April 5th 1960

under15s

That date was 1 week before I appeared on this mortal coil - so I understand my retirement options have changed. So I'm now 47 and run my own business. When I was 25 I started a personal pension with legal and general which now has something like £250k value, and I'm still paying in £115 per month. By the time I retire my kids will be well grown up (youngest is nearly 14 now) and mortgage will be paid off. On the radio today martin said something about 'pensions just being a wrapper'. Now I'm financially reasonably savvy, but I am very confused about what my best options are. For reasons I'd rather not go into I do not under any circumstances want to see a rep of L&G again (phrases like 'I wouldnt wee in their ears if their brains were on fire' probably tell you I fell out with them.);)

jamesd

So, one of your options is to stop L&G from making money from you by transferring the pension to another provider. As an old pension it probably has poor investment choices so you're likely to benefit from the move financially as well as emotionally. Though if you've been contributing 115 for 22 years, that's managed a bit over 15% return each year, which is pretty respectable.

How active do you want to be in managing pension investments?

What is your attitude to risk? Would losing 50% in one year then taking 5 to recover make you really unhappy? 40%? 30%? 20%? The more you can tolerate, the greater the potential returns long term.

What sort of total taxable income are you expecting in retirement? From the look of it you already have a fund sufficient to get you 17000 once you add the basic state pension. If you're a basic rate tax payer that suggests that using the maximum 7000 stocks and shares ISA allowance before pension contributions may be a good idea, to decrease the chance that you'll suffer from age allowance reduction for taxable income between 20k and 25k.

Getting a state pension forecast would be a good idea, to find out what additional state pension (SERPS and S2P) you might get.

Are you a higher rate tax payer?

Are you married and if so does your partner have a pension in their own name? Each of you will get your own tax allowance so splitting the pension contributions evenly to exploit that is a good move.

under15s

The return hasn't been as great as that - the pension started with lump transfers from previous employers (British Leyland & Rank Xerox) - along with a raft of 'mis-selling' penalty payments L&G had to put in. My quick sums suggest that if I had the lot in a simple 4% savings plan today it would generate 450k by the time I'm 62. (or on 5% it would be 570k by the time I'm 65). the reason I've picked on these figures is the comment Martin made about pensions being wrappers.
We were sold a bit of a pup with an endownment mortgage, and we were also sold a pup by an L&G 'consultant' who got us to put a big lump into a plan of theirs. So - my attitude to risk is - I avoid it where necessary in business, and don't really want to go there in my personal life anymore.
The thought of losing 50% of my pension value overnight frightens me to death.
I've been paying the £115 for so long now that I don't even notice it.
What I had wondered about was something like this .. is it possible to transfer the complete lump from L&G to a 'no-risk' pension fund, which generates a more reliable (the currently typical 4%..5%) rate of return, and then take my £115 per month and make that a standing order to an ISA, which is triggered to pay into a pension fund.
By using a combination of basic pay and director's bonuses, I'm managing to stay as a basic rate taxpayer. How much do I want / need per year when I retire - is there a smart way to work that one out?
My wife does work, and again we were taken for a ride by L&G - she was persuaded to come out of the NHS pension fund - but now she's back in and L&G had to pay a penalty there as well. She's a basic rate taxpayer, but I couldn't tell you her fund values at present.
After this lot, quarterly VAT returns are an absolute piece of cake!!

EdInvestor

Gosh, what a narrow squeak. :eek:

On April 5 2010, your birthday,when you turn 50 (if I understand you correctly) you can take benefits from that pension fund. This means you can take 25% of its value out in cash, and transfer the rest to a SIPP (self-invested pension scheme) where if you want to, you can put it in something safe (like gilts or cash) at low cost and leave it to grow further, without taking an income.

The day after your birthday, you won't be able to do that because the minimum age will rise to 55.

The 25% cash amount could then be fed into your maxi ISA @7k a year and invested esewhere while that's happening (there are way's of doing this tax free).This will mean that when you do actually retire you will have a much better balance between taxable (pension) income and taxfree (ISA and other) income.

At the moment you are likely to end up with too much taxable pension income and suffer punitive taxes resulting in the withdrawal of your age allowance as already mentioned.

Have a look around the sites of these two SIPP providers:

https://www.sippdeal.co.uk

This one is best for direct investment in gilts, cash or shares.

https://www.h-l.co.uk

This one is best for investment in funds.


