Need a Pension - any advice much appreciated!

EagerLearner

Hi all,

I am 31, employed in a brand new job but employer makes no pension contributions.

I was self-employed last year so stashed £3k into Hargreaves Lansdown Mini ISA last year in various funds, plus maxed my normal cash ISA (that one is at £13k now and is our wishful thinking property deposit).

I have now opened a SIPP with HL so I can start planning my pension and thinking of putting say £78 a month away (for these next couple of months) and increase in March. Plus as I understand it, the government also adds 22% of each payment I make, so my gross will be £100 these first few months. I have not put any money in yet though.

Is this the right thing to do? I have read people saying that unless you earn £40k plus a year that SIPPS are not the right thing, but I don't understand why, as the fees *seem* to be low? Plus I like the flexibility of being able to watch the performance and review the funds.

Or is is better for me to keep adding cash to the normal cash ISA with Bradford & Bingley for now? Or the mini ISA funds with HL?

I am not a pro as only have 1 year experience in investing in funds, even though they are doing ok, my pension is a different matter and both my husband and I are quite scared as the government pension will be so low, we have to act now to boost our pensions.

Mr EL is 35 and has contributed £110 approx each month for 3 years to his pension, inc employers contribution, and it's only worth £3k per annum in retirement according to the latest statement. He was shocked and we are learning some hard lessons.

Any help much appreciated as sorting out pensions for us is my goal for 2008 :T

dunstonh

Is this the right thing to do? I have read people saying that unless you earn £40k plus a year that SIPPS are not the right thing, but I don't understand why, as the fees *seem* to be low? Plus I like the flexibility of being able to watch the performance and review the funds.

The reason you have seen that is generally higher earners pay more money in and have larger fund values and either they or their advisers utilise the wider investment options. I've personally never seen a comment on people earning 40k as its normally more linked to size of investment and investment experience of the individual and/or their adviser.

Remember that the SIPP has more than twice the charges you would have got on a stakeholder pension and higher than a typical personal pension. So, you need to make sure you are utilising the benefits of the SIPP. If not, it is an expensive folly.

Or is is better for me to keep adding cash to the normal cash ISA with Bradford & Bingley for now? Or the mini ISA funds with HL?

Cash ISAs are not suited for long term retirement provision. Stocks and shares ISA has pros and cons with pensions.

I am not a pro as only have 1 year experience in investing in funds, even though they are doing ok, my pension is a different matter and both my husband and I are quite scared as the government pension will be so low, we have to act now to boost our pensions.

Investment options in a pension are virtually identical to other tax wrappers such as ISA. The same rules generally apply. You are right to be concerned about state pension. Upto now you have not qualified for any second state pension as self employed dont. You will start qualifying now but the basic state pension is just £4500 a year.

EagerLearner

Thanks dunstonh, just to clarify - I was only self-employed for 12 months in case that affects any of what you said...

We are considering buying a house at some point this year, would I be better off not investing in the SIPP and buying bricks and mortar? I know the market is slowly falling, which we hope will bring prices closer to a fairer price for first timers.

Also, even if I start the SIPP, it's with Hargreaves Lansdown who are the lowest for charges? I would split the £100 gross into 2 funds each month.

It seems cash ISA is not the way to go for pensions, the Mini ISA with investment funds is ok-ish, and the SIPP only ok if I utilise the benefits. Can you clarify a little further on the SIPP please?

EdInvestor

Remember that the SIPP has more than twice the charges you would have got on a stakeholder pension and higher than a typical personal pension. So, you need to make sure you are utilising the benefits of the SIPP. If not, it is an expensive folly.

There are cheap and expensive SIPPs, and there are cheap and expensive personal pensions.

A cheap SIPP will be no more expensive than a personal pension with external funds and will offer a far better choice of funds, much much better admin, and much better online access and control.

HL is a good choice of low cost SIPP for anyone planning regular investment in funds.

However if you are planning house purchase (always more expensive than you expect ) I would use the S&S ISA for your investments so that you can get at the money if you need it. The money can be switched into a SIPP later to pick up the tax relief if you want, but once it's in the SIPP you can't get it out.

EagerLearner

Thanks EdInvestor - I have just over £3k in the S&S ISA (funds) now (mini ISA?) so that's where that is staying until we have bought a place as it can supplement the £13k ish we have in the cash ISA if needed... we also have £650ish in another S&S ISA which we're deciding on jointly as to which funds etc. My idea is that that joint one might cover our legal fees when it comes to buying.

I researched carefully and HL seemed the cheapest SIPP, plus as I am already with them for funds it seemed the quickest and easiest thing. I have now filled in the DD form for my £78.00 per month and split between... holds breath... Neptune Global and Jupiter Ecology. I could then supplement this over time with additional £100 here and there in other funds via debit card once we have bought a place. HL seem to only offer one dedicated pension fund, which is not doing too well right now, so I'll review my DD split in a few months just in case.

Any other tips? I wanted the pension fund to have UK Equity but given the fall in housing prices am worried that will affect many UK industries and was thinking more along riskier emerging markets etc. But then again, I know a pension is for the long term, so perhaps I should buy into whatever is falling now... I know there is no right answer, but any generic pension thoughts you may have for someone at 31 much appreciated...

dunstonh

A cheap SIPP will be no more expensive than a personal pension with external funds and will offer a far better choice of funds, much much better admin, and much better online access and control.

