Pension independent on my employer and other questions

chrisgeller

Hi

I'm looking at starting a pension and have lots of questions. Apologies if these are covered in the WIKI's but I couldn't really find what I was looking for.

- I'm looking for a pension scheme that is independent of my employer so that I can just sort things out myself and keep track as I move between jobs.
- I'm not interested in active management, so I'm looking for the lowest fee passive management available.
- I want to set up something this year so in theory I can pay back into the 2014/15 tax year. I understand the scheme I pick needs to be 'approved ' - are there any examples of what that means?
- Is it common to need to change your pension scheme? Do there tend to be large fees for doing this? Obviously I'm wary of putting money away that might be difficult to move around.

Any starters for what I might be after?

Thanks for your help.

mgdavid

chrisgeller wrote: »

..........
- I'm looking for a pension scheme that is independent of my employer so that I can just sort things out myself and keep track as I move between jobs...........

but you will also join each employer's scheme won't you, as otherwise you will be turning down FREE money (the employer's contributions) which will damage your potential for a good pot come retirement age.

atush

While it is fine to have your own personal pension not attached to your employer, it is unwise in the extreme to not join the employers pension and pay in enough to their Maximum contribution. This is 'free money' to you and should not be shunned.

Pensions can be moved when you leave employers if you want to, and there is no limit on the number of pensions you can have.

As far as opening one quickly go online to Cavenidsh online or Hargreves lansdown. the pensions there will be 'approved'.

which one is cheapest for you will depend on what investments you want to put in it, and how much you will pay in as some are a flat rate (better for larger) and some a % (better for smaller). As to what investments, different types of investments have different charges on the different 'platforms' (ie the online pension shcme). So you'd need to decide what type of investments you w ant to choose before decide who is best/cheapest? for instance only SIpps can hold single shares (risky), and if you w ant to use investment trusts or lifestyle funds some platforms are better than others. If you want to use trackers, you need to see who charges the least for the Clean Class shares.

Or you can go to an IFA and get one open. But you'd have to get your skates on, so an online provider would be easier for this year?

Financial_Saddler

It is actually possible to choose your own pension scheme, which is not the company's "approved" scheme, and also get the company to contribute to it - one does not necessarily preclude the other. I've done it with two separate companies and am very happy with the outcome many years later - particularly since one would have meant becoming embroiled in the Equitable Life debacle...

However, this course of action is one that you should take only if you are certain that your own choice is better in terms of cost, investment choice, performance, etc than the company's pension choice. You need to make yourself very well-informed before taking such a step.

atush

While possible, it is not common. Many firms will only contribute to the in house one. You have but to ask them.

chrisgeller

Thanks all for your responses. Lots more questions!

I was interested to read a bit more about the Equitable Life disaster. As I’m planning to put money away and make use of it for decades and decades – I’m keen to understand if there are smart ways to avoid this sort of problem – I don’t want to take a wrong step right from the start

It seems to me that:

- Equitable Life went bust on the basis of specific products they had sold – but when they went bust it affected all the pension holders.

- They had significant exit fees so it was difficult for anyone to remove their investment

- The Government did step in to offer a compensation scheme, but it seems to have come years after the fact and to only partially compensate those affected, after quite a few of them had died.

I was under the impression that the government would provide a fairly solid guarantee for pension companies, but this doesn’t seem to be the case?

I also had a quick look around on the Hargreaves website, they seem to be charging fees of around 0.4% per year. Is this typical? I was hoping for lower, on something like a passive ETF.

Finally - my understanding is that to have the right to use this years £40k near tax year - I only need to be a member of an approved scheme. I could theoretically set up something entirely different when I get around to it next year and use that?

Thanks again

Thrugelmir

chrisgeller wrote: »

I was interested to read a bit more about the Equitable Life disaster.

That was some years ago. Hardly relevant to the market today.

xylophone

https://www.moneyadviceservice.org.uk/en/articles/your-first-pension-the-options

https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

jamesd

All pension schemes that you will find marketed to consumers in the UK are approved by HMRC, the body responsible for approving their giving tax relief.

It's unlikely that your employer will pay their contributions, if any, into any pension other than the one that they offer but if they do allow it they might have a list of alternatives that they approve.

chrisgeller wrote: »

I was under the impression that the government would provide a fairly solid guarantee for pension companies, but this doesn’t seem to be the case?

The types of things that Equitable Life sold are no longer available. Annuities sold today have 90% value protection via the Financial Services Compensation Scheme while they are paying out. Investments these days are not normally with profits funds with shared fortuned for all invested in them, though a few of those still exist. Instead it's usually funds each of which is independent of the fortunes of the others. or ETFs. Or investment trusts. Or shares. You choose.

chrisgeller wrote: »

my understanding is that to have the right to use this years £40k near tax year - I only need to be a member of an approved scheme. I could theoretically set up something entirely different when I get around to it next year and use that?

There are two limits:

1. your earned income in the tax year. You are not entitled to tax relief on any more than this level of income, which is usually the PAYE income. This cannot be carried forward to future years.
2. the £40k annual pension contribution limit, if lower than earned income. This can be carried forward for up to three years if you were in any pension to allow you to contribute closer to your higher earned income level.

bowlhead99

chrisgeller wrote: »

Hi

- I want to set up something this year so in theory I can pay back into the 2014/15 tax year.

chrisgeller wrote: »

Finally - my understanding is that to have the right to use this years £40k near tax year - I only need to be a member of an approved scheme. I could theoretically set up something entirely different when I get around to it next year and use that?

