund would be more volatile than a Personal Pension investing in a Cash fund

4. You are right that you should take more risk the further you are away from retirement

5. You are right to focus on charges, but don't just go for the cheapest, look for value for money. The reduction in yield on a pension (which is about the only way of comparing all charges, even then it is not perfect) can vary on a pension contract between almost zero to between 2% and 3% (personally I wouldn't accept anything above about 1.5%). But is it simportant to note that the performance of your chosen fund / s could vary by far wider margins. You should therefore focus as much time, if not more, on performance as you do charges. Too many people just look at charges and then invest in a dog fund which produces no return.

6. Tax relief depends on who will make your contribution. When you say you are a self employed IT contractor, are you actually self employed or do you work through your own limited company? The answer to that may dictate whether you or your 'employer' (your own company) should make the pension contributions.

I hope this helps.

The Canny Saver

fairleads

gbgeer43
You are obviously a go ahead person which begs the question why delegate this important responsibility/obligation to a third party? Secondly, why limit your retirement saving options to just pensions? Thirdly tax legislation can be changed, how will that affect you 25 years hence? We don't know do we, and if we don't know or understand a situation it's best avoided until we do, at least, understand the basics. Do some research before committing - yes, even it it takes a year. Good luck

jem16

gbgeer43 wrote: »

6) So I believe you get basic tax relief on your pension contributions. But how does that actually work? Is there a box on my self-assesment tax return form where I enter my pension contribution, then that amount is deducted from my taxable income? I just can't remember from filling it in in previous years and my previous paperwork is in a different country.

What is your tax status just now - higher or basic rate?

ISA rates are so terrible right now that my partner and I have been overpaying on our mortgage like mad. But I'd like to try and get a pension sorted so I can start contributing to that sooner rather than later.

I'm assuming you are talking cash ISAs here. Have you thought of using S&S ISAs?

gbgeer43

Hi everyone
Thanks for the info so far.

Basic rate tax payer and properly self-employed. Not a ltd company so I would be making my own pension contributions.

I hadn't thought of S&S ISAs, just assumed that the interest rate wouldn't be better than overpaying on our 4.3% mortgage. I only just noticed that my cash ISAs had been a joke for the past 2 years so I ploughed it all into our mortgage and cut a surprising amount of time off!

In terms of the yield. I had no idea there would be a mandatory reduction in the yield percentage throughout the term of the pension as well as an annual charge. Would that information be given in pension quotations?

Is it possible/advised to use a discounter for personal pensions? Or are they only for stakeholders?

Cheers

CannySaver_2

gbgeer43 wrote: »

In terms of the yield. I had no idea there would be a mandatory reduction in the yield percentage throughout the term of the pension as well as an annual charge. Would that information be given in pension quotations?

Just to clear this point up the reduction in yield figure includes the annual management charge.

The reduction in yield is supposed to be a guide to all charges paid, expressed as a percentage.

The Canny Saver

jem16

gbgeer43 wrote: »

I hadn't thought of S&S ISAs, just assumed that the interest rate wouldn't be better than overpaying on our 4.3% mortgage. I only just noticed that my cash ISAs had been a joke for the past 2 years so I ploughed it all into our mortgage and cut a surprising amount of time off!

S&S ISAs don't have an interest rate. They invest in the same funds as a pension does. The only difference is how the tax is handled on the way in/out.

As you are a basic rate taxpayer with no employer contributions I would say to use a S&S ISA just now and then later, when you may be a higher rate taxpayer, use a pension.

The basic idea is that you make good use of your tax-free personal allowance which at age 65 is £9940. As a self employed person you will only have the basic state pension so will still have around £4.5k left to use up. If you can organise your pension to pay that extra £4.5k, you will have gained from tax relief on the contributions and no tax payable in retirement.

In terms of the yield. I had no idea there would be a mandatory reduction in the yield percentage throughout the term of the pension as well as an annual charge. Would that information be given in pension quotations?

The RIY basically is the annual charge plus all associated charges and their effect on reducing the yield of the funds within your pension. The pension quotation will show the RIY and that is how you compare them - it's a bit like the APR on savings accounts.

