flaws with the opt in pension

sukh38

are there any ?

dunstonh

There is no opt in pension. There are opt in rules but the pension used can be any your employer likes as long as it meets the rules.

As the rules mean you get "free money" effectively from the employer contribution then then its hard to turn that down unless you are daft.

stinktankcynic

Your take home pay is reduced, your cash, a bit of tax relief and employer con s are invested in a scheme. At some date in the future, the government may change this, you can then choose to use the pot, perhaps take up to 25% tax free, then the rest buys you an annuity (usually). So if you have a pot of £50000.00, you may get back a taxable amount of £2500 a year. That's a long time just to get the capital back. Or put it another way. If you give me £100k now, I will give you back £5000 a year. I can invest the £100k to get a return. Someone can probably do a spreadsheet to show how long it would take you to live, for me to lose.

dunstonh

That's a long time just to get the capital back

You do realise your figures are out. You seem to be missing the employer contribution and tax relief and tax free growth.

hugheskevi

Take a male aged 65 with £100,000 purchasing a single life non-escalating annuity.

The man in average health should expect to live 21.4 more years, or until 86.4 (source here)

The relevant annuity rate is 5.72 (source here).

The 20 year gilt yield is 2.81% (source here)

Invest that £100,000 in gilts yielding 2.81%, and pay an annual amount of £5,720 (which is pretty much what the insurer does).

The pot runs dry when the man is aged between 87 and 88.

That looks about right, given the man expects to live to 86.4 and the insurer has operating costs and a profit to make.

With an annuity rate of 5.384% the pot runs dry between age 89 and 90.

Thrugelmir

sukh38 wrote: »

are there any ?

What are your plans for a comfortable retirement?

GhIFA

stinktankcynic wrote: »

Your take home pay is reduced, your cash, a bit of tax relief and employer con s are invested in a scheme. At some date in the future, the government may change this, you can then choose to use the pot, perhaps take up to 25% tax free, then the rest buys you an annuity (usually). So if you have a pot of £50000.00, you may get back a taxable amount of £2500 a year. That's a long time just to get the capital back. Or put it another way. If you give me £100k now, I will give you back £5000 a year. I can invest the £100k to get a return. Someone can probably do a spreadsheet to show how long it would take you to live, for me to lose.

But (and lets take the 8% contributions that will eventually apply as a guide to give some context) of that £100,000 my employer has contributed £37,500, and of the remaining £62,500 I have had tax relief, meaning it has cost me £50,000 (if a basic rate taxpayer) - looks a bit better that way doesn't it?

jamesd

Whether there are flaws with the opt in pension depends on the specific one being made available to you. Almost all are good, at the moment there are just two that I'd say aren't, and in those cases just for those that are not close to retirement.

stinktankcynic

GhIFA wrote: »

But (and lets take the 8% contributions that will eventually apply as a guide to give some context) of that £100,000 my employer has contributed £37,500, and of the remaining £62,500 I have had tax relief, meaning it has cost me £50,000 (if a basic rate taxpayer) - looks a bit better that way doesn't it?

Take away the employer contribution, any tax credit gains by paying into a pension and only being a basic rate taxpayer and the main benefits of a pension are reduced, are they not?

Or in simple terms, would I be stupid to invest £2880 of my own cash into a stakeholder pension scheme this week?

GhIFA

stinktankcynic wrote: »

Take away the employer contribution, any tax credit gains by paying into a pension and only being a basic rate taxpayer and the main benefits of a pension are reduced, are they not?

Or in simple terms, would I be stupid to invest £2880 of my own cash into a stakeholder pension scheme this week?

But that's not the question being asked - the question is with regards to an auto-enrolment pension. You used £100,000 as a figure, and I've outlined how it will work under the eventual auto-enrolment requirements.

I don't disagree that pension contributions can, in some cases (particularly basic rate taxpayers) be less beneficial without employer contributions, however, in the context of this discussion around auto-enrolment pensions then the circumstances I've outlined above are entirely relevant, and you can't just take these out of the equation just because they don't suit your point of view.

atush

Take away the tax releif and the employers contribs then it isn't a pension. Use a S&S Isa instead.

But that isn't what the OP is talking about.

Sukh, once you know what your pension is, get back to us. but it is likely to be better than no pension at all.