Totally confused - Pension advice please!

poshandspecs

Hi,

I consider myself fairly clued up with financial matters, but am totally confused when it comes to pensions! Can anyone help?

My husband (37 years old) changed jobs last year, due to redundancy, and the new company does not have a company pension scheme. He previously paid into a group personal pension scheme, held with Standard Life, which his employer also contributed to. He chose not to continue payments when he initially switched jobs since he had to take a considerable cut in salary. However, happily he has been promoted and we are looking for pension options (current salary £25K, due to rise to £30K shortly).

The statement he received from Standard Life in Jan '07 gave a fund value of £15,015.82, a projected pension of £1,590 per annum....

Should he:

-continue the pension he already has?
-start a new one?
-forget about it and invest in something else altogether?

Any comments/suggestions very gratefully received.

EdInvestor

In the absence of any employer contribution and given he's a basic rate taxpayer, he'd be better to fill up his investment ISA allowance ( 4k mini, 7k maxi), which is a "use it or lose it" tax perk and is much more flexible than a pension.

Under the new A day rules there is a lifetime allowance, so he can build up more in pensions later when the benefits are better.

DavidLaGuardia

Edinvestor is technically not incorrect but as always, very ISA centric. Pensions are a good habit to get into and cannot be touched by either you or any creiditors. Once its paid out of a regular contribution from ones wages it is not missed. Build up an ISA and when a sum is there to be transferred to a personal pension it is all to easy to skim a bit off here and there (while telling onseself that it is deserverd from ones own savings) for the new plasma TV, the holiday etc. etc. or to avoid pulling ones finger out in a minot financial crisis.

Additionally, if an inidivudal has an accident or illnmess and cannot work, then they may find the level of pension they can get tax rleif on to be severly reduced. ikewise 40% tax payers should pay in while they can get the addtional relief as should those which can get salary sacifice through their current employer as a future one might not do it.

LOST

go with a much more flexible ISA option!

I would only ever go for a Pension if a) my employer was contirbuting and I had to make complulsory contributions, b) if I had used my ISA allowances in the tax year and had excess funds to invest (assuming I was still receiving tax releif on contributions - especially if if had 40% releif)

EdInvestor

Of course if you have no self discipline whatsoever ( in which case it's surprising you are logged onto MSE) then pensions may be just what you need.

You can lock away your capital in an insurance company forever - you'll never be allowed to take it out - and when you're 65 they will confiscate 75% of it and hand you a monthly income approx the same as you would get in a high interest bank account. It's taxable of course at your highest rate.

If that suits you, then go for a pension.

If you'd prefer a little more control and would like to hold onto the capital, then try something a bit more flexible

cheerfulcat

poshandspecs wrote: »

Should he:

-continue the pension he already has?
-start a new one?
-forget about it and invest in something else altogether?

Do you have any other savings? If not, I would suggest that you make a rainy-day fund ( short term savings, in cash ) your first priority. If you are not earning yourself, you as a couple could make use of your tax-free allowance of £5035 for this year ( from memory ) by keeping savings in your name.

ISAs have been suggested. If you can, and if you are both disciplined enough to keep paws off the savings, then it makes sense to use both of your maxi ISA allowances as long term savings.

The tax positions of pension plans and ISAs differ slightly but the end result, tax-wise, is identical for a basic rate taxpayer. A higher rate tax payer who later becomes a BR payer gets the most out of pension contributions; there are also advantages for those just on the cusp of HR tax.

The major advantage which pension plans have over ISAs is that the capital cannot be touched by you or anyone else, ever ( though you can currently take 25% of it as tax free cash ). This can also be seen as a disadvantage, it depends upon your point of view.

All IMHO, of course...

HTH

Cheerfulcat

poshandspecs

Many thanks everyone for your suggestions - will ponder and probably look into the ISA option.:undecided

dunstonh

If you have children and get working/childrens tax credits, then pension contibutions can increase the amount you get. In effect, this increases the amount of tax relief making pensions the better option as you can get upto the equivalent of 72% tax relief effectively. ISAs get nothing.

Also, in retirement you can earn over £14,000 a year between the two of you without paying any tax. Your current fund value is nowhere near utilising your allowances projected forward so financially ISA is not as good as pension.

EdInvestor

dunstonh wrote: »

Also, in retirement you can earn over £14,000 a year between the two of you without paying any tax. Your current fund value is nowhere near utilising your allowances projected forward so financially ISA is not as good as pension.

But check how much of the 7k allowance will be taken up by the 2 state pensions.Forecast here:

https://www.thepensionservice.gov.uk

dunstonh

dont forget that £2000 odd 10% band as well which is best used up with pensions. So, a couple should really be looking at 20k between them and not £14k.

DavidLaGuardia

EdInvestor wrote: »

You can lock away your capital in an insurance company forever - you'll never be allowed to take it out - and when you're 65 they will confiscate 75% of it and hand you a monthly income approx the same as you would get in a high interest bank account. It's taxable of course at your highest rate.

Ever heard of SIPPs or maximinsing drawdown or even investment linked annuities? Yes they are not as good as total access but once added to the tax relief received, they can make the restrictions less offensive than they orignally appear.