Pensions, what to do?

Neverland

fairleads wrote: »

Following this link and hitting on their UK equity income tracker i note that from inception in June 2009 it has returned 18+ %. Whereas a popular EI managed fund has delivered 23+%. Not forgetting that the EI fund in question is not even a first quintile performer.

A tracker will never be a 1st quartile performer over any time period under 20 years

But the low charges and the fact it tracks an index will make it a reliable 2nd quartile performer in peer group of active funds that hugs around an index such as the FTSE 350 or the S&P 500 for instance

No big unpleasant surprises, no big pleasant surprises

I don't what an EI fund is even(a UT/IT/OEIC?), but you would need to look at the beta of the stocks in the fund and whether it is using derivatives or gearing over a much longer time period to be able see if the manager really has any alpha skill...or whether its all just luck over a short time frame

Neverland

gadgetmind wrote: »

Perhaps you'd care to explain how that switch would work?

Instead of putting £1000 a month (for instance) savings into a pension put £1000 a month into a bank account to save for a house deposit

The problem is you have to wait to buy a house and pay rent in the interim, obviously

Before you ask, I don't really believe in long term house price inflation above the annual rate of earnings increase

Neverland

fairleads wrote: »

According to Friends Life web, the cost of a typical UK all share fund, as per their SIPP, is as follows
1) FL extra fee .75%
2)Additional expense .1%
To which we add
3) Fund TER 1.66%
Sub total 2.51%
Brokerage fees within the fund est. 1.5%
IFA fee £1000 on 100K fund 1.0%
Grand total 5.01%

I think the IFA fee is probably in the 2.51%

But nevertheless, if you are expecting to get 5-7% a year from an equity fund that is 40-50% of the returns in fees each year right there

This is the maths that pushed me to trackers and self-investment

In a low inflation- low return world taking advantage of tax deductions and minimising fees is key to building wealth

gadgetmind

Neverland wrote: »

Instead of putting £1000 a month (for instance) savings into a pension put £1000 a month into a bank account to save for a house deposit

A HR tax payer putting £1000 a month gross into a pension would only have £580 a month to put into post tax savings, and they'd then have to pay tax on any interest.

Before you ask, I don't really believe in long term house price inflation above the annual rate of earnings increase

It's all down to where you draw the trend line.

http://monevator.com/2012/03/15/house-price-to-earnings-ratio-2012/

Neverland

gadgetmind wrote: »

A HR tax payer putting £1000 a month gross into a pension would only have £580 a month to put into post tax savings, and they'd then have to pay tax on any interest.

Without wishing to be pedantic the way it always worked for me is that:

- I put £1,000 into my pension out of my net salary
- the government stuck basic rate tax relief straight into my pension fund a few months later
- I claimed the addtional 20% tax relief when I filled in my tax form and I would get the benefit 6-12 months later

I have enormous trouble trying to gross things up, but I think each slug of tax relief would be £333 at 20/40%?

Yeah, you have to pay tax on the interest in a regular savings account

gadgetmind

Neverland wrote: »

I have enormous trouble trying to gross things up, but I think each slug of tax relief would be £333 at 20/40%?

If a HR tax payer puts £800 into a pension, HMG then adds another 25%, so it's £1000 gross. The tax payer than reclaims another £200, so total cost was £600.

I use £580 as the HR tax payer will also have to pay £20 in NI on every £1000 gross.

If you pay into the pension via salary sacrifice, you don't lose that 2% NI and will often get some of the employer's NI refunded.

Autumnrust

Hi Guys,

So say for arguments sake I was able to put £1000 PCM in a pension, I would automatically get 20% tax relief on that right? So I would only be contributing £800 of my post tax salary?

And because I am an highere rate tax payer, next year I fill out a tax return and get a cheque back for the additional 20% PCM?

Does that cheque go in my pocket? Or does it have to go in my pension pot.

If someone could explain how that process works I would be very grateful.

I have calculated that at present I would like to contribute £600 PCM (pre tax) into my pension fund, so if you could base the example on that it would be really appreciated

Thanks

Elliot

Autumnrust

Also, whats an OP?

Neverland

Autumnrust wrote: »

Hi Guys,

So say for arguments sake I was able to put £1000 PCM in a pension, I would automatically get 20% tax relief on that right? So I would only be contributing £800 of my post tax salary?

And because I am an highere rate tax payer, next year I fill out a tax return and get a cheque back for the additional 20% PCM?

Does that cheque go in my pocket? Or does it have to go in my pension pot.

If someone could explain how that process works I would be very grateful.

I have calculated that at present I would like to contribute £600 PCM (pre tax) into my pension fund, so if you could base the example on that it would be really appreciated

Thanks

Elliot

The basic rate tax relief goes straight into your pension fund a few months after you make each contribution..thats the easy bit

The higher rate bit you claim in your end of year tax return, so you won't get credit for it for a long while while they take months to get round to your return

I hardly ever used to actually get a check back from the Inland Revenue, I'd always have some higher rate tax on interest income or dividends due that it was balanced off against plus they fiddled around with my income tax code to reduce my PAYE so that they would not be owing me money at the end of the year

If they do send you a cheque for the higher rate relief, it does go to you not the pension fund - which is nice

In short...the higher rate tax relief bit is really complex...but after the first year you generally won't be getting a cheque from the Inland Revenue in real life

PS. You need to be quite careful to fill-in the tax return right for the higher rate pension relief. There is not just the grossing-up of contributions issue, but also issues like employer's contributions and salary sacrifice that have to be filled in precisely the right way (I do my own tax returns, badly, but the Inland Revenue are actually quite helpful I find if you ask them where to put things)

Autumnrust

Neverland wrote: »

The basic rate tax relief goes straight into your pension fund a few months after you make each contribution..thats the easy bit

The higher rate bit you claim in your end of year tax return, so you won't get credit for it for a long while while they take months to get round to your return

I hardly ever used to actually get a check back from the Inland Revenue, I'd always have some higher rate tax on interest income or dividends due that it was balanced off against plus they fiddled around with my income tax code to reduce my PAYE so that they would not be owing me money at the end of the year

If they do send you a cheque for the higher rate relief, it does go to you not the pension fund - which is nice

In short...the higher rate tax relief bit is really complex...but after the first year you generally won't be getting a cheque from the Inland Revenue in real life

PS. You need to be quite careful to fill-in the tax return right for the higher rate pension relief. There is not just the grossing-up of contributions issue, but also issues like employer's contributions and salary sacrifice that have to be filled in precisely the right way (I do my own tax returns, badly, but the Inland Revenue are actually quite helpful I find if you ask them where to put things)

Thanks Neverland. I was just trying to understand whether I could use th higher rate chunk to bolster my deposit savings at the end of the year.

Appreciated.