ISAs v Pensions: The Official Retirement Debate

jampot7us

dunstonh wrote: »

No but you can create one if you like.
You dont pay the commission on a stakeholder pension. Commission is not charged explicitly. You have to look to personal pensions for that which have moved to explicit fee basis. This is why most personal pensions now are cheaper than stakeholder.

You are not on about that highly flawed article about Danish charges are you? That has been totally discredited for using flawed data and analysis. i.e. in Denmark they have fund charges, platform charges and advice charges (much like the way the UK is currently heading. Ironically, a stakeholder pension is not compliant with those changes). The article only made reference to the fund charges. Nothing else. And the fund they referred to was the cheapest institutional fund in Denmark. Not a retail fund.

They then went on to compare charges against a hypothetical pension in the UK using rates 50% higher than the current UK benchmark that included charges for funds, platform/provider and advice (the figures were 50% higher than the benchmark but nearly 10 times higher than the cost of similar funds available in the UK). They used 1.5% but the benchmark for charges has been 1% since 2001 but modern UK pensions can get much lower than that. You can get 0.1% in the UK if you compare denmark on a like for like basis.

Some media outlets withdrew the article because of the number of flaws. Others left them in place as facts often dont matter to the media.

Thanks for your input but I have to admit quite alot went over my head. I am not able to post links to the articles as a new member.


So should I be looking for a better rate than the 1% sw are charging? Transfering etc. Any recomendations ?

dunstonh

Thanks for your input but I have to admit quite alot went over my head. I am not able to post links to the articles as a new member.

To simplify it, think of the following three things.
1) the investments you use.
2) the product provider and
3) the adviser

You may not need an adviser but you need a product provider and investment. Each has a layer of cost.

The article compared the Danish investment only (number 1) but didnt include the cost of the provider or the cost of the adviser. However, they compared that against the product, the investment AND the cost of advice in the UK and then added 50% for good measure. Hence why its not a fair comparison. A bit like comparing two roast dinners. The Danish version had only the meat. The UK version had the meat, veg, potatoes and an extra helping for luck.

They compounded the poor analysis by using an institutional fund rather than a retail fund. Institutional funds are available to companies in occupational schemes or very large investors or with some investment platforms. i.e. not the sort of fund an average person would be able to buy.

The research and conclusion were a complete disgrace.

So should I be looking for a better rate than the 1% sw are charging?

You can certainly get cheaper. However, lets just relate that article to what you have as it may help you. Of that 1% it is broken down as follows: 0.3% is cost of advice. 0.3% is the fund (where its invested) and 0.4% is the provider (SW taking their bit). The Danish side was only covering the cost of the fund bit. Also, note that you are not paying 1.5% yet the article used 1.5% as the UK benchmark yet its been 1.0% since 2001 (FSA rule RU64 requires all pensions, under advice, to be benchmarked for charges to stakeholder with a justifiable reason given if they are higher - Stakeholder being 1.0%).

When stakeholder was introduced it was the cheapest option. However, time moves on and personal pensions have got cheaper. You can get advised pensions down to around 0.6% (with servicing) or 0.25% (with no servicing).

Any recomendations ?

Cant do that. There is no one best option. The best priced versions will vary depending on things like fund based discounts (larger funds get more discounts) and how you want to invest. All I can say is that almost certainly you can get better than the SW SHP. That said, as stakeholders go, its not a bad stakeholder. I wouldnt have my money in it but I have used it for recommendations.

EternallyGrateful

Interested to read the comments about the 25% tax free lump sum. I have recently discovered a slight catch here that will affect your estate should you die before taking your pension.
Say, for example, you have a pension fund of £100k. You can take £25k as a tax free lump sum, but should you then die before you start to take a pension, your benficiaries will have to pay 35% tax on the £75k balance, ie . £26,250.
You can 'control' this to a degree by not taking all the 25% (you can take smaller percentages over a number of years with the limit being 25%) but your beneficiary will still pay 35% on that portion of the 75%. eg (using the example above) if you take only 5% (£5k) the tax liability would be 35% of £15k or £5250.
To put it another way the government will take back every penny of your generous 25% 'tax free' lump sum plus interest.

lisyloo

but should you then die before you start to take a pension, your benficiaries will have to pay 35% tax on the £75k balance

Is this still true if

a) your spouse inherits
b) you're in the nil rate band for inheritance tax
c) your pension is in trust

Are you simply talking about IHT here or is this something different.
I've never heard of this before.