That is incorrect. I'm afraid Ed compares execution only SIPPs against full retail personal pensions rather than like for like. The SIPPs that are often mentioned, like HLs have no discounting on annual managment charge. So you are typically looking at 1.5% as the amc. A stakeholder or personal pension on execution only basis could have as low as 0.5% amc with internal funds heading to 1 to 1.2% for external funds.

A stakeholder will be limited in fund choice but shouldnt be underestimated. A good stakeholder with decent sector allocation in the conventional sectors (UK, Europe, Far East, N America, Property and fixed interest) can often surprise you. It may not have the niche areas but if you are not going to keep the investments under review much then a decent stakeholder could be the right thing to us. If you want a little bit of niche investing then a personal pension can be the best thing as you get the best of stakeholder and the best external.

Sipps are fashionable. That doesnt make them better. Past high profile fashions include endowments, tech stocks and REITs.

EdInvestor

EagerLearner wrote: »

Any other tips? I wanted the pension fund to have UK Equity but given the fall in housing prices am worried that will affect many UK industries and was thinking more along riskier emerging markets etc. But then again, I know a pension is for the long term, so perhaps I should buy into whatever is falling now...

If you want to follow the value approach (buying cheap) then UK commercial property investment trusts/REITs and UK financial shares/banks/housebuilders/retailers are currently very cheap.Bear in mind that the market is very forward looking so much of the upcoming downturn (if it happens) is already "priced in" and these shares will bounce back quite quickly when it is seen that the problems are getting solved.

Natural resources/commodities funds and shares are the flavour of the month now as oil and mining shares have held up during the credit crunch period.

For anyone who has an interest in learning about investing, the SIPP is certainly the best choice as you have access to a wide range of different investing styles.The HL operation also offers lots of information about the markets to customers which helps them to develop their skills.

EagerLearner

Thanks - a lot to think about... Is there a site I can look at that will give me an idea of the percentages to invest in various sectors, at age 31? My SIPP is now open, so I would start investing from next month. Thanks

TRUSt_NO_1_2

EagerLearner
My view on pensions.
Unless you are getting a contribution from your employer,don't bother.
When you want to 'retire' and draw on it,you will be taxed.So you gain up front but they take it back off you.
You will be able to get a 25% tax free lump sum,(if the rules haven't changed by then) and will probably only be able to get access to the rest at a rate of 5% or less.
Once in a SIPP,you're tied by pension rules.
You could invest upto 14000 per annum in an ISA(between you and your wife) and have instant access to it all any time...untaxed.
I have ISAS.I also have a SIPP (TD Waterhouse) as I transferred a company pension.I trade shares only in both.
The reason I chose TDW is that I am trading silver and gold stocks on the Canadian TSX and TDW being Canadian are fantastic for that.
I would not touch ANY fund with a barge pole.I would stay well clear of the financial sector and UK property altogether for at least 12 months to 2 years.
As far as I am concerned buy energy (oil) stocks,stocks that will benefit from globally rising food prices, or gold and silver mining stocks of mining companies with mines in geopolitically safe countries.

dunstonh

When you want to 'retire' and draw on it,you will be taxed.So you gain up front but they take it back off you

Not strictly true. Any income below your personal allowance will not be taxed. At age 65, you will be able to earn over £10k a year (it will be at that level within a few years) without paying any tax.

25% of the fund value you can take back as tax free.

So, if you want to compare aginst an ISA, you should firstly deduct 20% from your contributions (its 20% from april not 22% so lets use that rate). You should then deduct 25% as you get that back on a pension. So, if you are going to compare then use £100 for a pension and £55 on an ISA to get a like for like comparison for income provision.

There are pros and cons to both pensions and ISAs and for a more complete discussion of these, the ISA vs pension thread at the top of the forum is worth a read.

TRUSt_NO_1_2

dunstonh “So, if you are going to compare then use £100 for a pension and £55 on an ISA to get a like for like comparison for income provision”

What sort of maths are you using ? That’s rubbish ! You must be in the pension industry !

dunstonh:"Not strictly true. Any income below your personal allowance will not be taxed. At age 65, you will be able to earn over £10k a year (it will be at that level within a few years) without paying any tax.

10k per year .I think you have to subtract your state pension first as that will be included in taxable income, so knock of at least 5k per annum.
So the net benefit is 20% of 5k=1k per year....whooo..! In 2020 that will fill your car and buy the shopping for 3 or 4 weeks ..if you're lucky !
I've read a few posts on the ISA v Pension thread and they seem to reinforce my view.
As an aside ,when the derivatives market melts down in the next couple of years (as a result of subprime,auto loans,credit card debts,collapsing house market etc) the financial sector will be running for cover. Hedge funds will be collapsing by the boat load. It will be interesting to see what happens to the pension industry and particularly the PPF.The government has enough on it's hands just with Northern Rock.The worst is yet to come.
My advice is remove as many people as possible between you and your method of preserving (hopefully increasing) your wealth. Keep your assets as accessible as possible. The pension industry is awash with middle men.
Good luck !