Pensions review

Supernova

Taking an end of year look at my pension arrangements. I am 48 and earn £55K

I have:

1 £132K in a company scheme to which my 4% matched plus employer contributions amount to 16.5% of my salary. Up to now I was adding an AVC of 11% up to the old maximum of 15%.

I participate in the Core fund at no charge which consists of various Barclays Global Investor’s Aquila Life Index funds (27% UK, 21% European, 21% US, 14% Japan, 7% Pacific Rim, 10% Corporate Bonds). I think I can afford to be a bit more aggressive for the next 12 years or so as 65 seems like a more realistic retiring age.

Other more active funds with charges are available namely:

Invesco Perpetual High Income (.82%)
Schroder Tokyo (.9%)
JP Morgan Fleming All Emerging Markets Equities (.85%)
Standard Life Investments UK Ethical (.3%)
Standard Life Investments Property (.4%)
Fidelity South East Asia (1.1%)
Barclays Global Investor’s Global Equity Index with 50% UK (.13%)
UBS Global ex-UK fund (.45%)
Standard Life Investments UK Equity (.5%)
Standard Life Investments UK Smaller Companies (.5%)
Barclays Global Investor’s Ascent Life US Equity (.6%)
Standard Life Investments European (Ex UK) Equity (.2%)
Plus Sharia, Fixed Interest Gilt, Index Linked Gilt, Overseas Bond and Cash funds


2. £17K in an L&G Managed fund Personal Pension capped at 1% charge running to age 65.

I can transfer this without penalty to the full range of L&G pension funds or to somewhere else entirely.


3. £6K in a Prudential With-Profits fund running to age 62. I can transfer this with no penalties.

Other internal funds available are various L&G Index funds, Northern Trust Int., UK or Balanced funds and Threadneedle Property.


4. A final salary scheme worth £4-£7K (delending on RPI) per year at age 65, but with a previous company that’s just gone bust. Will have to wait and see what the winding up process brings.


5. A Zurich / Allied Crowbar fund of £950 (worth less than what I put in 14 years ago) with an outrageous transfer value of £650. ****z.



So, I am deciding whether to open a SIPP and transfer the smaller funds whilst contributing 10% of my salary instead of the company AVC and then maybe I can afford to open a maxi ISA too. Seems to me that the 40% tax relief and 25% tax free lump sum swing things in the favour of the SIPP at the very least.

Next I will have to decide what to invest in -will study the form ;-).


For the existing Company pension Invesco, Schroder, JP Morgan, Ethical and Property look like they are quite viable alternatives to the trackers.

In terms of money elsewhere I have £30K in Mini cash ISAs and a fully offset £56K mortgage (but £15K Endowment shortfall in 5 years time) plus £5K high interest cash.


Thanks for any observations anyone might have.

EdInvestor

Have you worked out what income you can expect in retirement and the likely tax position?

That will have a bearing on how you deal with future savings.

Don't forget state pensions.

Supernova

EdInvestor wrote: »

Have you worked out what income you can expect in retirement and the likely tax position?

Very good point. Is there a reliable pensions / savings calculator somewhere?

Also do employer's contributions get bumped up by the 40% tax break?

If I contribute as I am until 65 I may well be an HRT but it could be borderline. I am more likely to get made redundant in my 50s at some point so who knows.

What are the choices depending on HRT / BRT - ISA vs Pension? Maybe it's possible to mix whatever the solutions are now to hedge the bet?

EdInvestor wrote: »

Don't forget state pensions.

Projection is £5K so far I think.


Thanks Ed.

EdInvestor

I'd have thought it worth getting an accountant to run through the tax side with you. A quick look suggests you are putting far too much into pensions and will end up paying HRT in retirement, what a disaster that would be :eek:

This can easily be sorted by diverting money into your investment ISA - you can use the spread of investment funds you have already, just duplicate it.Use a discount broker which rebates charges.

If you have protected rights money in the bits and pieces pensions, you won't be able to put them into a SIPP until next year or so, so not much point in moving that money yet.

Mortgage_&_debt_free

EdDInvestor, what level of pension income would mean HRT?

EdInvestor

http://www.hmrc.gov.uk/rates/it.htm

Supernova

So, if current allowances and tax bands persist at 2.5% inflation the allowance at age 65 in 17 years time will be £11.5K and the 40% tax bracket will start at £64K per annum.

After taking 25% tax free an annuity at £7K per year per £100K fund value would mean I would have built up a fund value of about £1,200,000.

I somehow think that is highly unlikely.

Even if I continue to earn as I am and contribute 25% of salary to a pension I'll only end up with £560K based on 2.5% inflation and 7% growth which gives me a max of £28K pa plus up to £10K from state/ rescued final salary...

Phew! Do those calculations look right?

Presumably income from other investments will come into it but I'm not sure how to quantify that yet.


(Do contributions by my company get topped up by the 40% rate?)

Supernova

Supernova wrote: »

Do those calculations look right?

Do contributions by my company get topped up by the 40% rate?

Anyone?

Ta

clairehi

(Do contributions by my company get topped up by the 40% rate?)[/QUOTE]

company contributions are not taxed. does that answer your question?

Supernova

Yeah, it was a pretty daft question too of course :-(


Anyway, since I am capable of asking such things, I was wondering about my annuity calculations in case I had assumed something similarly stupid.

It seems that I will most probably be a BRT in retirement, in which case would pensions be the way to go because they have the advantage over an ISA of getting 25% of the fund back tax-free having contributed tax-free in the first place?

wotsthat

So, if current allowances and tax bands persist at 2.5% inflation the allowance at age 65 in 17 years time will be £11.5K and the 40% tax bracket will start at £64K per annum.

After taking 25% tax free an annuity at £7K per year per £100K fund value would mean I would have built up a fund value of about £1,200,000.

I somehow think that is highly unlikely.

Even if I continue to earn as I am and contribute 25% of salary to a pension I'll only end up with £560K based on 2.5% inflation and 7% growth which gives me a max of £28K pa plus up to £10K from state/ rescued final salary...

Phew! Do those calculations look right?

They look wrong to me.

You have calculated your future income in todays money but have applied a future tax band - I think you should have used todays higher rate threshold and allowances to get a better feel for whether higher rate tax will apply.

In todays money I reckon you end up with (except inflation at 3% & contribution @16.5%):

c£24,000 from your main company scheme
c£1,700 from your L&G sheme
c7,000 (say, from your rescued final salary scheme)
c£4,300 state pension

That's £37,000 income and every penny of it (after personal allowance) subject to tax PLUS you will have a tax free lump sum (if they still exist in the future) of around £120,000 which will presumably accruing interest which, if it earns, 5% is another £6,000 per year.

You are clearly in a great position but I'd suggest higher rate tax is a real possibility especially if your investment returns are higher than 7%.