Newbie pension qs

Lara44

Hi Everyone

Another newbie with no pension and no idea where to start We have a bit of an unusual setup so I'd love to get some advice here, and also consult a financial advisor in person in October.

I'm a 29 year old funded PhD student, my partner is 33 and a freelance animator. He was a self-employed sole trader but changed this year to be a Ltd. company and instead taking dividends from the business.

We have no pension provisions at all and are wondering where to start. We have no kids (although would like to in a couple of years when my studies are finished). We own 40% of a 3 bedroom house in London with shared ownership. Our mortgage repayments are about £620pm and £250pm rent and service charge. We just bought last year and have a £100k mortgage which we can overpay from January 2012.

My partner's earnings fluctuate wildly. Last tax year he made a £32,203k taxable profit (but the year before it was approx. £55,000). So he moves between being a higher rate taxpayer and not. I receive a tax free stipend of £1300pm with a lot of travelling expenses to come out of that.

We put into the joint account £2000pm and everything above that gets saved. Some of the savings get spent on a 10 day holiday, some clothes but nothing too extravagant. We have just finished paying for our wedding in August.

Our savings currently are -

Prudential long term savings account opened by OH Mum and Dad when he was little - £4500
OH ISA - £3600
Me ISA - £4500

OH also has 3 months wages saved in the business (£3000).

We like living in London now, but would like to downsize in the future. I was thinking of overpaying the mortgage by £3000 per year. With the new SVR of 2.49% we will change to in August that would clear the mortgage in 10 years (although I realise rates will not always stay so low). It is realistic for us to live here for the next 10 years.

Then we could either staircase to the remaining 50% or move away and buy another property with a decent deposit. Ideally we could have £300k invested in our own home, when we are older we could downsize to a smaller home thus releasing half of that to be £150k pension lump sum??

Ideally we would also keep saving in our cash ISAs / possible pensions? I have no idea what to save if I am honest, something like another £150k :eek: it seems so daunting. Hopefully when I have my PhD I will have a better income, private sector pays very well, but university not so. Either way I would count myself extremely lucky to get a job in a related research role. So in the short term if we had kids even with my job our income would not increase massively, it may even decrease as nursery costs are horrendous in London. I don't see myself as a stay at home type, but you never know what might change.

Anyway, I am so sorry for the monster post!! Any advice would be helpful as we are so unsure as to where to start.

kidmugsy

My first instinct is that your chap should make pension payments in relevant years to let him avoid higher rate income tax, but his change of status may make that suggestion pointless - I'm ignorant on that topic. As for you, you should remember that as a a device for saving for old age, the attraction of a pension is either (i) avoiding tax (and perhaps NI), and (ii) getting an employer's contribution. Neither applies to you at present so you'd be better off saving by other means.

dunstonh

With the limited company, he is almost certainly better taking the contributions out of the limited company as that gets money out of the company without NI being charged (and its still a business expense for tax purposes).

coyocacan

Best of luck with your plans. I would caution about excessive reliance on property to fund retirement. Make sure you diversify and spread your risk in different asset classes (property; shares; bonds etc.). And do not underestimate what you will need to fund a comfortable retirement - 300K would be the minimum of what you should aim for.

Lara44

Thanks for all the advice, it really is appreciated.

dunstonh wrote: »

With the limited company, he is almost certainly better taking the contributions out of the limited company as that gets money out of the company without NI being charged (and its still a business expense for tax purposes).

Hi Dunston, so my OH could take the money out of the company and into a pension plan without it incurring NI? That sounds good. So we would need to get advice on the type of plan to take out, which would be (from some Googling) a personal/stakeholder pension plan or SSAs or SIPPs? Sorry if I am asking some silly questions here.

coyocacan wrote: »

Best of luck with your plans. I would caution about excessive reliance on property to fund retirement. Make sure you diversify and spread your risk in different asset classes (property; shares; bonds etc.). And do not underestimate what you will need to fund a comfortable retirement - 300K would be the minimum of what you should aim for.

Crumbs Coyocacan, what sort of figure do you recommend? Without the mortgage we spend just over £1000 per month on bills, food and fun. Let's say that's £18,000 for the year for the two of us by the time we include clothes and holidays. We would want a similar sort of amount in retirement, but in 'future money' rather than today's money. Any tips on how to start coming to a suitable figure?

dunstonh

Hi Dunston, so my OH could take the money out of the company and into a pension plan without it incurring NI?

