Starting a pension

Ante101

Hi,

I could use some advice about pensions, as I'm not very knowlegable on the subject. I don't currently pay into a pension, and thought it was about time I started planning for my retirement. Here's some details about my situation:

I'm 30, earn £32,000 a year, have ~£30,000 in savings (~£15k in cash ISAs, the rest in savings accounts). I would like to buy a house soon-ish (in the next couple of years or so), so don't want to take too much away from the deposit pot. My workplace doesn't offer a pension scheme, and has <50 employees, so probably won't be offering one until 2016.

I went to see an IFA, who suggested I set up a pension through them, but I was a bit put off by the fees. He said there would be a £350 set up fee, a 1% management fee, and they would take 4.5% of contributions. Seems a bit steep to me! Is this normal?

I spoke to another IFA over the phone, who actually steered me away from setting something up through them, and suggested I just go with one of the big providers (Standard Life, L&G etc.) instead. He also said I might be better off with a stocks & shares ISA instead of a pension.

So I'm not sure what to do.

Assuming I do go for a personal pension, would it be better to do so through an IFA? Are the IFA fees generally worth it in terms of investment returns compared to one of the big providers?

The IFA I saw said that part of the service would be a 6-monthly review of the investment portfolio. If I didn't go through an IFA, would I have to sort this out myself? I don't know the first thing about choosing investment funds.

Is a pension even the right way to go?

Any advice would be appreciated!

Many thanks.

dunstonh

I went to see an IFA, who suggested I set up a pension through them, but I was a bit put off by the fees. He said there would be a £350 set up fee, a 1% management fee, and they would take 4.5% of contributions. Seems a bit steep to me! Is this normal?

That seems a mixture of commission, fee and fund charges.

Is it normal? depends on the amount involved.

I spoke to another IFA over the phone, who actually steered me away from setting something up through them, and suggested I just go with one of the big providers (Standard Life, L&G etc.) instead. He also said I might be better off with a stocks & shares ISA instead of a pension.

This would probably indicate that the amount was very small and not cost effective to use an IFA. So, this one is telling you not to bother with an IFA whilst the first one is probably reflecting the cost of advice which appears expensive with a small premium.

Assuming I do go for a personal pension, would it be better to do so through an IFA? Are the IFA fees generally worth it in terms of investment returns compared to one of the big providers?

You are mixing things up a bit. An IFA is an adviser and places the business with a "big provider". So, you get the investment returns of the investment funds you utilise. I very much doubt an IFA will be able to add value to someone with no existing pension unless its a sensible contribution amount and even then it may take some years.

That said, some IFAs would be able to place a pension cheaper than you going direct to provider depending on your contribution level.

IFA is a classification of adviser that relates to their status and qualifications. However, there are many business models out there. Some will focus on different parts of the market. If you phoned a wealth management firm then you will get what appear higher fees as they are typically geared to those with say £200k plus.

The IFA I saw said that part of the service would be a 6-monthly review of the investment portfolio. If I didn't go through an IFA, would I have to sort this out myself? I don't know the first thing about choosing investment funds.

If you dont use an adviser then you have to do it yourself. However, a 6 month review is unnecessary and overkill. You typically dont need that level of review until you get to around £500k.

Is a pension even the right way to go?

Possibly. Possibly not. We dont know your circumstances, needs, objectives or personality.

What is the monthly payment you are looking to make?

jamesd

Ante101 wrote: »

I spoke to another IFA over the phone, who actually steered me away from setting something up through them, and suggested I just go with one of the big providers (Standard Life, L&G etc.) instead. He also said I might be better off with a stocks & shares ISA instead of a pension.

That may well be good advice - seems as though he'd decided that it wouldn't be economic for you to use an IFA and not to charge you relatively high charges at this point compared to the amount of money involved - a kind move most likely.

Given your situation with a need for a deposit in a couple of years your lowest risk and most sensible option is probably savings accounts and NS&I inflation-linked certificates.

Think about investing longer term once you have the property deal done. But in the meantime, start putting away as much as you would be investing long term, so you get started on that habit.

You might also start discussing pension options with work, since they and you can save money from them having a pension set up. One way that saves you both money is to use salary sacrifice. This is a nominal reduction in your salary that saves you the employee NI and them the employer NI. Splitting the employer NI is necessary to encourage higher rate tax payers to join, else their saved NI incentive is really too low to worry about, just 2%. For basic rate tax payers it's almost always a good deal because of the higher NI rate for basic rate income.

Your employer, if they set up a good scheme, could well find that all of the costs are paid for by their saving in NI.

Ante101

What is the monthly payment you are looking to make?

I'm just looking to get the ball rolling really, so probably small payments initially. Say £100-£200 or so. Then re-evaluate my situation once I've got my house. However, I'm not sure if might be better to just save every penny until the house is sorted, and *then* get the pension set up.

That may well be good advice - seems as though he'd decided that it wouldn't be economic for you to use an IFA and not to charge you relatively high charges at this point compared to the amount of money involved - a kind move most likely.

