Is starting a pension like taking a gamble on the future?

atush

lonewolf123 wrote: »

Hi all

I am looking into opening a SIPP especially since I will be getting a pay rise soon that will push me into the higher rate tax band and getting relief on that 40% tax is looking very tempting.

However I was wondering if taking out a pension is kind of like gambling on what happens in the future as I still have another 30 odd years of working left and so much can change in that time.

My employer does offer contributions to my pension (only up to 2% of pay) but the pension options are quite limited with average returns (pretty much tracks inflation) and I feel I can do better investing into a SIPP which I can tailor my investment to my risk levels. Therefore I will NOT be eligible for employer contributions due to opting out.

Lets make one assumption, that I am very very good at saving money so the advantage of "a pension makes sure you have money to spend when you retire" is not relevant.

Here I am sat at the cross roads of should I take the money now and take the tax hit but I know this money is mine or should I pay into a pension and get that relief and take the tax hit when I retire?

Currently for example I have retired and I take money out of a pension I will be taxed at basic rate of 20% (presume I stay in threshold) but who knows what will happen in 40 years, what if basic rate in 40 years rises to 40% or if pension rules change and you can only take out pension money under certain conditions?

I'm slightly cynical about the whole pension thing as I'm paying NI but I can honestly see that I would not be getting that state pension in 30-40 years as people are living longer and its becoming more and more impractical for the government to pay that large sum of money out. So I always feel a bit bitter when I look at my pay slip and see NI deductions (I am also aware that my NI payments are not only for the state pension, but I hope you get my jist).

Can anyone offer me some insight on this or tell me outright that I'm being stupid and I should start a pension pot right now

No. Not starting a pension (esp if you get 40% TR) is gambling on the fact that you wont need a pension. And that is a bad bet, given you've made it to the age you are already. Or are seriously ill already.

In every other circumstance, joining a pension is not a Gamble.

cns06

RuleTheWorld wrote: »

does that fair wedge early model rely on the 25% tax free which is by no means certain to always be there

No, if you see my other posts on my plan I have 3 main pots, pension, cash savings and property.

Johnny_Doe

Pensions aren't a gamble per se as they are merely tax wrappers like ISA's (unless you pass away before 55 of course), what you invest the pension in ie cash,property,funds/stocks is the gamble (one I'm not a huge fan of)..

..Speaking of which, I have a question (sorry to hijack thread) - I've deposited £10k into my SIPP (got the £2500 tax relief), It's currently sitting there as cash, I'm very nervous of "investing" it in a fund at present as markets have increased a lot recently and prices look high? FTSE record highs, etc.. uncertainty over Brexit/Trump etc.., What would you do with the £10k, and before you say diversify, diversify where?, What funds? My Risk level - medium to low if possible.. Thanks very much

Malthusian

Johnny_Doe wrote: »

It's currently sitting there as cash, I'm very nervous of "investing" it in a fund at present as markets have increased a lot recently and prices look high? FTSE record highs, etc.. uncertainty over Brexit/Trump etc..

Markets are always at a record high immediately before they hit another record high. 20 years ago the FTSE 100 was at a record high of 4,000.

I don't have nearly enough information to answer the main question.

ThinkingOutLoud_2

Unless you actively plan to die young - expect to live to a significant age where your savings will be necessary. You plainly get that.

Option 1
If I said give me 60p and I will give you back £1 - but you must save it long term for your future.
If then your employer said they would give you another £1 to match (same savings rule).
So today you had 60p and then suddenly you now have £2 saved for the future that you can invest in a fund of your choice.
Buy, you will pay tax on your income when you take your savings out.
OR
Option 2
You can put it in a Santander 123 account and get less than 2% interest so the 60p is worth less than 62 next year. And if you earn over £1k you will pay tax.
OR
Options 3
Put your taxed income in the best ISA's which will start with 60p, but on which you pay no tax on the growth ever.

Per previous posts - a balance of emergency funds, flexibility short term is good - but long term which options wins is clear. There are also inheritance tax and other considerations if you are single or have a family...

The Telegraph made a sort of comparison table recently that may help - http://www.telegraph.co.uk/finance/personalfinance/pensions/11145410/Pensions-vs-Isas-the-tables-that-show-which-is-the-better-place-to-save.html

[Deleted User]

Johnny_Doe wrote: »

Pensions aren't a gamble per se as they are merely tax wrappers like ISA's (unless you pass away before 55 of course), what you invest the pension in ie cash,property,funds/stocks is the gamble (one I'm not a huge fan of)..

..Speaking of which, I have a question (sorry to hijack thread) - I've deposited £10k into my SIPP (got the £2500 tax relief), It's currently sitting there as cash, I'm very nervous of "investing" it in a fund at present as markets have increased a lot recently and prices look high? FTSE record highs, etc.. uncertainty over Brexit/Trump etc.., What would you do with the £10k, and before you say diversify, diversify where?, What funds? My Risk level - medium to low if possible.. Thanks very much

So you don't expect the market to go higher in years, decades, etc...

RuleTheWorld

is there any benefit of pound cost averaging? for those who dont want to commit fully straight away?

bigfreddiel

RuleTheWorld wrote: »

is there any benefit of pound cost averaging? for those who dont want to commit fully straight away?

Nope in the case of a pension because it's such a long term investment a lump sum investment is just as good if not better because of lower dealing charges.

The old adage is 'time in the market, not timing the market'

Just do it cheers fj

bowlhead99

RuleTheWorld wrote: »

is there any benefit of pound cost averaging? for those who dont want to commit fully straight away?

Statistically, no.

That is, choosing to defer investing all your available money now, to instead hold only a little bit of investment and mostly cash, and then gradually shift your allocation to more and more investment and less and less cash, will effectively give you a blended average of having some investment and some cash. As, statistically, investments deliver greater returns over time than cash does, it follows that only holding a blended average of some investments and some cash will deliver a lower return than going ahead and investing what you can afford (but perhaps don't want to commit) right now.

Of course, markets go up and down all the time - and what the maths and statistics tell you do not always play out that way in every circumstance. And you might be happy with a lower return if, as you suggest, you are nervous of committing right away.

Of course the alternatives to investing your money now into a high risk investment do not solely include drip feeding into that high risk investment. You could, or should, perhaps invest into a lower risk investment instead.

Also worth noting that if you were the OP getting a pay rise, the money available for investment into the pension is becoming available each month. So if he invests monthly, as and when the spare money becomes available, it is inherently being 'drip fed'. The stark choice of "invest a lump sum versus drip feed because you don't really want to commit to investing the lump sum" is something that only really comes up when you have a big lump sum available (e.g. from a maturing savings deposit or an inheritance).

atush

RuleTheWorld wrote: »

is there any benefit of pound cost averaging? for those who dont want to commit fully straight away?

Yes, it is great for those who dont have large savings and are contributing from income monthly and for those of a nervous disposition who dont want to put in a lump sum then see it drop 10-20% the next week.