Jamesd's answer on the rules is right. But just in case you are thinking that you can save current year (2014/15) tax when you make contributions in future years - you can't.

If you set up a personal pension in the next month - you will be allowed to contribute this year's salary (restricted to 40k, if your salary's more than 40k) during this tax year. That would reduce this year's tax bill at your marginal rate for this year.

If you don't actually make much contribution, you can potentially carry the unused limit forward. Then next year (2015/16) you can contribute that year's salary to a pension (any pension) and the restriction will not be 40k it will be 40k PLUS the unused amount from 2014/15. Again, contributions would reduce that year's tax bill by your marginal rate of tax for that year.

As an example, say you earn 55k a year and have a marginal rate of tax of 40% on your last £13k or so of earnings.

You create a pension this week but only put £80 in it. The pension company presumes you are basic rate taxpayer and turns the £80 into £100 by claiming a gross-up from HMRC. But actually you are a higher rate taxpayer so you tell HMRC that you have £100 in a pension pot which means it should have only cost you £60 net, but actually you forked out £80. So HMRC send you £20 of cash or reduce any tax bill that you owe them. Woohoo, overall you diverted £100 of salary into a pension scheme and saved £40 of tax.

The maximum amount you could have diverted was £40,000, so you've barely touched your allowance. Your unused contribution limit that can be carried forward to next year if you need it (or the two years after that if you don't), is £39,900.

So then we get to 2015/16 and you have your £55,000 salary. Just like in 2014/15, the standard rule is that you can put £40,000 of this into a pension scheme of your choice, but also you have this £39,900 of carry-forward allowance. So actually if you were able to earn, say, £100k, you could put the last £79,900 of it in a pension scheme and then only be left with a £20,100 taxable salary, and pay a pittance in tax - half covered by your annual allowance at 0% and the other half at 20% basic rate.

But if you don't have £100k of salary, you only have £55,000, then having a limit of putting 'earned income, up to £79,900' into a pension is way more than you need. The most you would practically want to put into a pension if you earned £55,000 is about £45,000, because the first £10k of what you earn is in your annual allowance at zero tax anyway.

So, having the ability to put £45,000 into a pension as a result of your carry-forward might be useful, because it's more flexible than only being able to put the standard annual £40,000 into a pension, but at that sort of salary it's perhaps unlikely that you would need to use the flexibility at all. It is only really useful if you get a huge one-off bonus, or perhaps an inheritance or windfall that means you really don't need your day to day earnings and can make a big contribution. Whatever you don't use, gets carried forward again (up to the time limits).

But say you were on £55k for 2015/16. You are only paying high rate tax on the earnings above £42,385. So, the most you can put away and save high rate tax is about £13k. Because if you diverted £14k to a pension and only had remaining taxable pay of £41k, you are only paying 20% tax anyway, so you are saving tax at a lower rate when you make any further pension contribution.

So, the fact that you carried forward £40k of 'allowance' from 2014/15 doesn't help you save any more high rate tax in 2015/16 than you could already have saved. You already had £40k allowance in that year and only needed to use a bit of it to save all your 40% tax. The fact that you have an extra £40k allowance on top doesn't allow you to save any more 40% tax for 2015/16, and it doesn't allow you to go back and save any 40% tax for 2014/15 than you already did before 5 April 2015.

If you earn less than about £50k every year and don't have any one off windfalls or bonuses then having any more than £40k of pension allowance available is not particularly useful. If you're in the minority that earns lots more than that, and/or expect to have big lump sums available to make unusually large contributions in future years, then it can be handy and it's perhaps worth signing up to a pension before April just so you qualify to have this £40k allowance carried forward for you.

Sorry for the long post which might not have even been necessary but people get confused about this stuff - and I had the example saved elsewhere to mostly just paste in!

amandajc

jamesd wrote: »

There are two limits:

1. your earned income in the tax year. You are not entitled to tax relief on any more than this level of income, which is usually the PAYE income. This cannot be carried forward to future years.
2. the £40k annual pension contribution limit, if lower than earned income. This can be carried forward for up to three years if you were in any pension to allow you to contribute closer to your higher earned income level.

Sorry to interrupt but I would like to clarify the point James makes about tax relief on earned income being limited to the tax year in question with no carry over from previous years allowed.

This tax year I have earned around £26,000 and paid into my SIPP (£12,000), LGPS DB pension scheme (value increase I'm trying to establish? and have posted another thread to ask for help with this) LGPS AVCs (around £2,000) and a FSAVC (£120) - Added up it means I'm quite close to the limit if this is determined by this year's salary alone (depending on how the increase in the LGPS is calculated - 26000/49 X 16 = 8489. Total = £22,609?)

I was hoping to reach at least the same kind of levels next year and was relying on being able to use carry over salary allowance from previous years as I was earning more in the past (I am now part time) But it seems this is not allowed? I may need to review my plans. Thanks for the warning. :-)