Wwyd?

megan01

Hi everyone. My boyfriend is in a bit of a quandary. He is 26, and works full time and is the only employee of his employer. He doesn't have a pension, and I made him aware of the auto enrolment rules coming into force soon. He asked his boss, who said it wouldn't be for a while that he gets one. Having a pension in place myself which totals 18% in my contributions and my employer, it scares me that he doesn't have one. What would be the best course of action for him next do you think? Wait until his boss sets up a pension? Save in an ISA until this happens? Or get a private pension? If so where do we start with getting one?

Thank you.

atush

Wwyd?

Despite not knowing your question or what it means, here is my answer.

I'd be A- looking for a better employer (on the sly of course)

and b saving a full emergency pot to cover me for 3-6 months, then joining a personal pension.

some here may say to save into a S&S isa at first instead, but I say no- unless you have other shorter term spending needs on top of emergency cash such as, (but not limited to) a house deposit.

Otherwise, the compounded returns on the tax relief portion of your monthly pension savings will out pace any returns from a S&S isa (as the investments can be identical).

jem16

atush wrote: »

Wwyd?

Despite not knowing your question or what it means, here is my answer.

wwyd = what would you do.

Otherwise, the compounded returns on the tax relief portion of your monthly pension savings will out pace any returns from a S&S isa (as the investments can be identical).

The only thing that would be different would be any tax-free cash entitlement. Otherwise 20% tax relief going in and 20% tax paid would work out exactly the same.

kidmugsy

jem16 wrote: »

wwyd = what would you do.
.

Or "what would you drink?". Itsh Chrishmash!

hugheskevi

He asked his boss, who said it wouldn't be for a while that he gets one.

Does his boss know when the obligations affect the business? They can find out at at either of these pages (NOWpensions or the regulator). If unsure, they should find out, as it could be as early as 1 June 2015.

What would be the best course of action for him next do you think?

I'd say there are 2 general approaches and you should consider which one best fits your partner. First, you can follow a simple rule of thumb approach and save a percentage of salary equal to half of his age into a pension. Continue to save that percentage, and review things in a few years. That is a very passive approach, but if he isn't going to be very engaged is probably best.

Alternatively, if he is financially engaged, then it is better to treat pensions as part of overall investments. There is nothing particularly special about a pension, it is just another type of investment wrapper. As such, it can be used alongside the other wrappers and investments to optimise outcomes.

If he is a basic rate taxpayer with no salary sacrifice and no employer contribution, pension contributions are not very attractive, as all he gets is 20% relief on contributions, then pays 20% tax on the after a 25% tax free lump sum. Compare that to a 40% taxpayer who has their contribution matched by their employer, who also adds the 13.8% employer National Insurance contribution saving to the pension contribution...the income is still likely to be taxed at 20% in retirement, other than the lump sum, but the size of the contribution is much greater. It is when you get situations like this that pension contributions become hugely attractive. It is at that time that it is ideal to increase pension contributions, and draw down the ISA consisting of previous savings.

I would argue that unless there is higher rate tax relief, employer pension contributions or salary sacrifice available, it is better to use ISA investments for whatever investment saving is undertaken. At such a time when higher rate relief, employer contributions or salary sacrifice is available, pension contributions can be increased to effectively move the money from the ISA to the pension. Plus you have flexibility if needed - that is generally an advantage (you should want flexibility unless you are being rewarded for foregoing access) but some people struggle with financial discipline and it is best tucked away from their grasp, for which a pension is ideal.

Wait until his boss sets up a pension?

Given the company is so small, he could ask if his boss could make contributions to a personal pension, as employer contributions, with his salary reduced by the amount of the contribution. This way he would benefit from National Insurance contribution saving.

Also ask if the employer National Insurance savings can be added. That would make saving into a pension very worthwhile.

If so where do we start with getting one?

You could start by looking around the Cavendish website. Until there is a modest amount in the pension pot (say £10,000 or so) it doesn't really matter what you do, as long as you are not paying large fixed-fees which are disproportionate to the small size of the pot when first started. As the pot gets bigger it becomes more important to consider the most appropriate provider.