You may well have some "protected rights" money in your pension fund, if you were contracted out from SRERPS in your old pensions.This money can't yet go into SIPPS, so is probably best left in the existing L&G pension for now until the rules change.

What fund(s) is the L&G pension pension invested in?Since you have been paying into the fund over the years I am assuming this pension does not have a valuable guarantee attached,but you may need to check this aspect befotre moving it.

under15s

the squeak wasn't narrow sadly - my birthday is 12th april - oh beggar! So I guess that totally changes the information you've suggetsed?

dunstonh

You have a good size fund but your mistake was seeing a tied agent. Tied agents are not allowed to portfolio plan and pick funds. They ascertain your risk profile and show you the funds that match that risk profile for you to pick. Very often, you dont even get that and just end up in the default "managed fund".

To put this crudely, you are shopping in poundsaver with a £250,000 budget.

You may well have some "protected rights" money in your pension fund, if you were contracted out from SRERPS in your old pensions.This money can't yet go into SIPPS, so is probably best left in the existing L&G pension for now until the rules change.

hybrid SIPPs, fund supermarket pensions and personal pensions can take protected rights. There is no requirement for you to go into a SIPP, which is the most expensive pension option, unless you intend to use the features of the SIPP that you are paying extra for.

You could end up jumping out of the frying pan and into the fire if you dont know what you are doing.

EdInvestor

under15s wrote: »

the squeak wasn't narrow sadly - my birthday is 12th april - oh beggar! So I guess that totally changes the information you've suggetsed?

That's a pity.In that light I would suggest you cancel the monthly payment to the pension and start feeding it in to a maxi ISA.

Dunstonh is incorrect if you really want to invest the 250k remaining pension in gilts or cash - a cheap online SIPP will definitely be the lowest cost way to do this.If you use an insurance company pension you can only invest in gilt funds, where charges will eat into the returns and the risk level is higher, whereas in the SIPP you can do it much more cheaply and at no risk.

I would suggest you put any remaining PR money left behind in the pension in something more risky than gilts - otherwise you will lose out because of the charges.A mix of commercial property funds and equity income funds might be good - but it depends what proportion of the money is left.

Then at age 55 you can extract the 25% TFC if you want and add it to the ISA to build up the tax free income.

What do you want to invest the ISA in?

dunstonh

Dunstonh is incorrect if you really want to invest the 250k remaining pension in gilts or cash - a cheap online SIPP will definitely be the lowest cost way to do this.If you use an insurance company pension you can only invest in gilt funds, where charges will eat into the returns and the risk level is higher, whereas in the SIPP you can do it much more cheaply and at no risk.

And how many pensions invest in cash or gilts? In those cases, a SIPP could be cheap but only on the basis that you cannot put a savings account or gilts directly into any other type of pension. But you would have to ask what the point would be for a 47 year old. The vast majority of people use investment funds and in those cases, SIPPs are the most expensive option. Even the FSA (the financial services regulator) has issued warnings about too many people using SIPPs and paying for features they are not using when they should be using cheaper products. A cautious portfolio seems like the logical answer to this and that may or may not involve using a SIPP depending on his ability and willingness to seek advice from someone that does know what they are talking about.

The OP doesnt appear to know much about investing and suggesting he goes down the SIPP route on DIY basis is like asking a 17 year old who hasnt passed their driving test to go and drive a Formula one car.

What I had wondered about was something like this .. is it possible to transfer the complete lump from L&G to a 'no-risk' pension fund, which generates a more reliable (the currently typical 4%..5%) rate of return

Inflation is 4.1%. So unless you are beating that, your money is going down in real terms.

Risk is not two extremes. It is a sliding scale. You should find the level of risk that offers the right potential for return and not jump around the extremes just because you were sold a basic product from someone with basic knowledge.

You also need to consider the level of retirement income your wife's provision will pay. You both have personal allowances of £7280 at age 65 and a further £2150 @ 10%. You are well over that but is your wife?

jamesd

under15s, OK, the game here is to minimise the tax you pay and that's what EdInvestor was trying to do by taking out the tax-free sum and putting it into ISA money instead. Here's how it works, you can do it at 55 instead of 50.

250,000 + 115 a month at 5% after inflation for 18 years comes to 654,000. At 5% annuity rate that's worth 32700 in today's money. I'll assume that your basic state pension and SERPs/S2P contributions use all the allowances you have for simplicity in these calculations. You now pay tax on that, it'll make you higher rate but I'll just use basic rate for simplicity. After tax income ends up at 25,500. Because I ignored higher rate tax it's actually a bit lower, but this is good enough for now. You'll also pay the extra tax of age allowance reduction on 5000 of this.

