Concerned about my poor pension provisions

efunc

Hello all,

I'm in the process of piecing together the information I need to get my savings in order and try and make up for my lack of pension provision. Most of my questions are very basic because I'm just trying to get a grasp of what's available to me, if anything! I can then form a better picture and make more informed enquiries.

I'm 39 years old and have been in full time employment for only 2 yrs now. Previous to my job I was self-employed and earning barely enough to get by. Therefore I was exempt from NI contributions, although I may have one or two years of Class 2 contributions under my belt.

Since becoming employed 2yrs ago I'm now earning around £40k and have just begun contributing to the company Group Personal Pension through Prudential at the max contribution of 6% on my basic salary (which is £30k, so it works out as a contribution of about £116 a month). The company tops up the other half so I guess there's almost £300 going into the pot. Pru charge what seems a very reasonable 0.75% annual charge.

I took out an earlier Personal Pension with Equitable (Unit-Linked) when I was 30 in 1998. This is really very small and I've only been paying £50 a month into this for the past 10yrs. It appears to be charging me 3.5% on each contribution plus 0.5% annually(?).

I have no property, but in the last 2yrs have saved up £40k for a deposit on a house, and also maintain two tiny investment policies with Canada Life (a £12/month Savers plan and a £20/month severely underperforming Endowment Policy running since 1987).

On to the quick fire questions! Would it be wise for me to look into transferring my Equitable PP into my Prudential one? The charges look better. Also Equitable has no online fund manager at the moment, and my chosen funds look pretty mediocre - European Fund and High Income Fund. Also Equitable's previous mismanagement of their with-profits policy mares my judgement of them. Is this justified? If I don't transfer this Pension into my Company PP should I keep it at it's current level and instead invest further in ISAs and other savings (I already have an ISA anyway), or begin to step up my contributions to £100 or £200 a month, with a new choice of fund now that I have an income?

Secondly, on the subject of NI contributions, will I qualify for a basic State Pension? I _could_ potentially have 28yrs of contributions under my belt if I continue in employment until I'm 65. Will the Class 2 contributions I've paid (if any) add to this? How can I find out how many qualifying years I have on record?

If I don't qualify can I opt out altogether and contract-out these payments into my Prudential PP? I'm guessing this only applies to the 2nd State Pension.

Thanks for reading this far! Obviously there's not enough detail here for specifics but I would be grateful for any general advice and any questions I should be asking and avenues to explore. I'm very conscious of the fact that I've left all of this pretty late in life but if I can scramble something together at this late stage I might just have a fighting chance of an income in retirement! Thanks again.

jamesd

The Future Pension Center will be able to tell you for each year of your life whether that year has counted for the basic state pension. They even told me my earnings each year... so if you're curious ask, and write down the answers so that they only have to do it once.

They will also be able to tell you if you are eligible to make additional payments of about 350-400 for any past years to increase the number of years that count. Due to recent pension legislation your target is exactly 30 years, which will get you qualified for a 100% basic state pension, less years will result in a pro-rated portion of it. So you will qualify for at least some basic state pension.

Find out what the annual management charges and investment choices of the current work pension are. They could even be higher and more limited than the Equitable one. It's probably worth transferring the Equitable pension to a more modern one that can be had with lower charges, but it might not be the work one, or might be the same pension plan as work, but purchased independently if that's cheaper and it's a good plan.

Contributing to both the pension and ISA investing is good. The pension for income above the higher rate tax threshold, ISA below that. You can switch money from ISA to pension in later years when your higher rate income is high enough to get you 40% tax relief on it.

The ISA money is considerably more flexible than a pension since you can take it all whenever you like, but you'll probably be getting 40% pension tax relief on the way in and 20% when taking the pension and the ISA can't beat that for your core retirement income. See ISAs v Pensions: The Official Retirement Debate.

Contracting out only applies to the additional state pension, not the basic state pension. You can do that if you wish and your age is one where, provided your investment risk tolerance is at least medium, it's likely to be beneficial. See Opt out of SERPS/S2P?

You do have ample time to accumulate an excellent retirement income.

efunc

james, thanks so much for the comprehensive reply. (sorry for the delay getting back to you though!) Anyway, that's all very encouraging because I thought I'd left everything woefully late.

It looks like The Future Pension Center is currently not processing enquiries, but I'll try them again in the new year. I suspect I won't have paid enough for any State Pension though so I'm looking at alternatives.

My 10yr old Equitable Unit-Linked looks a bit long in the tooth with it's 3.5% charges so I think I'll transfer that elsewhere as a priority. My question is, how do I evaluate different pensions? Is the charge the only thing that differentiates them? So the lower the charge the better? In which case my company Group Personal Pension with Prudential seems OK with its 0.75% annual charge. Are there any better ones I should look at, or have I completely misunderstood Pensions? Obviously I intend to select excellent performing funds and try to maximise returns. Anything else I should think about?

thanks a heap for the advice!

dunstonh

My question is, how do I evaluate different pensions?

Experience and knowledge. (corny I know but its like any subject)

Is the charge the only thing that differentiates them?

No.

