MSE News: Young people 'confused by pensions'

jem16

hello_sunshine wrote: »

That's quite a logical leap, and one that isn't true. The entire point about the changes is that pensions were supposed to be secure and tax efficient, so if they don't confer any tax planning benefit, what's their attraction over other forms of investment?

Pension do have tax planning benefits;

Tax relief on contributions - especially useful if you pay less tax in retirement than you gained in tax relief.

Tax free lump sum

No CGT to worry about

No extra tax to pay on dividends if a higher rate taxpayer

Of course the main point for pensions is if your employer also contributes and/or offers a salary sacrifice arrangement.

I know that I'm not the only one among my friends who sees a pension as a financial product which isn't something that they don't want, but which is inappropriate for their needs.

So what do you and your friends feel is important for your needs?

hello_sunshine

We're more concerned with having enough money to get to the end of the month to be honest. The majority of young people are unlikely to be higher rate taxpayers- where I live there are very few permanent jobs available and graduates can expect to get just over minimum wage. When we can't get enough money scraped together for house deposits, we're putting off having kids because it costs a fortune, we're hardly likely to write off 5% of our pay for 40 years' time when we could be saving for something we need sooner.

dunstonh

hello_sunshine wrote: »

We're more concerned with having enough money to get to the end of the month to be honest. The majority of young people are unlikely to be higher rate taxpayers- where I live there are very few permanent jobs available and graduates can expect to get just over minimum wage. When we can't get enough money scraped together for house deposits, we're putting off having kids because it costs a fortune, we're hardly likely to write off 5% of our pay for 40 years' time when we could be saving for something we need sooner.

At least you will be well prepared for 30 years of poverty when you get to retirement having had what you make out to be be years of poverty getting there.

Think it is bad now. Just think about the £5000 basic state pension.

jem16

hello_sunshine wrote: »

we're hardly likely to write off 5% of our pay for 40 years' time when we could be saving for something we need sooner.

When do you get to the stage of planning for your retirement then? What will you use to do so?

Loughton_Monkey

hello_sunshine wrote: »

We're more concerned with having enough money to get to the end of the month to be honest. The majority of young people are unlikely to be higher rate taxpayers- where I live there are very few permanent jobs available and graduates can expect to get just over minimum wage. When we can't get enough money scraped together for house deposits, we're putting off having kids because it costs a fortune, we're hardly likely to write off 5% of our pay for 40 years' time when we could be saving for something we need sooner.

This is a very succinct, and extremely common 'reason' quoted for not saving for retirement.

But sadly, this argument does not hold water any more than one that says "I know I am stuck on this desert island for a year and have exactly a year's supply of water. But I decided to drink 20% more than the daily amount. So I will have nothing to drink for 2 months, and will almost certainly not survive..."

If you are struggling to make ends meet, then you have chosen a lifestyle which costs around 100% of your income. This is entirely your business, but inevitably (lottery wins or large inheritances apart) it means that you will have 25/30 years of living on State Pension together with whatever extra 'benefits' might apply when you get to an age when earning more money becomes almost impossible.

This is not opinion. It is fact. The fact of financial life. Or the law of mathematics. You can fool yourself for as long as you like that you "need" those things now, and that it's impossible to live on 80% of your income. But the people you cannot fool are the millions who actually do live on 80% of your income.

Exceptions are those who have extremely low incomes, in which case the State Pension will provide little or no drop from 'working' income.

Pincher

The entire balance of the ISA is tax free when you take it out.
The annuity is taxed, albeit you can take 25% lump sum tax free from the pension. Ever since Gordon Brown started taxing the dividend on the pension investment, there is little difference EXCEPT:

You can spend what's in your ISA any time you want.

If you are 65 years old, and you have a terminal disease,
a fat lot of good is £100k in a pension going to do you.
You will want to blow it before you go.
No, you can have £25k lump sum, but you can't touch the rest except in little drips, in which case the damned annuity provider gets most of it. You can leave it to your beneficiary on your death: what beneficiary? I have no children, I want to spend the £75k myself!

dunstonh

The annuity is taxed, albeit you can take 25% lump sum tax free from the pension. Ever since Gordon Brown started taxing the dividend on the pension investment, there is little difference EXCEPT:

The annuity is taxed on the amount above your tax free personal allowance.
The ISA suffers the same taxation as the pension whilst invested.

Pincher

Let us say you need an annuity income of £15k p.a. for age 65 to 75. You need to build up a £300k pension pot at current annuity rates.

If you just put money into ISAs, you only need to build up £150k, and then take £15k out per year from age 65, the rest still accruing interest or stay invested. Take more or less when you want, nobody rations your pocket money.

When you are tired of life, or the money finally runs out, take a pill and leave £500 on the desk for cremation.

Daniel_Elkington

So you are going to live about 10 years and then kill yourself? Great plan!

Pincher

The reason that pension and endowments are no longer acceptable for mortgage repayment is because the growth expectation is too little, even if they manage to curb the management fees.

For the low income, they won't even be able to save £50k by 68 years of age. If they have an annuity, it will actually disqualify them from getting various credits. Therefore, the only strategy is to spend all your money, and then apply for benefits.

The desperately proud who refuse state aid will never save £300k, so the honourable thing to do is to live decently on what you do manage to save, spend it at your own pace, and die with dignity. There is also the satisfaction that no fund manager or financial advisor leeched off you for decades.