Say instead you stopped contributing to the pension and used ISA instead, and you took the 25% tax free sum from the pension at 55. 47 now so that's 8 years to go. The pension grows to 372600. You take 25% of that tax free so you have 93150 in cash. Still 279450 in the pension which grows to 460250 by 65 and at 5% annuity that's 23000 in taxable income, 17950 after basic rate tax.

Next bit, the ISA contributions you're making instead of pension. I'll assume 115 was the gross pension amount (probably wrong, it'll do for this) so the after tax part you get to invest without the pension tax reduction is 89.70. 89.70 for 18 years at 5% ends up at 31450. At 5% that's 1570 with no tax to pay. After tax income is now at 17950 + 1570 = 19520.

On to the 93150 in cash you got at 55. 10 more years to 65. You're using 1076 in stocks and shares ISA money for the regular 89.70 payments so you can put 5974 a year or 494 a month into stocks and shares ISA. Do that for ten years and the ISA is worth 77200. At 5% that's 3860 tax free, now you're at 19520 + 3860 = 23380 after tax. Those ten years only used 59740 of the 93150. Stick the remaining 33410 into an investment bond with a selection of investments when you're 55 and you end up with 55020 and at 5% that's 2751 bringing you up to 2751 + 23380 = 26131 after tax income (I don't know if investment bonds are actually tax free when taken, it's lower if they aren't, but they don't count against age allowance which is what I'm after here).

At this point you would have had 25500 after tax in the pension and get say 26130 this way. Add in these things I ignored:

• The higher rate tax on the pure pension.
• The age allowance reduction in the pure pension method, gets you 600 or so more income the other way.
• The gain on the 59740 you were putting into the ISA from the lump sum at 55 before you put it into the ISA, which comes to something like 14500 at 4% (assuming it's taxed but you could avoid that). Adds 5% of this or around 725 a year.

A very rough calculation puts you something around 2000 a year better off and it's probably better than this. It would have been better if you could have done this at 50 because the earlier you shift the money into the ISA from the pension with the lump sums the greater the tax benefit.

An IFA with retirement planning skill can undoubtedly come up with something more refined but this probably does well enough to illustrate how you can use the ISA and investment bond tax wrappers to get more money than just using the pension.

Investments next. Have a look at the h-l links of these examples of property and fixed interest funds:

• New Star Property (h-l) from Property all regions BI - real property uk, small REIT component
• Baillie Gifford High Yield Bond (h-l) from fixed interest - UK junk bonds

See how they didn't move much when the stock market took its dips?

What you do with the investments when you want lower risk is pick sectors like these for the core holdings, perhaps with UK and European fixed interest and real property, say 50% of the total. Then you add 50% spread around in equities, say 25% UK and 25% elsewhere. If the equities fall 50% you'd end up with a dip more like 25% and in the good years you take the profit from them by shifting the money out into the lower risk ones to keep the percentage split the same. You adjust the mix to hit whatever risk you want to hit, but you'll need some equities to get 5% after inflation.

People like dunstonh make a living doing this sort of thing and good people in the field are probably good enough that you'll make more than the service costs in extra profit if you don't want to be bothered looking after it all.

So, what I suggest: go hunt for a good IFA, preferably one who is of the New Model Adviser (NMA) type because they seem more likely to have an interest in looking after your money long term - their income is typically a small percentage of your ongoing investment value.

Paul_Varjak

under15s wrote: »

That date was 1 week before I appeared on this mortal coil - so I understand my retirement options have changed. So I'm now 47 and run my own business.

Surely, you must be 46 then?

under15s

yes I am 46 now - but too damn close to 47 ... the info from james makes very interesting reading, and dunstonh has correctly picked up that I'm not desperately keen on un-necessary risk. I think I could do with finding out a lot more from the NHS scheme my wife is in .. it looks like i could end up paying more money into pensions now to be hit by extra tax when I retire!!
I think dunstonhs comment about frying pan and fire has hit the nail on the head. i dont think I'm in a frying pan, but I have a little instinct that says 'if I stopped / reduced my pension paymnets for a while, and used the money against current loans/mortgage right now, I'd be better off ..
The more I read the less I know ..