Where to start with pensions

mattih5

Hi,

I'm 23 and have been working for a year upon graduating, I have been contributing the full amount in ISA's for 3 years now and have some more cash to invest other than £250 a month - approximately another £80.

For a couple of months I have been contributing this £80 as part of a pension just by dumping it in a high interest account.

However, I would like to start an official pension with a provider, but I am completely confused by the options available. I have heard of SIPPS and get regular mail saying if I was to contribute so much, the Government will contribute the rest.

What is the best option for me, to continue just saving into a regular saver or open an official pension scheme? What are the benefits of contributing to pension over a savings scheme? Does a pension schemem basically mean I can't touch the money until a certain age?

I was thinking of contributing this extra money to an Index Tracker or some form of stock market investment. Can pensions be wrapped in an ISA?

Regards,

Troubleatmill_2

A pension is a tax wrapper
An ISA is a tax wrapper.

The word "pension" is generally used as a phrase as "save for retirement".
( which in truth is kind of true - as you can't touch the funds until you retire )

A pension may or may not be suitable for you.

Are you a higher rate tax payer?
Does your company run a contributary scheme?

If you can post more details about your salary, company schemes etc - the fonts of knowledge that haunt these boards will be able to guide you better.

Best
Troubleatmill

dunstonh

What is the best option for me, to continue just saving into a regular saver or open an official pension scheme?

a savings account is for short term savings and a pension is a tax wrapper which is designed to put investments into which can mature when you retire.

Savings are not suitable for the long term. Historically, they dont keep up with inflation.

I was thinking of contributing this extra money to an Index Tracker or some form of stock market investment. Can pensions be wrapped in an ISA?

A pension is wrapper. An ISA is a wrapper. You cannot wrap the wrapper inside another wrapper. No point either as the same funds that are available with ISAs are available with pensions and both wrappers are tax free. So there would be nothing to gain.

What index tracker did you have in mind? Depending on what type of pension you go for, your investment funds available will be different. A tracker in a SIPP could be an expensive option.

mattih5

Hi,

Thanks for your replies.

The company I work for is small and don't offer any type of pension scheme. I earn £18,000 a year and try to save as much as I can.

btloptingout

mattih5 wrote:

Hi,

Thanks for your replies.

The company I work for is small and don't offer any type of pension scheme. I earn £18,000 a year and try to save as much as I can.

If your company is not making any contributions, you are only 23 and earning £18K a year I would anticipate a pension is not high on your list of savings priorities.

Personaly speaking (this is not advice) I would focus on using your ISA allowance up. This way you can access the funds for those key points in your life: property, marriage, career progression/change.

Since A day there is plenty of opportunity to bulk up on your pension when/should you become a HR tax payer.

Edit: In your post you say you have £330 pcm to save of which you are putting £250 in a cash ISA and £80 in a high interest account. That's probably the best thing to be doing! Though you can of course place up to £7K in an ISA, through a mix of stocks/shares & cash.

EdInvestor

Start thinking about your investment ISA allowance - this is another 4k on top of the 3k savings ISA allowance.

This money would be invested in stockmarket-related long term investments.Trackers are one option.

You might like to look at the Selftrade Ishare plan.This enables you to invest in Exchange traded funds - a new type of tracker which is cheaper than a tracker fund - in their ISA which costs only 25 quid a year. These ETFs cover a wide range of markets now, not to mention other asset classees such as bonds. The IUKD ETF is worth a look IMHO - it pays a high dividend of around 4%, almost like having a savings account with the hope of capital growth as well

https://www.selftrade.co.uk

If you can get someone to recommend you as a member, you will get an extra 50 quid, which will pay the fee for two years.See the MSE referrals board.

wotsthat

I have heard of SIPPS and get regular mail saying if I was to contribute so much, the Government will contribute the rest.

Sort of... the government only give you back the tax you have already paid on your contribution and for this 'generosity' they impose restrictions on what you can do with the pot and tax you on any income you draw - I was mesmerised for years by the tax rebate until I woke up.

In my view, unless you are a higher rate tax payer AND your company makes a contribution, it's best to exhaust ISA limits in the first instance. However, the big disadvantage of ISA's for retirement saving, especially when retirement seems such a long way off, is that you may be tempted to spend it on something you 'need'.

mattih5

Thanks for the advice.

I think perhaps the advice is wise to focus on using my ISA allowance, this way I have access to the funds if needs be. I just thought that maybe contributing £50 a month (which i don't think i would notice) would give me a grounding over years to come. I've heard of the full £7,000 ISA allowance but never gone down that route and have tended to just utilise the Cash Mini ISA allowance.

Can I still utilise my £3,000 allowance the way I am doing it i.e. With various providers and then put another £4,000 in with another provider or does the full amount have to be with the same provider?

Also, there is risk then placed on the £7,000 isn't there.

I do try and do as much SpreadBetting as I can - obviously there is a lot of risk involved in this but the returns are tax free/stamp duty free. This Seltrade thing, I take it this is dealing direct with shares, which involves tax and stamp duty?

A tracker is the same as a Index Tracker isn't it? I have thought about this previously in the past but the downside risk puts me off, also, what with the bull market of the last couple of years. I suppose there is also the benefit of Pound cost averaging if the market slides.

EdInvestor

This Seltrade thing, I take it this is dealing direct with shares, which involves tax and stamp duty?

No stamp duty, no dealing fee and no taxes, as in ISA.

The market still hasn't recovered to ite pre crash peak in 1999, so I wouldn't worry too much.

jamesd

You can and should use different providers for any cash ISA savings and stocks and shares ISA investing if you are using any cash part. The current limits are up to 3000 in cash plus up to 4000 in stocks and shares (meaning funds in practice) or usually 7000 in stocks and shares (technically can have cash, doesn't usually).

Within a stocks and shares ISA it's normal to have 50 per fund minimum monthly investments and you would want to split into as many different funds in different parts of the world and parts of the stock market as possible.

It's worth noting that EdInvestor tends to favor low fee options even when higher costs could produce higher returns. Trackers aren't the best option, generally speaking, since you can pick non-tracker funds that do better than the average fund.

What you might consider doing for long term results is first using all of the mini stocks and shares allowance, then putting the extra into cash.

The split between stocks and shares and cash ISAs may change in the budget this year, there's talk that you will be able to choose anything up to 3000 in cash and all of the rest could go into stocks and shares, so 1000 cash 6000 stocks and shares splits would be doable.

mattih5

Yes, I have always used a different provider each year, although I keep meaning to move my Bradford & Bingley balance as the rate is poor compared to some of the new ones.

Splitting the fund will stop me from having my eggs in all one basket and exposing myself to different markets.

Do you have any examples of providers of these funds? I'm not too bothered on costs if the gain could be more.

That would be useful if the budget allows for that type of control over cash/stock and shares isa.