Contributions - Advice Needed

jem16

stinktankcynic wrote: »

Thanks

So with a £100000 pot instead of taking an annuity at say 5.8%, you draw an agreed amount from the pension each year, perhaps £5500 after charges, based on government rates.

The amount able to be taken is all based on GAD rates but fairly similar to annuity rates. This is reviewed every so often.

So instead of getting an income for life and losing the pot, you perhaps take a slightly lesser amount each year, after some complex reviews and some additional charges you may have some fund left, if you have say £70000k left at death, what happens? Is it then paid to your estate less 55% tax, or can you pass the pot on?

It's either paid out as a lump sum with 55% tax or passed on to provide a pension for a spouse/dependant.

Can you for example, take a lump sum at 60, drawdown for 5 years, then buy an annuity at 65 with the remaining cash?

Yes you could.

So drawdown is a bit of a gamble, if values fall, you could run out of cash, if markets rise, you may be able to increase your drawdown amount every few years and also have something to pass on?

As the amount you are allowed to drawdown may change on your review, you are unlikely to totally run out of cash but you may have to draw down less.

atush

Basically, if you want to leave money for a spouse/dependent you would be drawing a lot less initially- could be as little as 3K per 100K pot.

DD gives you 100% spouse inheritance (within the pension to be drawn as pension for the spouse) over the 55% tax lump sum option.

I would only consider annuity if I was single.

Silvester

Sadly it seems that the level of contributions from your employer are not amazingly high, however unfortunately it seems that as of late, especially with companies having to absorb the cost of auto-enrollment, many companies seem to be lowering the amount they contribute.

One additional thing which may be worth looking at is whether your new employer offers any additional benefits, such as a sharesave scheme or discounts on products or services you already use. In which case, if you're saving money elsewhere, it may leave you with that little bit extra you can contribute to your pension.

I use sharesave at work, with the intention of using it to boost my pension and so far I have been really pleased with the outcome. I'm not sure if you've come across sharesave schemes before, but its generally an employer scheme where normally one of 2 things happens.

Scenario 1

This seems to be the most common share save scheme I have come across and the type of scheme I am currently in.

Each year on a given month, your employer look at the current share price and takes a certain percentage off this value (often about 20%). Your employer then allows you to buy so many shares at this price, with your contributions spread over so many years (normally 3-5 years).

After this period is up, you have the option of either taking back the money you have invested, or you can take the value of the shares at the present time, even if they have gone up.

For example, the share save scheme I started in October I essentially will pay 14.5p per share, however they are now worth more than twice that. So at the moment, my investment is worth more than twice what I have put in. Now in this scheme, I only contributed £35 a month, however if the shares are still worth twice as much when I sell them, I will get back £70 a month and if you then contribute that to your pension, you will recieve 20% tax relief.

Scenario 2

This scheme is similar to the first scheme, however in my eyes a little more generous.

In a similar manner, so much money is taken from your pay each month, however with this money you receive shares in the company you work for along with additional shares from your employer. My partner works for an insurance company for example and for ever 1 share she buys, her employer give her 2 in addition.

Again, at the end of so many years (normally 3-5) you can sell both the shares you have paid for, along with the free shares you have received. You can normally sell the shares before 3-5 years, however you will often lose the free shares you received from your employer.

I would suggest looking into whether your employer offers such a scheme. I've just updated my spreadsheet to work out what my sharesave is worth if I was able to take the value of the shares now and if it was pensioned. If I was able to take the value in cash now, I would have made a profit of 132.37% and if I was to put this into a pension, I would have made a profit of 178.84%.

Perelandra

What is your tax situation?

If you are currently a basic rate taxpayer, but have a likelihood of becoming a higher rate taxpayer further on in your career, then there may be a tax benefit for using excess contributions to instead fund investments outside of the pension "now", and transfer those to the pension as you become a higher rate taxpayer. Of course it's a little more complicated, but would give an extra 20% tax relief on the contributions.

Of course, this requires enough financial discipline not to dip into the out-of-pension investments!

I do agree with the other posts on this thread, though- it takes a large percentage of your pay to get a decent pension, unfortunately.