So the lower the charge the better?

No.

In which case my company Group Personal Pension with Prudential seems OK with its 0.75% annual charge.

Thats not bad but its not very cheap for DIY. I also doubt the quality of the investment options.

Are there any better ones I should look at, or have I completely misunderstood Pensions?

Where do you want to invest? How do you want to invest it?

Obviously I intend to select excellent performing funds and try to maximise returns.

In which case, you wont get that with in-house (internal) insurance company funds.

Charges are important but they are the secondary consideration behind the investments you want to use. Your investment experience and knowledge and the frequency you will be keeping the investments under review are key to how you should invest and what type of pension you should use. There is little point an inexperienced investor using a SIPP for example and paying higher charges for doing so.

jamesd

The provision of a suitable range of funds for your investments comes first. Only once you are comparing two pensions for the same funds that you want does the difference between their charges matter and then you also get to factor in issues like customer service. I'm not familiar with the Prudential pension so I have no comment on it.

If you're interested in an IFA managing your investments for you, a visit to http://www.unbiased.co.uk/ is your next step. I suggest asking the IFAs who you get from there if they do New Model Adviser (NMA) pricing, where ongoing management is paid for out of the 0.5% of your total pension fund value that's the typical annual ongoing commission level. Or fee-based, with the annual charges for the investment set lower or commission rebated to you or the investments.

There's no longer any restriction on how many pensions you can have so you might find that it makes sense to have several, one work if work requires theirs to pay contributions to it, and one or two of your own, perhaps one just for contracted out money and one main one.

You'll also need to select your target income in retirement to work out what you'll need to invest each month to be fairly sure of achieving it at your desired retirement age.

My own target currently needs about 1,000 a month of total investments (after any tax relief) to provide the capability to retire on a little over my current spending amount at 55 with 7% after fees investment return, or achieving 20k a year income if I get 12% return. Takes a lot less than that if you retire later or get better returns but I started later than you and like you I'm very conscious that time has passed and the later it's left, the greater the monthly investment required to reach a particular target income. So, a very aggressive initial few years to build up the investment capital value while also saving for property deposits - I've been saving and investing more than 60% of take-home.

The Future Pension Center won't do a pension projection for you until they have updated their computer systems to reflect the new rules (like 30 years for a full pension and elimination of credits for men in the last 5 years before retirement even if they aren't working) but they should be able to tell you what it'll take to qualify and whether you can buy any past years to help you to get the full state pension. You can go back to 1996 throughout 2009, then it reverts to the usual six years back. Currently you'll have about five years - three juvenile credit years that everyone is entitled to plus the two full-time work years.

efunc

Thanks again for a very useful post. 7% sounds pretty good and I'd like to achieve a similar pot by 65, but £1000 a month is not possible for me at the moment as I save for a house. My contribution to the company pension is £116 and with their contribution and tax relief should give me in the region of £300 odd. I hope to increase my 2nd PP contribution to about £200 but am looking for a suitable place to transfer that to from Equitable.

All this talk of different funds gives me much more to chew over. Is there a website where I can compare the performance of different funds in different pensions? I know it's probably a bit complicated with all the different variables, but shouldn't they be broadly comparable? ie ftse100, ethical, N American, etc? My preference is for medium/high risk, high return, but obviously a reasonable spread to balance the risk.

I intend to go to a IFA as I obviously lack the skill/experience to do everything myself, but I'll at least like to go in with as much knowledge as possible.

efunc

dunstonh wrote: »

Thats not bad but its not very cheap for DIY. I also doubt the quality of the investment options.

Why do you doubt the quality? because it's a Group PP, becuase it's Prudential, or some other reason? Also, how much cheaper am I likely to find on the market - 0.5% or less?

dunstonh wrote: »

Charges are important but they are the secondary consideration behind the investments you want to use. Your investment experience and knowledge and the frequency you will be keeping the investments under review are key to how you should invest and what type of pension you should use. There is little point an inexperienced investor using a SIPP for example and paying higher charges for doing so.

OK, that makes sense. I intend to monitor my chosen funds fairly closely, but where do I begin comparing and assessing what's out there? I'm looking to put about £200 a month in at the moment and generally favour moderately high risk funds ionvestments i've still got time to play.

dunstonh

Why do you doubt the quality? because it's a Group PP, becuase it's Prudential, or some other reason? Also, how much cheaper am I likely to find on the market - 0.5% or less?

because its Pru and because its a group PPP. Pru are not highly regarded as far as pensions go. They used to sell a lot via tied agents and did get tie ins with a number of companies but their fund choice was often only the with profits fund or a limited number of internal funds depending on when it was bought.

If you are going DIY then you could get as low as 0.3% depending on fund value but you should be aiming for 0.6% as a minimum (I did a 0.7% on advice recently so you can see that it is possible).

You wont get those sort of figures on a quality pension though. With those you are looking closer to 1.5% amc.

here do I begin comparing and assessing what's out there?

There are two thousand unit trust funds and about five thousand open pension funds (disregarding overlaps). The majority of these can be discounted leaving you with a core of funds which can be considered.

