IFA pension advice, what do you think.

dunstonh

Surely it is obvious from the endowment crisis that relying on the stockmarket to pay off your mortgage is very risky?

If that is your interpretation of why endowments went wrong then you really shouldnt be offering any "advice" here. Endowments had high charges and had generally high target growth rates and used funds that were increasingly unsustainable with a low inflation, steady economy (but worked well in the old boom/bust high inflation economy). Had PEPs (and now ISAs) replaced endowments much earlier then you would probably see the investment linked mortgage being more mainstream that it currently is.

Modern investment options are more flexible and the choice of investments has never been so good.

Risk is perception and opinion. I wouldnt take the risk with a FTSE tracker for example as the potential gains are not likely to be enough to make it worth the risk taken. However, a decent investment spread kept under review (not invest and forget) is worth the risk for the reward potential if you can afford the risk and accept the risk. Some will, some will not.

Forgive me if I'm wrong but aren't contradicting yourself there?

Get used to it lloyd. Ed tells everyone to do income drawdown as its easy to achieve the income target and get some growth. Yet here you see Ed saying that its too much of a risk to link your mortgage to it.

EdInvestor

lloyd_1980 wrote: »

Forgive me if I'm wrong but aren't contradicting yourself there?

In what way?

It is risky to rely on paying off a mortgage by using stockmarket investments,particularly when 75% per cent of the returns are inaccessible. Especially if you have no particular investment skills.

The proposal here has been tried before: it's called a "pension mortgage."The OP should check out what happened with them, an even worse disaster than endowments.

Some info:

http://news.bbc.co.uk/2/hi/business/1625628.stm

It is silly to waste a tax wrapper by investing in it and then taking all the money out, thus losing its benefits for all time, when it could provide tax free income and capital right through retirement.

My comments relate to two different issues.

EdInvestor

peterg1965 wrote: »

I am now confused, I agree that paying the mortgage off by this means has an element of risk.

Right. Let's see, what if the Government decided to end the practice of allowing pension tax free cash lump sums? Rumours to this effect go around quite regularly.

You'd be in deep doodoo.

Do you want to have to worry about these rreewgular rumours coming true?

BTW I agree that if there is to be any more pension investments, they should be aimed at using up your wife's tax free allowance, much more tax efficient than the current plan.

You seem only to be looking at the tax issue from the point of view of saving money now, not at the long term effect on income in retirement.It's a common mistake.Many couples end up with a totally imbalanced and non-optimal tax arrangement in old age.

peterg1965

EdInvestor wrote: »

Right. Let's see, what if the Government decided to end the practice of allowing pension tax free cash lump sums? Rumours to this effect go around quite regularly.

You'd be in deep doodoo.

Maybe so, but so would potentially millions of others who have made their retirement plans based on the 25% tax free lump sum facility. It would be a brave Govt that risked the wrath of the voters in this way, and that, in my opinion, would be the final nail in the 'pensions coffin'. It isn't going to happen!

I would, of course, have the option of using my entire Armed Forces pension lump sum (predicted to be £130,000) in 13 years to reduce the mortgage captial together with the equity ISA. (This would leave me with no lump sum and is not ideal but I would still have a big pension income and income from working maybe which would pay off the remaining mortgage).

EdInvestor wrote: »

BTW I agree that if there is to be any more pension investments, they should be aimed at using up your wife's tax free allowance, much more tax efficient than the current plan.

Makes me wonder why the IFA (who is a pension specialist) did not suggest this. As I said before the money going into my pension attracts the higher rate relief which would be invested in an equity ISA, I could not do this if it was going into a PPP for my wife.

This plan is not costing me any 'new' money. it is funded entirely out of my existing mortgage payments. The potential rewards, even if the returns are only a modest 6-7% are greater than the 'do nothing' option.

BTW the IFA is independant but a Representative/member of 'Sesame', are any of you IFAs out their familiar with the organisation?

peterg1965

EdInvestor wrote: »

In what way?




The proposal here has been tried before: it's called a "pension mortgage."The OP should check out what happened with them, an even worse disaster than endowments.

Some info:

http://news.bbc.co.uk/2/hi/business/1625628.stm

It is silly to waste a tax wrapper by investing in it and then taking all the money out, thus losing its benefits for all time, when it could provide tax free income and capital right through retirement.

My comments relate to two different issues.

Acknowledged, and I would never have considered putting all my 'eggs in one basket'. I am not suggesting that the NU PPP will pay off my mortgage, merely that it will form part of the strategy to pay off a portion of it, with the other money coming from other sources, some investment backed and some from my rock solid occupational pension scheme.

I also hear what you are saying about potential inefficient use of tax wrappers, however at 55 (in 13 years), I will have a variety of options, that may or may not involve cashing in the ISA. If I decide to continue working and continue to pay into the ISA/PPP then I may not have to use the ISA at all to pay off the mortgage capital.

Judwin

peterg1965 wrote: »

Thanks for the comments. My wife's pension is an NHS one, she doesnt yet have a PPP. I am in the Armed Forces and fortunate enough to have a gold plated pension, which also provides a substantial Death In Service benefit for my wife and ongoing pension in the event of me pre deceasing her in retirement. she is well covered.

It's not a question of how well covered she is in the event of your demise. It's solely to do with percentage of your contributions that the tax man gets his grubby mitts on, sooner or later.

If you pay into your PPP, the tax man gets between 30% and 40% of it sooner or later.

If you pay into your wifes PPP, then the tax man gets between 18% and 40%, sooner or later.

I'd rather he got 18% than 30% - wouldn't you?

peterg1965 wrote: »

....As I said before the money going into my pension attracts the higher rate relief....

