Private Pension - do you lose it?

dunstonh

If you put the money in a cash isa, say £3k per year, which is probably more than the amount your likely to commit to a pension fund anyway. Then you know eactly your return and where you stand EVERY year. Plus at the end, at retirement age, you don't have to buy an annuity at say 4% or LESS per year.

Ok, lets look at your figures.

You put in 3k into a cash ISA which over the years will pay an average rate of 4%. In year one that cash isa makes £120.

You put 3k into a pension which over the years will pay an average rate of 7%. In year one that pension makes £660 immediatly due to basic rate tax relief (more if higher rate tax payer) and then £256 at 7%.

If you are risk adverse, you can put your pension funds in cash funds, gilt funds, fixed interest and index linked funds. You can use 5% as the projection then and still easily beat a cash ISA.

Going back to the 7%, you will probably say that isnt guaranteed. Of course it isnt but with all the ups and downs and a fund allocation spread across a range of areas you will be looking at 7% over the long term. In exactly the same way that the Cash ISA return is not guaranteed and will fluctuate. Indeed, for those paying monthly over the last 5 years and with more than 10-15 years to go, the recent stockmarket crash has been wonderful news for them as they can buy their units at much cheaper prices.

And as for the annuity at 4% or less. At 65, you would be looking at 6.3% for a single person level annuity.

And if you plan your retirement schemes correctly so that husband/wife (partners) both have retirement plans, you can end up with nearly £10,000 pa tax free income in retirement from a pension.

deemy2004

Hi

Your figures don't stack up.

In the real world, the one that we actually experience, as against the ficticious returns of say 7% is as follows.

1. Cash ISA - 4% - You can lock in the cash isa now for FIXED 5.8% compound for 5 years, no ifs or buts its fixed NOW.

2. Pension fund growth - 7% ?
Any pension contribution you make into a fund will have 1-2% taken off so your looking at 98% of what you put in as a starting figure.

Pension fund return of 7% year on year would be great, but is it what people are likely to get ? Since pension funds try to track the FTSE, over the last 5 years you would have LOST 23% Thats BEFORE pension fund annual charges of say 1.5%

On the other hand even a crap ISA at 4% would have grown by 22% ! thats with 0 risk !. Now a 5.8% fixed ISA with ZERO risk will grow by 33% !!!

So I rest my case Mlad. Give me a cash ISA ANY day over a pension fund over which I have no control. As all you can do is to hope that it grows, and then be disappointed at retirement when the pension forecast letter pops through your letterbox, unfortunately by then its a little to late to go and picket outside westminister about how youve been lead up the garden path with promised returns of 7% compound per year.

Nope, still cash isas win hands down ! Its your money to do with as you choose. Now if your RICH ! I mean RICH then pensions are great ! Wow you get all your tax back ! 40% !

ANNUITY
Now for the annuity 6.3% level life for a 65 year old person, you forget to mention that when that person drops dead, be A few days after they start getting their pension - ALL OF THE MONEY THEY PUT IN IS GOOOOONNNNNEEEEEE!!!!

EVERY SINGLE PENNY HAS EFFECTIVELY BEEN ROBBED OFF OF THEM - LEGALLY !

What kind of investment is that ? 30-40 years hard work, paying your money into a pension fund you can't touch until you retire and just like that its all gone into the insurance companies coffers ! Not a penny to your partner, not a penny to your children - ALL GONE ! It consider it criminal to sell such products ! Your taking all of their money at 65, and giving them a fixed return of 6.3% - FIXED without change for the rest of their life, which will be TAXED as they recieve it.

How can this compare against a cash ISA based pool of money which continues to earn a rate of return and you can draw funds from WITHOUT ANY TAX LIABILITY - Infact the money you earn in interest and draw does not even count as income to declare ! ALSO if you pop your clogs, your family gets ALL of the cash !. Also if you decide to go on a spending binge say cruises YOU CAN !! Your financially free ! Not stuck to a rigid annuity which YOU CANNOT CHANGE ! EVER !

Nope again give me the cash ISA anyday ! Afterall It will be my money or my famalies - no matter what happens.

