Pension or shares?

andy013

Hey, recently I have been thinking about putting some money away for my retirement. I am 25 years old.

I feel like the options I have are:

1. Put money directly into an index tracker (stocks&shares isa)
2. Put money into a private pension.
3. Put money into my workplace pension.

Currently I am only working part-time and I don't earn enough to be taxed, although that will probably change in the future.


My workplace pension scheme only offers 2.5% interest at a max. depending on inflation. I'm not sure what returns I could expect from the index tracker, but I have a feeling it will beat my workplace pension over 30+ years even with the employer contributions. Although, I'm not sure if I can put some money into the workplace pension and then transfer out to a private one to get the best of both worlds. In any case, I would only be putting a tiny amount in (since that's all my employer will match) so I'd probably need a private pension as well.

I'm a little confused about what is the best way to set up a private pension, putting some money away each month into an index tracker. There seem to be a lot of hidden fees, which can make it difficult to compare different plans.

I like the idea of putting the money into a private pension because I don't want to be tempted to touch it, although I wouldn't get any tax advantage immediately. I'm sure I will be working full time in 1 year from now.

Any advice on how best to go about setting up a private pension and avoiding hidden fees?

BLB53

Any advice on how best to go about setting up a private pension and avoiding hidden fees?

Probably the best way is via a low cost sipp like sippdeal. Invest in low cost trackers.

You could do this and also take whats on offer from your workplace, especially if your employer is contributing (free money).

The workplace pension could always be transferred to your sippat a later date.

Check out www.monevator.com for passive investing ideas - Vanguard or HSBC are usually the front runners on low cost.

quotememiserable

Putting money directly into a tracker if you are planning to hold it long term seems like a bad choice, because if you do the same thing inside a pension wrapper you save 20% tax. I'm sure some IFA people will be along to suggest a low fees pension provider.
Are you sure your workplace pension only provides 2.5%? That sounds very unusual, because either its a money purchase type scheme, in which case the return is entirely dependant on your investment choices, or else its a salary based scheme (defined benefit) in which case this is the runaway winning choice. Remember also with workplace schemes, not only do you save the income tax but also your employer will be paying into the scheme

andy013

Thanks for the replies.

Well, I don't get taxed at the moment so putting money into a private pension right now is of no benefit since I will get taxed on it when I retire. It would make more sense to put it in a stocks and shares isa and then open a pension once I start working full time. But it probably won't make that much difference and I just want to set up a pension that I can continue to contribute to throughout my working life.

I work for Morrisons supermarket. They have 2 pension schemes. I tried to do some quick calculations and I think an index tracker will beat the main one over the long term, but if I can do something like:

Put money in employer pension for 1 year >> transfer to private pension >> repeat...

then perhaps that would be best. Does anyone know if this is actually allowed? It feels like cheating. (I think it says in the morrisions info that you can do this as long as you have contributed for over 3 months).

They also have a CARE Scheme, it states: "You contribute 5% of your pensionable pay and every year you build up a guaranteed pension of 1.5% of your pensionable pay. This is adjusted each year in line with inflation. "

I'm not exactly sure what that means. Why would getting just 1.5% be good if I contributed 5% ?


Also, will setting up a SIPP allow me to make regular contribution of say £50 a month, without having to pay fees each time? On SIPPdeal it says it's £9.95 a deal, but I'm not exactly sure what counts as a "deal".

dunstonh

Your question is a bit like asking whether you should buy a car or petrol.

A pension is a tax wrapper for investments. It is not an investment. A Stocks & Shares ISA is another tax wrapper. Again, it is not an investment. You place the investments inside the tax wrapper.

Shares are an investment. You either hold them unwrapped or inside a tax wrapper.

My workplace pension scheme only offers 2.5% interest at a max.

not many pensions pay interest or have access to deposit paying accounts. Do, you really mean 2.5% interest or do you mean only 2.5% of your pay as an employer money (or to put it another way, 2.5% of your salary as free money)

I'm not sure what returns I could expect from the index tracker, but I have a feeling it will beat my workplace pension over 30+ years even with the employer contributions.

A UK index tracker can gain/lose 40% a year. Have an index tracker in the pension and it will still gain/lose 40% a year except you will have a chunk of free money to either increase the gains or reduce the losses.

There seem to be a lot of hidden fees, which can make it difficult to compare different plans.

