self emplyed pensions options?

dunstonh

How would you go about dealing with the effects of inflation on savings?

Someone drawing the interest rate has exactly the same problem and the savings rate is likely to be lower than the annuity rate.

oceanblue_3

Long-term professional experience gives valuable insights that are denied to all but the most gifted and perceptive amateurs, and amateurs you most certainly are, Editor and Reporter, as evidenced by your spreadsheet approach to this issue, your eagerness to rubbish any solution that has imperfections, and your obvious glee in vilifying IFA's.

The ideal solution to the problem of securing income in retirement is by way of generous State provision topped up with widespread Final Salary benefits. We all agree that this situation neither exists now, nor is likely to exist in the future. The default alternative is provision via a "pension plan" of some variety, and the bona fides of this method are made manifest by means of State support: tax relief at source, and tax-advantaged investment growth.

However, falling annuity rates since the early 1990's, and tempestuous equity markets from December 1999 until March 2003, have prompted the pouplar media to polarise towards a very narrow-minded view that causes most of the population to dismiss pension plans. The equally narrow-minded panacea is "Buy To Let" - can you imagine how many people stopped paying into pension plans and, of those, how many actually embarked upon an alternative of buying and letting out residential property? I would imagine that most of those people are now doing nothing to provide for their retirement - thanks to the unauthorised, unqualified, sensation-seeking media.

In cyclops' case, the best solution is almost inevitably going to be a "patchwork" solution, comprising Basic State Pension, Deferred Occupational Benefits, ISA investments, Cash on deposit, and, I would suggest, a Pension Plan of some description. If I were his adviser, I would encourage him to develop an understanding of how these components interact, and of their strengths and weaknesses. I would suggest that he explore means of adding value to his new business - there are only so many hours in the day if you're a driving instructor and, therefore, an obvious limit to earning/retirement income potential - could additional qualifications provide potential diversification into more lucrative markets? The more he is able to earn, the more he will be able to invest for his future.

EdInvestor

dunstonh wrote:

How would you go about dealing with the effects of inflation on savings?

Someone drawing the interest rate has exactly the same problem and the savings rate is likely to be lower than the annuity rate.

Yes, agreed.I wouldn't deal with inflation by putting the capital in the bank;)

Any more suggestions?

ReportInvestor

sneekymum wrote:

"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

Well that tips the balance very strongly towards pension saving in your circumstances while your family is growing up.

Similarly, if you do not expect to have other pension income or savings income that will lift you over the 7K personal tax allowance ( + 2K 10% tax band) then the equation is tilted towards pension.

The ISA route does seem relatively more suitable for those who are more comfortably off.

oceanblue makes the very valid point that there may come a time when we are not up to managing our ISA portfolios, but most people would set them up for income by age 65.

I can't see what ob has got against the spreadsheet approach. I will continue to develop it. It's thrown up some informative debate all round and no-one on the thread has so far suggested that ISAs are the only solution to retirement saving, or should not be considered for retirement saving.

oceanblue_3

Reporter wrote:

oceanblue makes the very valid point that there may come a time when we are not up to managing our ISA portfolios, but most people would set them up for income by age 65.

I can't see what ob has got against the spreadsheet approach. I will continue to develop it. It's thrown up some informative debate all round and no-one on the thread has so far suggested that ISAs are the only solution to retirement saving, or should not be considered for retirement saving.

I still think the "setting-up" of the income is best managed by somebody who knows what they're doing: gilt funds would be the safest, but how would the yield they produce improve upon what an annuity would offer?

It is vital to remember that although annuity rates are influenced by the yield on long-dated gilts, they are always higher than those yields, especially for a 65-year old.

If, on the other hand, you were to select corporate bond funds, then capital erosion is still a significant consideration, as demonstrated by the fortunes of even the most selective bond funds over the last eighteen months.

Income generation via investments is probably the most demanding exercise for an IFA to manage: negative pound-cost averaging is the most damaging of all the dangers that can befall an inexperienced investor - the analogy is "burning the candle at both ends."

As far as the spreadsheet approach is concerned, Reporter, I believe it could encourage the unwary investor to misinterpret and rely too heavily on the information it produces.