People need to look hard into what the pension will offer them and then compaire it against what they want to do when they retire, if they want financial freedom then go with cash isa's if they want someone else to control how much they get and when they get it then yeh, go with a pension. But don't then moan that you can't touch your small pot of gold when your 65 !

dunstonh

1. Cash ISA - 4% - You can lock in the cash isa now for FIXED 5.8% compound for 5 years, no ifs or buts its fixed NOW.

Thats now whilst the rates are higher. What happens in 5 years when they are back down to 3.5% again?

2. Pension fund growth - 7% ?
Any pension contribution you make into a fund will have 1-2% taken off so your looking at 98% of what you put in as a starting figure.

You forget the 22% that is added right away

Pension fund return of 7% year on year would be great, but is it what people are likely to get ? Since pension funds try to track the FTSE, over the last 5 years you would have LOST 23% Thats BEFORE pension fund annual charges of say 1.5%

Im managing double rate returns a year average over the last 5 years.

And since when do pensions funds try to track the FTSE? A few may but there are thousands of funds which do not. There are funds that cover all risk attitudes.

On the other hand even a crap ISA at 4% would have grown by 22% ! thats with 0 risk !. Now a 5.8% fixed ISA with ZERO risk will grow by 33% !!!

right, so your crap cash isa would taken 5 years to grow what the pension grew in 24 hours due to the tax relief.

ANNUITY
Now for the annuity 6.3% level life for a 65 year old person, you forget to mention that when that person drops dead, be A few days after they start getting their pension - ALL OF THE MONEY THEY PUT IN IS GOOOOONNNNNEEEEEE!!!!

Hardly anyone purchases an annuity without a 5 or 10 year guarantee.

What kind of investment is that ? 30-40 years hard work, paying your money into a pension fund you can't touch until you retire and just like that its all gone into the insurance companies coffers ! Not a penny to your partner,

Well if it worries you that much, purchase a joint life annuity instead so your partner gets it on your death.

which will be TAXED as they recieve it

It is taxable income but sensible planning can mean a couple can earn 10k pa (in todays terms) without paying tax.

Who says the cash ISAs will be tax free in years to come?

How can this compare against a cash ISA based pool of money which continues to earn a rate of return and you can draw funds from WITHOUT ANY TAX LIABILITY

And watch the value of the ISA drop as you continue to make withdrawals until the balance is all gone. What do you do then? From 2006, you will only be able to put 1k a year into a cash ISA. That isnt going to provide for you much in retirement.

People need to look hard into what the pension will offer them and then compaire it against what they want to do when they retire, if they want financial freedom then go with cash isa's if they want someone else to control how much they get and when they get it then yeh, go with a pension. But don't then moan that you can't touch your small pot of gold when your 65 !

What people really need to look at when reading your comments is that you are preparing your retirement to be a poor one.

You seem to have a very narrow understanding of how the pension can be invested. Pensions are certainly not perfect but for anyone less than 50, they are the most tax efficient way to save towards retirement.

deemy2004

Yeh the only negative is the drop in 2006  :(

£100k in a pension fund would give me a taxable income of £6k per year.

£100k in tax free savings accounts (if they replace 2006 ISA drop with something else), would still generate the £6k per annum TAX FREE.

I can't see them ever taking away the tax free status of these accounts. Afterall the Peps and TOISA's are still alive and kicking.

Okay enuf, youve tired me out.

dunstonh

£100k in a pension fund would give me a taxable income of £6k per year.

£100k in tax free savings accounts (if they replace 2006 ISA drop with something else), would still generate the £6k per annum TAX FREE.

You shouldnt forget personal allowances. A couple with £50k each in pensions giving 3k each would be tax free.

£100pm in an cash ISA at 5% average per annum for 30 years would give a fund of £82,500. A personal pension with the same net amount paid would get £93,400 at 5% and £134,000 at 7%. The pension has much better potential to hit 7% than a cash ISA.

£82500 would provide £4125 pa income at 5%

The pension would provide £4125 pa income as an annuity and have £23,300 as a tax free lump sum which in turn could be used to provide an income which at 5% would be £1165. Therefore the pension would provide £1165 per year more than a cash ISA. Thats at 5% growth. 7% gives £7280 pa income as an annuity and £33,600 as tax free lump which if invested for income at 5% gives £1680pa.

deemy2004

Yes, but the state pension would gobble up virtually all of the tax free allowance so the income would still be taxed.

If anything with grey power on the increase, the state pension, despite the pain to the rest of the economy are likely to remain in their present form for all those who are contributing via their NI payments at this moment in time.