Absolute beginners help in laymans terms please

icw

Hi
I am 41, I have a mortgage which will be paid when I am 65. (house is currently worth about £300k (july 07)
I run a small limted company, earn about 4-5K per month.

I have NO pension or any other kind of savings but am becoming increasingly aware that I am getting older and moving unavoidably towards the day when I will have to retire.
The big question is what to do?
you have to understand - I know nothing about pensions AT ALL. So why is a pension better than just putting my money in to a high rate savings account?
Maybe I should not even consider pensions and buy a couple of cheap properties in eastern europe?

If anyone can help with the most basic of advice I will be very grateful. All I am looking for is a starting point from which to carry out further investiagtion.
PS - is it worh getting the services if an IFA (if so , how do i know he is really independent)

thanks
ICW

seven-day-weekend

Well, there are more complicated answers to your question, but one major reason why I would say a pension is better is that onced you are receiving it, it won't run out, whereas your savings might!

Do you pay your insurance contribution towards your State Pension? Get a forecast of how much you will be likely to receive and when:
http://www.direct.gov.uk/en/Diol1/DoItOnline/DG_4017970

Ian_W

Like seven-day-weekend I'm no expert but I suggest you start by reading this thread:
http://forums.moneysavingexpert.com/showthread.html?t=375217&highlight=Pensions+v+ISA

You obviously realise you need to do something towards retirement savings but whether it's a pension or ISA will very much depend on your tax situation I would have thought. If you're earning about £4/5K per month then I would have thought you'd be a HR taxpayer which may favour the pension but I would suggest you seek professional advice either from an IFA [not a bank "advisor"] or your accountant.

So why is a pension better than just putting my money in to a high rate savings account?

Some figures in the paper to-day showing [in round figures]that £100pm over 30yrs in a cash account would be worth £100K, whereas the same in stocks and shares would be worth £400K. Over the long term equities have always outperformed cash and there seems no reason for that to change. Plus, other than your cash ISA allowance, you'll be paying tax on the interest whereas both ISAs and pensions have tax advantages.

Maybe I should not even consider pensions and buy a couple of cheap properties in eastern europe?

And if they remain cheap your state pension is going to be the equivalent of about £4Kpa but you'll have somewhere cheap to while away your days I suppose!

dunstonh

PS - is it worh getting the services if an IFA (if so , how do i know he is really independent)

The I in IFA stands for independent. The ones which are not indpendent cannot use the term independent at any time and cannot put I in front of FA.

Just avoid salesforces and you should be fine (salesforces in any profession are best avoided). A small directly authorised firm or one attached to a network is your best bet. The network IFAs tend to get better pricing and terms from providers as they are viewed as a collective by the providers and not individually.

So why is a pension better than just putting my money in to a high rate savings account?

Its a little bit like comparing car and petrol. A pension is a tax wrapper. Think of it is a container for investments and savings. You can have cash accounts inside a pension if you want. The savings account is not a tax wrapper and you cannot put different investments inside it.

Historically, cash more or less performs in line with inflation if you are a basic rate taxpayer and keep an eye on your interest rates and move when required. So, you get no real growth. Pensions and ISAs are tax free. Pensions also benefit from tax relief at your highest rate. Also as a director you can make contributions via the company and save on NI.

I wont cover investments vs ISA here as Ian has posted the link to the thread that covers pros and cons of both.

In very very simple terms, if you work on 5% as a rate of income in retirement, this means you have to have a lump sum of £200k to pay an income of £10k a year (200 x5% =10k). So, decide how much income you need in todays terms and calculate the lump sum required. That will give you a target in todays terms. Obviously, that figure will increase over time due to inflation so like any investment, it needs to be kept under review and contributions revised periodically to make sure you are still on track. Failure to do that is a common error.

Once you know how much you need, its then a case of how much do you need to put aside and what is the best way to do it (ISA, pension or both) and then what are the best investments to do it and which providers can so that for you.

If you are unable to work that out for yourself,then that is when you get the IFA to do it for you. You are in business so you should have a better understanding that often you need professionals to do a job that you cannot do. There is little point going DIY if you are not capable of doing the job properly. Do you service your own car? Do you service your own boiler? Do you do your own accounts? Do you do you own decorating? Some things you may do, somethings you dont and you get someone to do them for you. Some people will try the DIY and end up making a right pigs ear of it costing them a fortune.

EdInvestor

Some people will try the DIY and end up making a right pigs ear of it costing them a fortune.

Then again exactly the same thing can happen if you get an incompetent or self - serving advisor.

Investment isn't actually rocket science. IMHO it's sensible to learn a bit about it first, so that at least you will have a better chance at spotting any 'deliberate mistakes' perpetrated by a poor advisor, before they do too much damage to your wealth..

dunstonh

Then again exactly the same thing can happen if you get an incompetent or self - serving advisor.

Quite possibly that could happen if you saw one of the small minority of bad apples out there. Every profession has them. However, at least you have FOS protection with the advice route. There is no protection for your own mistakes.

A good adviser will be willing to explain the pros and cons, the strategy they use, show research and information to back up the recommendation. A bad one will probably be very good with the talk but actually have little evidence or information and will probably not explain their reasoning as much. The subject may bore you but a little bit of questionning about the investment strategy can give you a good indication of the quality of the adviser (if only one fund recommended, then that is usually a sign of a lazy adviser or incompetent adviser - note there is an exception for those with small amounts who dont want ongoing advice and wont be keeping an eye on it).

icw

Thanks everyone for your input so far.
I get the picture.
I think it's time to find myself an IFA, in order to get my house in order.

Cheers
ICW

btloptingout

icw wrote: »

Maybe I should not even consider pensions and buy a couple of cheap properties in eastern europe?

I think a lot of people have taken this route......It's my suspicion that they may live to regret this.