Planning for income in retirement is a complex undertaking: we are dealing with intangible products, inordinately lenghty time-frames, inexperienced clients who will naturally gravitate towards an apparently simple solution, and potentially volatile investments.

These factors call for an understanding of the "hard facts" relevant to each individual but, more importantly, they demand an examination of the "soft facts" by which we are all actuated.

ReportInvestor

oceanblue wrote:

I still think the "setting-up" of the income is best managed by somebody who knows what they're doing.......

.....Income generation via investments is probably the most demanding exercise for an IFA to manage:

Indeed. It is complex and never completed. And when the income is only, say, 4% then even small annual commission charges are a tough handicap to overcome.

Planning for income in retirement is a complex undertaking:

We get the picture. ALWAYS seek out a friendly IFA.

gilt funds would be the safest, but how would the yield they produce improve upon what an annuity would offer?

They won't, and no-one's suggested that ISA income could beat income from a pension fund, or that you should try to artificially "force" it to match pension income - with the attendant risks.

The advantage of the ISA route is that you continue to have control of your capital after retirement. If you live too long then that advantage diminishes.

To repeat for the sake of clarity: The ISA approach could be part of a solution for someone who is not getting family credits, who has a reasonable retirement income guaranteed already and who does not like the idea of dying in their early 70s and not being able to pass on a large chunk of their life's savings. My spreadsheet shows that it becomes increasingly attractive the later you carry on working.

If you still like the idea, check it out with your own IFA :A

ReportInvestor

oceanblue wrote:

However, falling annuity rates since the early 1990's, and tempestuous equity markets from December 1999 until March 2003, have prompted the pouplar media to polarise towards a very narrow-minded view that causes most of the population to dismiss pension plans. The equally narrow-minded panacea is "Buy To Let" - can you imagine how many people stopped paying into pension plans and, of those, how many actually embarked upon an alternative of buying and letting out residential property? I would imagine that most of those people are now doing nothing to provide for their retirement - thanks to the unauthorised, unqualified, sensation-seeking media.

Is this the sort of thing you mean?

Link to The Times

Means-testing 'cuts pension saving by £3.7bn'

"....Helen McCarthy, ABI head of pensions, said: “Action is needed urgently to encourage people to save and save more. (But) individuals and their financial advisers worry that it’s not worthwhile saving as they might be better off on means-tested benefits.”

The ABI estimates that there is a £27 billion gap between the amount that Britons save and the amount that they need to save for retirement. It found that the poorest 20 million of Britain’s 28 million workers — those earning £9,000 to £25,000 — would save enough to cut the gap to £23 billion if means-testing were ended. Almost half of Britain’s pensioners are eligible for the £105-a-week pension credit, the means-tested benefit introduced in October 2003. But even those with modest savings face an effective tax rate of 40 per cent on savings....."

oceanblue_3

Reporter, I admire your optimism - I wish I could believe that if the Government ended means-tested benefits the entire polulation would start saving!! Are you suggesting that "the savings gap" did not exist before October 2003?

Whilst I admit that ISA's allow you to retain control over your capital, that very accessibility is a double-edged sword since the capital could be depleted by the injudicious, possibly capricious, encashment of units.

I think we agree about the fundamentals here, Reporter: a "patchwork" solution is what most of us will have to aim for. However, because of its complex nature, this approach will require maintenance. If this is achieved successfully by DIY maintenance, great. If people feel they need professional guidance, then no purpose is served by you and Editor continually attempting to undermine IFA's.

DavidLaGuardia

Reporter wrote:

The ISA route does seem relatively more suitable for those who are more comfortably off.
.

The intriguing fact is that the more comforatably off (as a group) have a greater life expectancy and therefore are the ones more likely to have a gain from the cross subsidy that occurs in annuities.
Additionally, if someone is a 40% tax payer the case for pensions are stronger.

DavidLaGuardia

Editor wrote:

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?

Editor, You are limiting yourself here to conventional guaranteed annuities based on gilt yields fixed at the point of retirement. Annuities based on other underlying investments can work more like a portfolio and respond to changes in the economy, but with the advantage of cross-subsidy which like any insurance is good but has winners and losers.