EternallyGrateful

I can only speak of my personal experience.
I was exploring my options with my IFA and asked what would happen to my pension fund should I die before I start to take a pension.
Basically they would go to my estate or nominated beneficiary - in my case my wife.
I was relieved at that but then he went on to explain the 'tax free lump sum, 35% tax clause' and I have to confess I was quite shocked.
Being the person I am (disbelieving of everybody:o) I checked on the HMRC web site yesterday and, after much exploring, found this magical bit of government robbery in black and white.

dunstonh

I was exploring my options with my IFA and asked what would happen to my pension fund should I die before I start to take a pension.
Basically they would go to my estate or nominated beneficiary - in my case my wife.

Most pensions are not paid to your estate. Pensions are a master trust where the assets are paid outside of the estate to the nominated beneficiary.

I was relieved at that but then he went on to explain the 'tax free lump sum, 35% tax clause' and I have to confess I was quite shocked.

There is no 35% tax charge on pensions that have not been crystallised. Only if crystallised and taken as a lump sum (and not income).

Being the person I am (disbelieving of everybody:o) I checked on the HMRC web site yesterday and, after much exploring, found this magical bit of government robbery in black and white.

Apart from the incorrect information, why do you think it is robbery? It would be 40% if it was inside of the estate and the pension fund is higher due to tax relief given over the years when it was built up. For most, it works out largely cost neutral.

JamesU

EternallyGrateful wrote: »

Basically they would go to my estate or nominated beneficiary - in my case my wife. I was relieved at that but then he went on to explain the 'tax free lump sum, 35% tax clause' and I have to confess I was quite shocked.
Being the person I am (disbelieving of everybody:o) I checked on the HMRC web site yesterday and, after much exploring, found this magical bit of government robbery in black and white.

EternallyGrateful, I also looked into this recently and as far as I understand, the 35% tax on the pension would be due on death (this is not IHT) if a lump sum is taken or income drawdown starts before age 75. Disturbingly, there are Government consultations taking place right now where this tax may increase to 55%, and various other restrictions also implimented.

http://www.investorschronicle.co.uk/InvestmentGuides/FinancialPlanning/article/20100723/70a39996-95a4-11df-bbc9-00144f2af8e8/So-long-compulsory-annuitisation.jsp

http://www.hm-treasury.gov.uk/d/consult_age_75_annuity.pdf


LissyLoo, Found things easier to understand from above articles. Taxation on pension pots as above but that said, Government has mentioned it intends to ensure tax savings (if these are possible!) are not made by transfer of pension on death vs IHT liabilities in their consultation document, second article above, end of Section 2.2.

From first article: Tax on death benefits.
The other issue industry experts have raised concern over is a potential tax increase for many middle income pensioners who die before age 75. At the moment, anyone who has already taken some tax free cash or income drawdown, but then dies before age 75, will suffer a 35 per cent tax charge on any funds passed on to their heirs. The consultation is proposing increasing this tax to 55 per cent. If this is enforced, anyone in income drawdown who dies before age 75 will be affected, but it is basic taxpayers who will be hit hardest.

We believe the government needs to consider this proposal carefully because it runs the risk of hitting basic rate taxpayers particularly hard because an increase to 55 per cent will far exceed the tax relief (20 per cent) they will have gained while they built up their pension pot," says Barry O'Dwyer, deputy chief executive of Prudential UK.


Dunstonh, Articles describe taxation of pension on death if there is income drawdown before age 75. But you mentioned 35% taxation only if crystallised and taken as a lump sum (and not income). Missing link or ambiguity on income/income drawdown here somewhere? Need for clarification?


JamesU

dunstonh

Dunstonh, Articles describe taxation of pension on death if there is income drawdown before age 75. But you mentioned 35% taxation only if crystallised and taken as a lump sum (and not income). Missing link or ambiguity on income/income drawdown here somewhere? Need for clarification?

If the spouse/dependent continues to use the pension for income, then the 35% tax doesnt apply. Normal income tax would. However, if it later goes to lump sum (i.e. on the spouse death) then the 35% would apply (or higher proposed limit - if they stick with that).

An uncrystallised pension pre 77 (75 prior to emergency budget) is tax free in the majority of cases. A pension fund with mixed crystallised and uncrystallised funds would be taxed on each bit appropriately (that is why phased drawdown is often seen as a good option).

JamesU

dunstonh wrote: »

If the spouse/dependent continues to use the pension for income, then the 35% tax doesnt apply. Normal income tax would. However, if it later goes to lump sum (i.e. on the spouse death) then the 35% would apply (or higher proposed limit - if they stick with that).

Dunstonh, Understood, thanks for clarifying this.

JamesU

BillionD

Can anyone recommend if now is a good time to start an ISA? I have a few thousand tucked away which are earning a very low interest in an online savers account from lloyds.