Approaching 40 - Pension or look at other options?

mari01

Hi

I'm approaching 40 and don't have a pension.

Is it worth taking out a pension plan, or would my money be better off elsewhere?

I'm self employed & employed (boss currently not participating in the pension contribution scheme) and will be looking to retire by 65yrs of age.

I could commit up to £200 into an investment per month with a small lump sum added each year.

Advice would be much appreciated.

dunstonh

I'm approaching 40 and don't have a pension.

oh dear. Not the end of the world but its going to cost you.

Is it worth taking out a pension plan, or would my money be better off elsewhere?

We dont know your financial circumstances so cant say. However, generically, pensions are a very strong option for retirement planning.

I'm self employed & employed (boss currently not participating in the pension contribution scheme) and will be looking to retire by 65yrs of age.

I think it is fair to say that you will not be retiring at 65 unless you are used to living a very frugel lifestyle and have little ongoings. You havent funded any income above state let alone funding 2-3 years of no income before the state pension kicks in.

I could commit up to £200 into an investment per month with a small lump sum added each year.

Its better than nothing but its on the low side for someone starting so late.

atush

Basically the only better way to fund retirement is to be independently wealthy.

Starting at 40, wanting to retire at 65, you should really be putting in up to 20% of your income incl the tax relief. What is your approx income?

But 200/month is better than nothingso get to it.

Ask your employer when they will offer a pension- they have to by law and can't drag their feet beyond their 'staging date'. Ask them when that is?

dunroving

It's never too late to pay into a pension. I effectively didn't start until I was 39.

buytwolet

dunstonh wrote: »

oh dear. Not the end of the world but its going to cost you.



We dont know your financial circumstances so cant say. However, generically, pensions are a very strong option for retirement planning.

For some maybe (higher rate tax payers) and not all.

The reason I'd say choose an alternative investment vehicle is that by delaying this far you have missed out on 25 years of gains however we have also seen successive governments take out advantages of pension savings brick by brick. First losing dividend tax credits, then a slashing of the lifetime allowance and recently upping the age at which you can access your pot to 57 (from 55, previously 50) and a detail in the white paper to suggest a 10 year peg to state pension.

Where next? Losing the 25% lump sum for a start. There is no advantage in getting 25% tax relief if it's only going to be taken off you at retirement . So consider the initial uplift as 'you' managing their portion of capital on behalf. The mooted 30-35% relief won't swing it for me either.

Also your pot will likely never be big enough for a serious IFA to manage on your behalf and those that do will charge you handsomely for their advice.

Put that £200 a month into an ISA for 25 years and assume you'll take out a £200 equivalent (inflation adjusted) monthly for 25 years or to aged 90. This will be in addition to your state pension (*at state pension age) and if you're a home owner aim to be mortgage free! If you don't think that is then enough to live on, increase your contribution to 300, 400 or more (1,250 tops at the moment).

Where to invest?!

Rule of thumb is 100 less your age in equities, so 60% in your case, remainder in bonds, cash and precious metals (25%, 10% and 5% respectively).

Half the equities in a global tracker (excluding UK) and the other half in individual stocks or cash until the right share comes along at the right price. I look for good dividend payers and am happy to invest in UK companies with my only rule that I use them myself.

As an idea this financial year my purchases were Sainsbury's, Esure, De La Rue, Braemar and Debenhams. Diversify.

dunroving

buytwolet wrote: »

For some maybe (higher rate tax payers) and not all.

The reason I'd say choose an alternative investment vehicle is that by delaying this far you have missed out on 25 years of gains however we have also seen successive governments take out advantages of pension savings brick by brick. First losing dividend tax credits, then a slashing of the lifetime allowance and recently upping the age at which you can access your pot to 57 (from 55, previously 50) and a detail in the white paper to suggest a 10 year peg to state pension.

Where next? Losing the 25% lump sum for a start. There is no advantage in getting 25% tax relief if it's only going to be taken off you at retirement . So consider the initial uplift as 'you' managing their portion of capital on behalf. The mooted 30-35% relief won't swing it for me either.

Also your pot will likely never be big enough for a serious IFA to manage on your behalf and those that do will charge you handsomely for their advice.

Put that £200 a month into an ISA for 25 years and assume you'll take out a £200 equivalent (inflation adjusted) monthly for 25 years or to aged 90. This will be in addition to your state pension (*at state pension age) and if you're a home owner aim to be mortgage free! If you don't think that is then enough to live on, increase your contribution to 300, 400 or more (1,250 tops at the moment).

Where to invest?!

Rule of thumb is 100 less your age in equities, so 60% in your case, remainder in bonds, cash and precious metals (25%, 10% and 5% respectively).

Half the equities in a global tracker (excluding UK) and the other half in individual stocks or cash until the right share comes along at the right price. I look for good dividend payers and am happy to invest in UK companies with my only rule that I use them myself.

As an idea this financial year my purchases were Sainsbury's, Esure, De La Rue, Braemar and Debenhams. Diversify.

It sounds like the OP has limited experience with investing, in which case I'd advise staying away from investing in individual stocks.

dunstonh

however we have also seen successive governments take out advantages of pension savings brick by brick.

No they havent. There has been too much tinkering but most of the things since 1988 have improved options and terms whilst restricting things for high net worth individuals. The OP doesnt sound as if they fit that.

