self emplyed pensions options?

isasmurf

Editor wrote:

Cyclops

ISASmurf reminds me that there is an income limit for tax relief after A day next year.

It's 215,000 pounds.

You see this is why financial advice is regulated. Because giving out partial information like this could get you into trouble.

From 'A day' you get tax relief on contributions up to either 100% of your earnings, or £215,000 whichever is the lower. Alternatively (nearly?) everyone can put in £3,600 into a pension. There is no limit, I believe, on how much you can put into the pension, just a limit on what you get tax relief on.

I think that's correct, someone more knowledgeable will come along and correct me if I'm wrong I'm sure.

Regarding the subject of financial advice. I asked Martin this once in my capacity as the Savings & Investment board guide, and the guidance I got was that what we can't talk about is specific regulated products, funds, shares etc. Giving general 'advice' is allowed as long as it isn't targeted towards an individual.

ReportInvestor

Martin's a smart lad so he'll get up to speed on what is allowed rather than close down forums or limit discussion for which there is a demand.

There is a limit on pension funds come 2006/7 - it was £1.5m when I last looked. There are swingeing penalties for exceeding £1.5m - effectively a 55% tax on the excess.

The limit on the amount you can have in your pension fund will be allowed to rise to £1.8m by 2010.

One final point - not relevant to many reading these messages - is that in your final year of employment before retirement the £215K annual contribution limit does not apply, as long as you are earning over £215K :rotfl: .

ReportInvestor

Hi dunstonh,

Just coming back on some of your comments.

dunstonh wrote:

Personally, I would have used 5% net on the tax free lump sum but that will only make a little difference.

You are right that it makes (surprisingly) little difference. But I would question anyone's ability to get 5% net on their investments in 20 years' time given the wall of retirement money that is looking for income.

I would also have perhaps used 65 as a benchmark as, if things are to be believed, the majority of the public will not be able to afford to retire before 65-70 in the future. An age 65 annuity rate would bring the difference down a bit from an age 60 one.

Did you really mean this, or was it just one of those comments people make when on bulletin boards and pressed for time?

It is simply not true. So you may need to change your own future advice to clients.

The earlier you aim to retire [after 55], the better off you are using pensions rather than ISAs [assuming that you and your IFA think either/both would be suitable for you].

dunstonh

It is simply not true. So you may need to change your own future advice to clients.

How?

An annuity rate to a 65 year old would be higher than that to a 60 year old. I would therefore expect the number of years until equalisation to be lower than that of a 60 year old.

But I would question anyone's ability to get 5% net on their investments in 20 years' time given the wall of retirement money that is looking for income.

You can elect to take 5% from OEICS/UTS and Bonds. As long as you have a suitable portfolio, 5% average over the long term should be achievable. However, predicting anything in 20 years time is virtually impossible.

ReportInvestor

dunstonh wrote:

An annuity rate to a 65 year old would be higher than that to a 60 year old. I would therefore expect the number of years until equalisation to be lower than that of a 60 year old.

Well that's true.

But any client should be more concerned about how close equalisation was to his/her likely death than how close it was to their retirement date .

And if you retire at 65 it is four years higher closer to your death than if you retired at 60.

I accept your very good earlier point that higher tax free bands after 65 (which I've not yet incorporated into the spreadsheet) will mitigate this slightly - the more so the smaller the pension pot.

Thanks for your comment about how to achieve a 5% net return on the lump sum - although I think this may put the capital at a slight risk.

BTW, what rate would you go for regarding the achievable income from the ISA after retirement? [I've used 4.5%.]

sneekymum

Hey Reporter - I like your analysis - but you forgot to include Tax Credits at 37p per £1 of pension contribution. People really don't seem to be taking this onboard (apart from Dunstonh - who wasn't specific on £££). How about an illustration with 37% extra pension investment - which assumes that this money is used for that purpose?

I think IFAs need to think "Tax Credits" a little more. Claiming credit for pension contributions is really easy - just fill in the box on the Tax Credit Annual Review form.

ReportInvestor

Well you've got to sympathise with IFAs on this one, since the government can't do its own sums and has just overpaid £1,900,000,000 to 1,800,000 families :eek:. Not a bad error to make in an election year :rolleyes: .

Family credit depends on both family income and number of children. Is the sliding scale consistent or is it weighted towards the lower end?

If you could give me an individual example I could factor it in and say what difference it makes.

Don't forget that I've already counted in the 22p/£1 tax relief for a basic rate taxpayer. You aren't saying that £1 saved in a pension gets you 37p family credit on top of that, are you?

sneekymum

It doesn't matter what the payment for Child Tax Credits is (For those earning under the £50K-ish ). The credit is simply increased by 37p for every pound spent on a pension.

As a low earner (though by no means poor) I was able to seek help from Tax Aid who confirm also that it doesn't matter where the money comes from for this pension contribution to reduce earnings - it might pay to take it out of savings or, as in my case, come as a gift from someone.

"You aren't saying that £1 saved in a pension gets you 37p family credit on top of that, are you?"

YES -

See my thread on this...here

oceanblue_3

[But any client should be more concerned about how close equalisation was to his/her likely death than how close it was to their retirement date]

This may be of particular concern to you, Retorter, but you are not typical. In an ideal world everybody would have the ability, confidence and inclination to make good decisions about their plans for securing an income in retirement. This doesn't happen in the real world; furthermore, even the most competent and able people lose confidence as they get older - believe me, I've been a financial adviser for 14 years, and I've seen people struggle with what to write on a shopping list.

Most people are more concerned about how predictable their retirement income is going to be. An annuity is not a perfect solution for everybody, I admit, but at least it's guaranteed and regular.
Income from other sources will fluctuate, and will not be predicatble. Even "income" from bank accounts can cause serious concern to older people - imagine the impact of a savings rate reducing from 4.8% to 3.6%. If the capital were to stand at £100,000.00, this would represent a monthly reduction of £100.00. In circumstances like these, most people would be tempted to withdraw some capital to compensate for the loss..........you know where that would lead.

This example can be applied equally to income derived from investment ISA's: look at the yield column statistics provided on the Trustnet website. Accepting that we're looking at a number of IMA sectors - UK Gilts, UK Corporate Bonds, UK Other Bonds, UK Equity Income, for example - how would you go about constructing a portfolio of Unit Trusts and OEIC's that will provide an income that will match an annuity? What if a fund manager leaves and the performance suffers, who will carry out the repair? What if dividends dwindle because of a recession, how will you attempt to recover that lost income by effecting a timely switch to other sectors?

Please - think about what you're writing: what sits comfortably with you will not suit the majority of the population.

EdInvestor

How would you go about dealing with the effects of inflation on an annuity, ocean blue?

In 1971, the state pension paid 6 pounds a week.
By 1981, it had gone up to almost 30 pounds a week.

Money had been devalued 5 times.

How would you advise the annuity buyer to cope with such a problem when his capital has gone?