Yes. It is actually done as a direct debit or cheque from the limited company into the pension. It is paid gross and then the accountant will treat is as a business expense so the company will pay less tax and as the company has paid the contribution, not your OH, there is no NI to pay on the money that would have been liable had the money been paid out as an income to your OH.

So we would need to get advice on the type of plan to take out, which would be (from some Googling) a personal/stakeholder pension plan or SSAs or SIPPs? Sorry if I am asking some silly questions here.

You are not asking silly questions. Your main choices are to DIY or use an IFA. Other options like using an FA should be avoided (FAs are typically more expensive and limited on their advice and product range). Like any area of DIY, if you know what you are doing then it can end up a cheaper option. However, if you dont and get it wrong, then it can end up a more expensive option.

So, if your idea of DIY is say buying the Virgin stakeholder pension then you should use an IFA as that would be a bad DIY option.

An IFA will select the provider and the investments and you can employ them on a servicing or transactional basis (ongoing reviews and advice or just one off ad-hoc basis)

Crumbs Coyocacan, what sort of figure do you recommend?

one of the biggest failings with pensions is not the pension itself but it gets blamed for it is where people pay small amounts for 30 odd years and then wonder why their pension is small. It is not uncommon for people to say have paid £30pm for 30 years and then complain that their pension isnt paying them £1000 a month. They blame the pension and not the amount they paid in.

A pension is only as good as what you pay in. If you work on the basis of 5% being paid as income (which may be too high or too low depending on your objectives), then £100k pension fund would pay £5000 a year. So, a £300k pension would pay £15,000 a year.

The IFA can tell you what you need to pay or there some online calcs which can give you a basic idea.

Would the £18k be inclusive of state pension or in addition to? e.g. if you assumed a state pension of £5000 each then you would need the personal retirement arrangements to give you £8000. Not £18000

Lara44

Hi Dunston

Thanks again for your really helpful post. I think we would be very bad DIY-ers so we should definitely see an IFA. I looked up some companies today but they seem geared up to people with serious wealth already. Maybe OH accountant could recommend someone.

In answer to your question, I sort of assumed that there would be no state pension by the time we were retiring - for OH 2044, and me 2048. Either way I think I would prefer to count it as an extra rather than a core part of our retirement planning. Perhaps that slightly averts the risk of replying on property to fund half the amount? Thanks again for your advice

atush

You have had some good advice there already.

So, OH should start a pension and be paid out of his LC. Pronto. You sould keep saving monthly into cash and equities either in ISAs or when they are full, regualr savers and investment trust savings plans. Overpay your mtg when you can, if the rate you are paying is more than you can get in savings.

That way you will have a good sound strategy of cash, pensions, equity and property. I would look to build a fund of 500K if you can.

Lara44

Just a quick update

We contacted an 'IFA' through my husband's accountant, as we thought it would be good to get someone through word of mouth recommendation.

Despite calling himself an IFA in an email he's turned out to be an FA with St. James's Place Wealth Management. A quick Google has revealed some negative press. The gent is nice enough in himself, and wasn't a pushy salesperson or anything.

We have around £450pm to play with for retirement planning, but we have decided to put £250 of this into overpaying the mortgage. For the sake of a pension of £200pm is it really worth seeing an IFA? My husband is self employed via a Ltd. company as you'll see above.

I'm a PhD student and my circumstances will change after around 2 years, so we'll have to re-assess financial planning then. My income could rise a lot or plummet depending if I get a private sector research job or stay at home to have kids.

Anybody got any perspectives? Thanks

dunstonh

We contacted an 'IFA' through my husband's accountant, as we thought it would be good to get someone through word of mouth recommendation.

Despite calling himself an IFA in an email he's turned out to be an FA with St. James's Place Wealth Management.

Your husband ought to tell the accountant off for recommending a sales rep. Most accountants will only refer to IFAs as tied sales reps, like SJP (who are just about the most expensive distribution channel going - even more than the banks) are not going to be best advice and your account should be giving you best advice.

Despite calling himself an IFA in an email

You should complain straight away and also send a copy to the FSA as this sales rep is misrepresenting the facts and breaching FSA rules. If he is doing that before he has even seen you then what other rules are being broken?

The industry needs these cowboys dealt with.

jamesd

Lara44 wrote: »

we have decided to put £250 of this into overpaying the mortgage.

You might try asking the IFA about products that offer an assured return that is greater than your mortgage rate, so there's minimal risk of failing to be better off by doing that instead of overpaying. Things like kick-out plans might do the job, with some up to around 10% a year for up to five years available.