First losing dividend tax credits

Very misunderstood.

then a slashing of the lifetime allowance

Does it sound like the OP is going to have a fund of over £1.25 million?

and recently upping the age at which you can access your pot to 57 (from 55, previously 50) and a detail in the white paper to suggest a 10 year peg to state pension.

Does the OP sound like they fund the funding to retire in their 50s?

Where next? Losing the 25% lump sum for a start. There is no advantage in getting 25% tax relief if it's only going to be taken off you at retirement .

Wrong. You get 20% tax relief as a basic rate taxpayer. (pension contributions can also increase working/childrens tax credits). The 25% lump sum on retirement means that only 75% of the pot is subject to tax and only above your personal allowance.

Also your pot will likely never be big enough for a serious IFA to manage on your behalf and those that do will charge you handsomely for their advice.

Who says he has to use an IFA ongoing service?

Put that £200 a month into an ISA for 25 years and assume you'll take out a £200 equivalent (inflation adjusted) monthly for 25 years or to aged 90. This will be in addition to your state pension (*at state pension age) and if you're a home owner aim to be mortgage free! If you don't think that is then enough to live on, increase your contribution to 300, 400 or more (1,250 tops at the moment).

The OP is not going to be using all of their personal allowance in retirement. So, this option would result in a lower amount.

Where to invest?!

Rule of thumb is 100 less your age in equities, so 60% in your case, remainder in bonds, cash and precious metals (25%, 10% and 5% respectively).

That is far too basic and would be considered mis-sale if advised. There is no such rule of thumb. Its what some people say to get people thinking. That is all.

mari01

Thanks for your replies. I am actually 38 so have an extra couple of years to save/invest into a pension before planned retirement but I realise time is ticking on.

I have recently taken out an ISA and was planning on paying approx £500 into that per month and taking out a pension of around £200 per month. Also considering buy to let as an investment/income option (which would require a mortgage - another subject).

I guess I was really wondering if I would be better paying as much as I can afford into a pension or just put it into an ISA and look to get a buy to let property as an investment in the future (being mostly self employed, I wasn't so keen on the idea of committing £500-700 per month).

As for my employer - well they will eventually have to sort the pension but are very vague and tend to leave everything until the very last minute - I would like to take advantage of this once it is implemented though.

I do have a VERY small pension which isn't worth moving due to fees etc & which I am unable to continue with as no longer working for the company.

atush

BTL is fine, but income and gains are taxed.

ISas are fine, and you should have one.

But I would get the pension before BTL, and I would probably (if you have a good emergency cash fund and other investments) reverse your split with 500 into pension and 200 into ISA. Or 350 each.

Triumph13

As other have said, because you are going to be retiring well after the date when you can access the pension fund that takes away the main disadvantage of looking the money up in the pension so it will almost certainly be your best option. A simple personal pension or stakeholder will probably be appropriate - or you could park your contributions in an ISA for a year or two until your employer is forced to offer a pension and then use them as additional contributions to that fund.
A quick back-of-a-fag-packet spreadsheet can give you an idea of the likely amounts you could have after 25 years of investing £200 a month (increasing with inflation) for 25 years. If you assume a state pension of £8k, personal allowance of £10,500, 4% real investment return, a 4% drawdown rate in retirement and that in both cases you take a quarter of the fund to cover the period until state pension kicks in then the comparison comes out something like:


ISA
Lump sum £25,500, income £3,060, tax nil, Net income £11,060


Pension
Lump sum £31,900, income £3,820, tax £264, Net income £11,556


The two key conclusions are:
1 The numbers are not very big. Unless you are comfortable living on that income level then you need to find a way to either contribute more or work longer.
2 The pension route leaves you better off than the ISA route.


Edit - sorry, too slow typing and missed your second post which revealed the additional £500 a month of savings. I would redo the numbers, but I need to get back to work!

buytwolet

dunstonh wrote: »

No they havent. There has been too much tinkering but most of the things since 19888 have improved options and terms whilst restricting things for high net worth individuals. The OP doesnt sound as if they fit that.


So what are these improvements?

Very misunderstood.



Does it sound like the OP is going to have a fund of over £1.25 million?

The trend is your friend... down, down down.

Does the OP sound like they fund the funding to retire in their 50s?

Again the trend is your friend... up, up and away, where future meddling goes no one knows. It'll be in the OPs 60s I guess.

Wrong. You get 20% tax relief as a basic rate taxpayer. (pension contributions can also increase working/childrens tax credits). The 25% lump sum on retirement means that only 75% of the pot is subject to tax and only above your personal allowance.

Can you guarantee the 25% lump some will still be available in 25 years. Most hear seem to believe it'll be reduced to £30k max (doesn't bode well for inflation) or cut altogether.

What I meant to say £100 into a SIPP gets £25 rebate. You know that just that you were being facetious.

Who says he has to use an IFA ongoing service?



The OP is not going to be using all of their personal allowance in retirement. So, this option would result in a lower amount.



That is far too basic and would be considered mis-sale if advised. There is no such rule of thumb. Its what some people say to get people thinking. That is all.

No different to the rule of thumb IFA use here that is half your age in a pension. Gets people thinking.

OP save for your retirement but consider the ISA wrapper your pension wrapper first and foremost.

I've done really well using my method building a pot in excess of £250k (same age) just it's now in a SIPP. I'd prefer to have held less outside this but that is just the way it is.