Don't get too obsessed with this. It's really tax deferral. You get the HRT back now, but you have to pay tax when you draw the pension. It's only of benefit if you are currently paying HRT, but in retirement you'll only be paying basic rate.

peterg1965 wrote: »

....Maybe so, but so would potentially millions of others who have made their retirement plans based on the 25% tax free lump sum facility....

There is regulatory risk with both pensions and ISA's, and it's all guesswork and oppinion which is the higher risk - IMHO.

With pensions, I can't see the govenment removing the 25% lump sum, at least not in one fell swoop. However, I can see them removing the tax free status of the lump sum, and taxing it at 5%, 10% or something. Or perhaps giving everyone a pension lump sum allowance, and then taxing everything above that alowance.

Same with ISA's. I reckon that eventually they'll cap the amount of tax free income/gain you can get from them, and tax everything above that.

With the percentage of people in retirement rising, then sooner or later they're going to have to start raising more tax income from them somehow.

dunstonh

Makes me wonder why the IFA (who is a pension specialist) did not suggest this. As I said before the money going into my pension attracts the higher rate relief which would be invested in an equity ISA, I could not do this if it was going into a PPP for my wife.

You mentioned your wife was in the NHS scheme. So, she is likely to use up all her personal allowances and pay basic rate tax. So, paying into yours gives a slight advantage due to higher rate relief now. In retirement as personal allowances increase (including age allowance) less of your income will become taxable at 40% For your wife, she isnt going to have any at 40% (assumption there) so increase in age allowances and annual increases isnt going to benefit as much.

example: personal allowance increases by £1000.
Your wife no longer pays 20% on that £1000 saving £200
You no longer pay 40% on that £1000 saving £400

So, income in your wife's name would be £200 higher that year but income in your name would be £400 higher.

BTW the IFA is independant but a Representative/member of 'Sesame', are any of you IFAs out their familiar with the organisation?

Sesame are a network. Not an employer or owner. They provide compliance services and bulk buying power to IFAs. Sesame are the UKs largest and you generally find that Sesame get the best pricing from providers. A similar (but not exact) comparison would be the wholesalers that supply independent shops. The bulk buying power of 5000 IFAs is better than 1 and financial services products are the same as other retail products in that pricing is based on quantity of supply. i.e. Clerical Medical's investment product annual managment charges are 1.0% but with an IFA from Sesame, they are reduced to 0.8%. I have an IFA who is a member of the personal touch network who is putting his own investment through me as the product he wants has lower annual management charges and higher commission than if he did it himself (higher commission means higher rebate back to him).

You would never measure the quality of the adviser on the network though because the IFA is independent. It is their own business and they have their own personality which may or may not suit you. That said a few networks do operate a bit like salesforces and are intrusive into the business of the IFA. However, Sesame are not one of these so nothing to fear there.

EdInvestor

Re changes to the tax arrangments, I'd have thought the additional HR tax relief paid outside the pension has got to be under threat at some point - abolition is already on at least one political party platform. It would be so easy to do it for PPs and D/C occ pensions, just end the practice of paying the additional 18% (going up to 20%) in cash via the tax return.It's more difficult to end it for final salary pensions as the companies will scream blue murder.But there no real justification for this extra perk for the well off. When the NPSS/end of d/c contracting out/change in state pension to match earnings comes in (probably 2012) might be a suitable date.

Peterg

Brief summary of my situation; solid occupational pension scheme, will recieve £31.5K pa and £97K tax free lump sum (todays rates) @ 53. have small (PR funded) PPP with Scot Eq, current value £18K (fund spread on the risky side - 8 funds). I have a £259K mortgage - currently repayment with 16.5 years to run (costs £1900 pm - £1067 interest/c£840 repayment). My 'aim' was to pay mortgage off in an efficient manner whilst maximising/optimising pension options at 53/55 with a view to semi retirement at 55 (13 years).

It seems to me that the two of you are already well stocked with pensions -with income probably in the 55k range, and taxable presently at basic rate (just) depending on how much your state pensions are.The company pension will also generate a decent cash lump sum of c.100k (if you can get more, do so).


Do you have any surplus disposable income?

If you do I would throw it at the mortgage, and try to get it down to a final repayment date of age 55.

Once that is achieved I would max out ISAs @7.2k a year, and finance a small topup pension for your wife to use up her 10k tax free allowance.I would suggest your wife starts maxing out her ISA now via a discount broker such as https://www.h-l.co.uk as this allowance is 'use it or lose it' every year and pension can be done later.

Perhaps I should note that this proposal would generate zero commission for any advisor from you, might be a little from your wife.

dunstonh

Once that is achieved I would max out ISAs @7.2k a year, and finance a small topup pension for your wife to use up her 10k tax free allowance.I would suggest your wife starts maxing out her ISA now via a discount broker such as www.h-l.co.uk as this allowance is 'use it or lose it' every year and pension can be done later.

Perhaps I should note that this proposal would generate zero commission for any advisor from you, might be a little from your wife.

If the IFA was to recommend HL there would be no FOS protection (as HL are execution only) and the IFA wouldnt be able to service the contract as HL are the IFAs for the contract, not the IFA giving the advice. In the meantime, HL would would be getting the trail commission but not giving any advice to earn it. HL dont provide their prodcuts for free and do earn commission. So, whilst this adviser wouldnt earn a penny from it, HL would so your comments about zero commission are incorrect.

Why are you so desperate that an IFA giving advice shouldnt earn anything but IFAs doing execution only should?

EdInvestor

HL rebate almost all the commission, so it will be cheaper for the client. That's why I suggest E/O services.

Of course it would be interesting to hear the explanation for the fund choice made by Peterg's IFA, perhaps there is a rationale for putting half his money in bonds and property at his age and with his aims,and hardly any in UK stocks.

The more examples you see of IFA advice the less it looks like value for money.Of course the clients of the good ones probably don't post here.