Monthly Saver For A Pension?

Steve-182

I agree. I'm starting a new job next week, and its initially on a 1-year contract with the option on a 2nd year, so i don't see the point in taking up their pension scheme. I'm going to make regular payments into a Bonus 60 - style account instead. I much prefer knowing I'd have a set amount in an account that I can use as I see fit rather than having a company "allow" me a small amount per week to live on when i'm old, then keep when I'm gone. Also, with a saving account you can divide it up to your loved ones later on.

dunstonh

ISAs are more flexible but they will have a lower value at retirement (on like for like contributions) and annuity rates are generally higher than savings rates after age 60/65.

So, you are paying for that flexibility. A combination is often desirable. Ideally, get your pension contributions in whilst you are young and switch to ISA when you are older.

If you have a long life in retirement, you will do well out of an annuity. If you have a short life, the annuity company does well. Its the averaging out that allows the product to work.

You can forget drawdown unless you are someone with a high risk investment profile.

MONEYBUG_2

Yeh I think you're right Dunst. I'll probably combine it. I might set up a pension for say £30 per month and £50 into my monthly saver. Can't really use my ISA as that's just for my travelling money and is always full to the brim anyway.

Can you switch pension provider half way through - or is it set?

EdInvestor

Don't forget you have to pay tax on the income from the annuity.The income from the ISA is tax free.

Drawdown is only risky if you invest it in risky assets. If you put it in gilts or cash it's safer than an annuity and you don't lose the capital

The big risk with the level annuity is inflation.

dunstonh

We have two similiar threads now running at the same time. So excuse overlap.

Drawdown requires a critical yield to be achieved. This requires investing in funds with the potential to meet that yield. That usually means stockmarket. Gilts/Cash would reduce the volatility but would almost certainly not meet the critical yield and cause the pension fund to drop in value and when the annuity does have to be taken, the fund will be lower and provide a smaller annuity income.

Don't forget you have to pay tax on the income from the annuity.The income from the ISA is tax free.

That isnt all an advantage though. The annuity rates are currently higher than ISA rates generally. You have to take personal allowances into account and the 10% tax band as well. Plus you have husband/wife/partner allowances to utilise. So you are looking at an income of 14k in todays terms before you pay tax and another 4k at 10% tax.

Once you take an annuity, you know that income isnt going to drop below that level. If you take an increasing annuity, it goes up every year. Your ISA will fluctuate with interest rates. Also, there is no guarantee that a tax free savings account will exist later in life. Remember the tax burden is likely to increase over the next 20 years and removal of tax free savings is one possibility that may happen.

EdInvestor

Paul_Herring wrote:

From what I can gather, it's the percentage of the capital you receive in the first year. So, for example from a random table at £100,000 would get a 55 yr old single male £5,770 a year (without increasing) from L&G this equates to 5.77%. [/URL]

What happens is that this man gives his 100k to L&G.The company then invests it is safe bonds - Government ones (called gilts) and low risk blue chip corporate ones. These pay an income, which might be about 5% say.The company then pays you this money plus a sliver from your capital worth 0.77% to make up the 5.77% rate.

Over the years your capital slowly diminishes and thus so does the return on it, and by around 20 years later,the insurer has already paid you back your capital and the earnings from it as your annuity income.

If you're still alive,it has to find the money to keep paying you.Where from? From the people who died before their capital was exhausted.The insurer pockets the capital of those that die young and uses it to pay the people who live a long time.

So if you think you'll die young, annuities are TBA. But if your grandparents lived to be 100, and your parents look like teenagers, an annuity could be just the thing for you.

If you don't really need that extra 0.77% of income, you can of course forget the annuity idea,consider income drawdown and keep the capital for yourself.

Here's a Drawdown calculator which enables you to compare what income you are allowed to take.The limits are based on Government bond yields.