Yes, that's the impression I got too.

Given your situation with a need for a deposit in a couple of years your lowest risk and most sensible option is probably savings accounts and NS&I inflation-linked certificates.

Thanks for the suggestion - I'll look into those.

Thank you both for your responses so far. Much appreciated!

atush

I would set up a personal pension thru a low cost operator direct. Those charges sounded high to me for the level of contribs you were talking about. Normally it is either fee based or comission based but the one you talked to seems to be double dipping and asking for both.

I would ialso save elsewhere into the other products mentionned. Although you seem to be doing well so far (no debt, 30K savings, using Isa etc) you should already be saving 15% of your salary into a pension. So I might be inclined to start one and then when they are obligaotory you could move into your new one savings that are outsode ot tax wrapper such as ISAs and NSIs.

gadgetmind

Ante101 wrote: »

I'm just looking to get the ball rolling really, so probably small payments initially. Say £100-£200 or so.

I recently started small pensions for my wife and daughter, neither of whom work, though daughter is at school so has an excuse.

I used Cavendish Online and chose Aviva as a provider as they seemed to have the best combination of fees and underlying funds. My wife is putting in the full £240pcm that someone can who isn't working, but daughter is only putting in around £20. This won't build a decent pension for her, but it does mean there is something running that she can easily keep going later on and it will remove the inertia regards getting started.

Cavendish will charge £35 up front and the fees with an Aviva stakeholder are 0.55% pa for the standard funds. I'm told that starting a personal pension via an IFA can be cheaper than this, but I guess both you and I have been speaking to the wrong IFAs as our experience seem to be very different.

dunstonh

Cavendish will charge £35 up front and the fees with an Aviva stakeholder are 0.55% pa for the standard funds. I'm told that starting a personal pension via an IFA can be cheaper than this, but I guess both you and I have been speaking to the wrong IFAs as our experience seem to be very different.

For £20pm the stakeholder is best. For £240pm the personal pension is best.

30 year old paying £240pm with indexation until 68:
aviva SHP = £766,323
Aviva PPP = £775,352
best priced PPP = £780,494

So, pay the IFA £500 on fee basis (collect it via the pension to get tax relief on the fee) and save £14k.

gadgetmind

dunstonh wrote: »

So, pay the IFA £500 on fee basis (collect it via the pension to get tax relief on the fee) and save £14k.

However, the OP's IFA wanted 4.5% of all contributions and an IFA recently quoted me 5%. Is the trick to have all the info regards the direct options and then ask the IFA to beat it?

BTW, do you think there is any glimmer of hope that indexation will be allowed on the £240pcm that a non tax payer is allowed to contribute? It seems to have been stuck there for a wee while.

dunstonh

However, the OP's IFA wanted 4.5% of all contributions and an IFA recently quoted me 5%. Is the trick to have all the info regards the direct options and then ask the IFA to beat it?

Both of those are commission basis. Not fee basis. The trick is to go fee basis, agree the fee in advance and then the commission is rebated.

You dont need servicing advice. You just need transactional advice to set the pension up. Shouldnt cost any more than £500. You could go direct to an IFA and ask what they would charge on execution only basis to set up a specific pension. Typically it would be the cheapest way but you have to pick the provider and the funds.

BTW, do you think there is any glimmer of hope that indexation will be allowed on the £240pcm that a non tax payer is allowed to contribute? It seems to have been stuck there for a wee while.

The £3600 limit has been stuck for a while. Just like the minimum £20pm on a pension has as well. Both should be increased really. No hints that they are going to be though.

kidmugsy

Your proposed pension won't avoid Higher Rate Tax and won't attract an employer's contribution, so personally I wouldn't recommend it. I would, in your shoes, consider moving my £15k from savings accounts to ns&i Index-Linked Savings Certificates (as long as I was confident of keeping them for at least one year) and looking for a "regular savings" account for my monthly saving. Once my house purchase had been done, I'd take stock. By then you might have an employer who would make contributions for you, or you might have a higher salary.

Ante101

The IFA just got back to me saying he revised the proposal and now won't charge the 4.5% on contributions. So it'll just be £350 setup and 1% management now. It's starting to sound pretty good. This might be a question for the IFA, but if I were to go with something like that, and later on I decide that I wanted to manage the funds myself to avoid the management fee, is it usually straight-forward to do so?

Your proposed pension won't avoid Higher Rate Tax and won't attract an employer's contribution, so personally I wouldn't recommend it.

Could you please elaborate on that a bit? What does it mean when you say it won't avoid higher rate tax, and why won't it attract an employers contribution? Would that be an issue if I got a job where they offer a company pension? I was under the impression that it would be a separate pension plan in that situation, or is it common for employers to contribute to existing personal pensions? Perhaps I'm misunderstanding entirely!

The NS&I index linked certificates sound great, but I'm not 100% sure that I won't need the cash in the next year. I could do with moving the savings *somewhere* though, as I just checked the interest rate on my savings account and it's pretty dreadful.

Once again, thanks everyone for the advice and suggestions.