Is there a website where I can compare the performance of different funds in different pensions?

Trustnet will give you some basic data (they save the full data for their retail version).

but shouldn't they be broadly comparable? ie ftse100, ethical, N American, etc?

Yes and no. They will be allocated to a certain sector. However, funds in the same sector may have different aims and objectives. That can alter the risk. For example, there was a thread recently in the investment section about a global fund that had done well consistently since its relatively recent launch and was a top performer in its sector. However, the reason was that it was one of the highest risk funds in its sector and was heavily weighted to Asia and natural resources. The two things which have done well in the period since its launch. If those two areas had done badly then it would have been near the bottom.

Successful investing takes time. If you just want sector allocation (i.e. North America, Europe, Asia etc) then a stakeholder is probably the best way to go. If you want to be more specific and are willing to spend time researching then a personal pension or a SIPP are likely to be better. However, you do have to be aware that they are not invest and forget options. They will need more frequent reviews. For that, you either need a servicing IFA (rather than a transactional IFA. The difference being one that just sets up the product and one that provides ongoing advice) or you do it yourself.

You can do a bit of both. A fairly common method is to use an IFA to get you started but get the IFA to use a provider that has online client access so you can get values and switch funds if you wish. Then over time you can use the IFA as a sounding board until you are ready to take over.

jamesd

7% return on 300 a month would get you about 15,500 a year at 67. 12% would produce 41,000. Both at 5% of the lump sum as the assumed income. 7% isn't very good, 12% before costs (of about 1.5-2%) is the long term average for the UK market.

Have a look at the Trustnet sector focus page and click through to each sector in turn to get a summary and then go on to the full list of constituents to see just how huge the variation in performance within the same sector can be. Tracker funds tend to be in the middle, poor managed funds near the bottom and well managed funds near the top.

Dunstoh's example would be fine if the manager was restricted to just the areas he mentioned but since that's actually a global fund that can invest anywhere in the world in any type of company the manager would probably have shifted out of those concentrated holdings if they looked like a bad idea. But not all managers have this flexibility - there are pure China funds and pure resources funds and since the managers of those can't leave those areas, they may well be forced to stay invested through a drop, leaving it up to you to decide to sell and move the investments elsewhere, or not. Of course a tracker is certain to track a drop, since trackers (as opposed to managed funds) are supposed to do that.

Trackers became popular in the US due to some local peculiarities there: fund holders in the US get taxed whenever the fund manager sells something, while in the UK that happens only when the individual fund holder sells; in the UK there's a quite large CGT allowance with no tax (and ISA and pensions free from CGT); the large and medium company US markets are very well researched, so managers there seem to have difficulty outperforming a tracker. Outside the US the situation is pretty different and managed funds seem to do well. So here a tracker (except for large US holdings) seems only worthwhile for people who don't want to do the work of watching for fund manager changes and switching holdings when they happen. bestinvest tracks fund manager performance and you can do far worse than looking for the sectors that interest you and then looking first at funds in that sector that have managers with a consistent record of doing well.

EdInvestor

You can check out the best funds here:

https://www.citywire.co.uk/Funds/home.aspx

Regarding your savings plans, you would probably be better to cash these in and move the money and the contributions to a investment ISA at a discount broker like https://www.h-l.co.uk

The HL site will also give you lots of info about funds, which would apply to both ISAs and pensions (in a SIPP).

You may like to give some info on the endowment for a more specific view:

Guaranteed sum assured
Declared bonuses
Surrender value
Maturity date
Maturity projections

efunc

dunstonh wrote: »

Successful investing takes time. If you just want sector allocation (i.e. North America, Europe, Asia etc) then a stakeholder is probably the best way to go. If you want to be more specific and are willing to spend time researching then a personal pension or a SIPP are likely to be better. However, you do have to be aware that they are not invest and forget options. They will need more frequent reviews. For that, you either need a servicing IFA (rather than a transactional IFA. The difference being one that just sets up the product and one that provides ongoing advice) or you do it yourself.

You can do a bit of both. A fairly common method is to use an IFA to get you started but get the IFA to use a provider that has online client access so you can get values and switch funds if you wish. Then over time you can use the IFA as a sounding board until you are ready to take over.

thanks for all the excellent advice. there's so much more to this than I originally suspected. It strikes me that monitoring my pension performance can become a part time job itself and take a significant proportion of my time. Realistically I think a good Stakeholder may be a better option for me since my understanding is that a Tracker can do almost as well as a managed fund, but without all the nervousness.

One thing that interests me is what kind of relationship should one expect with their IFA? Presumably you would want to be in close contact with them on a daily/weekly/monthly basis for the life of your pension evaluating twists and turns in the market and switching funds regularly. This seems an unrealistic level of service given the small-ish fees involved. Is this how it works? What's the cost differential of a servicing IFA compared to a transactional IFA and what should I expect from them? I get the sense that if I'm not proactive and researching things for myself on a daily basis then no advisor will be doing much to correct matters for me.

If I do choose a Stakeholder Pension, can you recommend a good one, or point me in the direction of any comparison data?

many thanks!