Is it possible/advised to use a discounter for personal pensions? Or are they only for stakeholders?

The likes of Cavendish Online also have discounts for personal pensions. However be aware that an IFA, with full servicing, can beat these charges with the amount you are considering investing.

gbgeer43

I think I understand.

So it's not as if personal pension contributions are tax deductibles - meaning that I don't pay tax on the money I contribute? So my immediate taxable income wouldn't be reduced by saving into a pension?

Because S&S ISAs offer tax free income now, I should be making use of that. As I can only get that element of tax relief once. But I will have paid tax on the money that goes into an ISA.
If there are no annual management charges with an S&S ISA to gradually cream off the top, then that's another benefit.
Then once I've got a big enough pot in an S&S ISA, then I could just dump that all into a personal pension at a later stage.

I thought the annual management charge would be the only regular charge.
What other annual/regular charges would/could there be?
Obviously I'd expect one-off charges for other actions like transfers, migration to other products, change of funds etc.

How much does an IFA cost? Ball-park figure?
It would almost certainly be worth it to reduce the annual charge percentage though.
How do I get one?

Cheers

CannySaver_2

gbgeer43 wrote: »

So it's not as if personal pension contributions are tax deductibles - meaning that I don't pay tax on the money I contribute? So my immediate taxable income wouldn't be reduced by saving into a pension?

I'm afraid you are mistaken, pension contributions do attarct tax relief, that is one of the major advantages of this type of saving.

The Canny Saver

jem16

gbgeer43 wrote: »

I think I understand.

So it's not as if personal pension contributions are tax deductibles - meaning that I don't pay tax on the money I contribute? So my immediate taxable income wouldn't be reduced by saving into a pension?

Yes your immediate taxable income is reduced by making pension contributions - you get 20% tax relief as a basic rate taxpayer. However pension income is taxable when you take it so any tax relief is cancelled out at the other end apart from your tax-free lump sum and the amount below your personal allowance.

Because S&S ISAs offer tax free income now, I should be making use of that. As I can only get that element of tax relief once. But I will have paid tax on the money that goes into an ISA.

Basically with an ISA, you pay tax on the way in but all growth is tax-free and when you take anything from it, it is tax-free.

If there are no annual management charges with an S&S ISA to gradually cream off the top, then that's another benefit.

No - a S&S ISA uses exactly the same kind of funds as a pension with exactly the same amc.

Then once I've got a big enough pot in an S&S ISA, then I could just dump that all into a personal pension at a later stage.

Not quite. The idea would be to build up your S&S ISA pot and then when you are a higher rate taxpayer, you start paying into a pension, either instead of or in addition to. You can make lump sum payments into the pension but only up to £50k as far as tax relief goes. If you do make a lump sum payment you would only make it as much as the higher rate tax that you pay.

The idea is to get more tax relief going in than coming out. So either basic rate relief going in and no tax coming out or higher rate tax going in and either no tax or 20% tax coming out.

I thought the annual management charge would be the only regular charge.
What other annual/regular charges would/could there be?

The TER is a closer indication of charges with pensions but even that doesn't include everything.

Have a read of this;

http://www.oldmutual.co.za/documents/UT08Forms/TER.pdf

But remember all funds have a TER, not just pension funds.

Obviously I'd expect one-off charges for other actions like transfers, migration to other products, change of funds etc.

Fund switches are often not chargeable.

How much does an IFA cost? Ball-park figure?

Up to £2k but could be much less - depends on amounts involved.

It would almost certainly be worth it to reduce the annual charge percentage though.
How do I get one?

Cheers

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gbgeer43

CannySaver wrote: »

I'm afraid you are mistaken, pension contributions do attarct tax relief, that is one of the major advantages of this type of saving.

Ok that's great. Exactly what I thought, then got confused

So the best way would be to pay into a combination of S&S ISA and personal pension.
Pay into a pension up to the point that my pension income + basic state pension = my over 65 tax free allowance.
But also pay into an S&S ISA to give me extra tax free allowance. So I pay no tax when I'm over 65?