What exactly are you looking at as most pensions geared for the inexperienced investor are mono charged. i.e. they only have one charge. That is the annual management charge. Are you perhaps looking at SIPPs and platform pensions geared more for larger investors with more experience of investing? Fees are not hidden. They are clearly disclosed.

Any advice on how best to go about setting up a private pension and avoiding hidden fees?

What hidden fees?

At the moment, you do sound confused and I suspect you are getting things mixed up (i.e. employer contribution, interest and hidden charges).

Linton

quotememiserable wrote: »

Putting money directly into a tracker if you are planning to hold it long term seems like a bad choice, because if you do the same thing inside a pension wrapper you save 20% tax. I'm sure some IFA people will be along to suggest a low fees pension provider.
Are you sure your workplace pension only provides 2.5%? That sounds very unusual, because either its a money purchase type scheme, in which case the return is entirely dependant on your investment choices, or else its a salary based scheme (defined benefit) in which case this is the runaway winning choice. Remember also with workplace schemes, not only do you save the income tax but also your employer will be paying into the scheme

It sounds like the Morrisons scheme about which there was a lengthy discussion here some time ago. The OP describes it exactly - a good employer contribution with only capped inflation matching investment increases. It provides a guaranteed lump sum on retirement so it has characteristics of both a DC and a DB scheme. Over a long time period the poor return becomes more significant than the employer contribution.

andy013

dunstonh wrote: »

Your question is a bit like asking whether you should buy a car or petrol.

A pension is a tax wrapper for investments. It is not an investment. A Stocks & Shares ISA is another tax wrapper. Again, it is not an investment. You place the investments inside the tax wrapper.

Shares are an investment. You either hold them unwrapped or inside a tax wrapper.

Yes, I know. If you had bothered to read my post you would see I am asking if it best to put money into an index tracker directly (with an isa wrapper) or use a private pension to do the same thing. I am also interesting in comparing these options to my employers pension scheme to see what is best.

not many pensions pay interest or have access to deposit paying accounts. Do, you really mean 2.5% interest or do you mean only 2.5% of your pay as an employer money (or to put it another way, 2.5% of your salary as free money)

I pay 5% of my pensionable pay. Morrisions pays 11%. This equals a total of 16%. This money then stays in the pension only increasing by a max of 2.5% depending on the CPI.

A UK index tracker can gain/lose 40% a year. Have an index tracker in the pension and it will still gain/lose 40% a year except you will have a chunk of free money to either increase the gains or reduce the losses.

Yet, I would be more tempted to withdraw the money. The appeal of a pension is that the money is locked away as I believe over a 30+ year period the index tracker will give me very healthy returns.

What exactly are you looking at as most pensions geared for the inexperienced investor are mono charged. i.e. they only have one charge. That is the annual management charge. Are you perhaps looking at SIPPs and platform pensions geared more for larger investors with more experience of investing? Fees are not hidden. They are clearly disclosed.

I was referring to hidden fees from index trackers within the pension wrapper.

Tammer

Hi,

It's worth remembering that for personal pensions, including group personal pensions, you can pay in up to £3,600 a year and get tax relief, even if you pay no tax.

T.

Lokolo

andy013 wrote: »

I was referring to hidden fees from index trackers within the pension wrapper.

What hidden fees?

There are 2 fees; the fund charge and the platform charge. Neither of these are hidden.

andy013

Tammer wrote: »

Hi,

It's worth remembering that for personal pensions, including group personal pensions, you can pay in up to £3,600 a year and get tax relief, even if you pay no tax.

T.

Ah, cool. I didn't know that. Thanks for the info

Lokolo wrote:

What hidden fees?

There are 2 fees; the fund charge and the platform charge. Neither of these are hidden.

I was under the impression that the TER of each fund wasn't always the only cost.

Linton

When we discussed the Morrisons scheme last time the conclusion we came to was that whether it was a good scheme for young joiners or not depended crucially on if and on what terms you could transfer money out of the scheme early either because you left the company or simply because that's what you wanted to do whilst remaining employed with Morrisons. This would be of particular interest to younger employees as presumably most would not expect to stay with the company their entire working lives.

By leaving early they possibly could get the benefit of the large employer contribution without the downside of the poor long term investment return.

We could never get clarification on this. So to the OP: do you have any information which could help?