I'd be A- looking for a better employer (on the sly of course)

Rather harsh, without knowing full details of the remuneration package. My ideal employer pension provision would be something like statutory minimum contributions, offering salary sacrifice with all employer National Insurance contribution savings added to contributions the employee chooses to make. That would enable me to choose how much I want to go into a pension, without my employer paternalistically choosing a level that they think is right for me (and reducing my salary accordingly, as it is all about the remuneration package and there is no free lunch), but without knowing anything at all about my financial arrangements and hence almost certainly getting it wrong.

Otherwise, the compounded returns on the tax relief portion of your monthly pension savings will out pace any returns from a S&S isa (as the investments can be identical).

If the money moves to a pension in the future (and assuming income tax rates remain the same), the outcome is at worst identical (if the contributor never gets access to salary sacrifice, higher rate relief or employer contributions they can take advantage of) and at best significantly better as they benefit from one or more of those things.

jamesd

Assuming he's a basic rate tax payer it'll probably be best for him to start using a stocks and shares ISA to buy funds when there's no employer pension scheme at his age. Both have a broad range of investments available and can deliver the same growth because of that.

Once he has a job with a pension scheme that uses salary sacrifice or is a higher rate tax payer he can consider moving the money from the ISA into the pension. This way he'll end up getting higher tax relief - NI and income tax from salary sacrifice or higher rate income tax relief.

So S&S ISA and be patient until he has a better opportunity to exploit is the way to go.

There are two significant catches for the ISA approach that don't apply to pensions:

1. ISA money counts towards benefits means tests. Eventually he'll have enough that it will prevent him from getting these and he'll be forced to draw on the money instead. this matters a lot if his work is seasonal, intermittent or in cases of long term unemployment for any reason.

2. ISA money is vulnerable to bankruptcy because it's treated as just savings like any other.

I'm assuming that neither of these is likely to be significant for him but he does need to be aware of these two risks and that eventually it'll be better to protect the money from means tests by putting money into a pension instead of ISA.

There is another exception later, when it becomes credible for him to save enough to live on for life, combined with existing pensions. When this appears possible he might deliberately accumulate money outside a pension to allow him to live without benefits until he gets to the age at which he can take pension income. He's too young to be in this position at the moment, because he has too many years to support himself on savings for it to be possible.

atush

jem16 wrote: »

wwyd = what would you do.



The only thing that would be different would be any tax-free cash entitlement. Otherwise 20% tax relief going in and 20% tax paid would work out exactly the same.

The first letter being a capital made me think it could be a typo.

And I was saying the compounded investment returns on the tax relief portion would boost a pens
ion above an equivalent ISA- I wasn't talking about the end game.

In any case, with early retirement, you could conceivably take cash up to your PA each year, thereby paying no tax on the pension income- at least until you have other income streams such as SP or a DB pension.

ViolaLass

atush wrote: »

And I was saying the compounded investment returns on the tax relief portion would boost a pens
ion above an equivalent ISA- I wasn't talking about the end game.

But in the end, it's not how much that's in there that matters, it's how much you can get out.

atush

true, but yet the compounded returns on 80 in an isa will be lower than the compounded returns on 100 in a pension. Assuming equivalent investments in both.

Also, given the new flexibility, it can be easier in the case of early retirement before SPA to get money out of your pension w/o paying tax by fully using your PA.

ViolaLass

atush wrote: »

true, but yet the compounded returns on 80 in an isa will be lower than the compounded returns on 100 in a pension. Assuming equivalent investments in both.

But you would still lose 20% of the latter. If it has grown more, the 20% will be bigger.

Also, given the new flexibility, it can be easier in the case of early retirement before SPA to get money out of your pension w/o paying tax by fully using your PA.

Agree with this point.

jamesd

It's a shame that you agree because it is wrong. The taxable part of the pension is 75% of it, not 100%. Of the taxable part some may be tax free within the personal allowance. So overall the pension has an advantage unless there is a significant increase in income tax between putting the money in and taking it out, or loss of the tax free lump sum.

However in the short term the ISA has the advantage because today all the pension gets is the income tax relief. By using the ISA first the growth rate will be the same as the pension but the money can be put into a pension when there is employer matching, salary sacrifice or higher rate income tax relief, or even one of the political proposals to set pension tax relief to 30% or whatever, an increase on the current position.

With no urgency to use the pension today and good prospects of better results from doing it later, ISA now wins, with pension to follow later when circumstances are more favourable, or when means test risk becomes a significant factor due to the amount involved.