stakeholder pensions

tentickles666

think its time i sorted one. can anyone direct me to some up to date info plase? also which 'companies' are regarded as the best, as i dont want to loose my money am i best sticking with my bank?? cheers

dunstonh

There is no such thing as a best company. Each one has pros and cons. Some more be important to you, some not. Depending on what you want, will depend on which one is best.

One thing is sure, you shouldnt buy your pension/investment products from a bank. Expensive and poor quality funds are the usual failings of bank products.

EdInvestor

helenathena wrote:

as i dont want to loose my money am i best sticking with my bank??

If you mean sticking to a savings account, then yes.However you won't accumulate much retirement income that way.

A pension investment will involve some risk, but as it's over the very long term, the risk is not as bad as it may appear.

If you are a basic rate taxpayer and have no company scheme with an employers contribution, you might be best to invest in a maxi ISA, which has far fewer restrictions than a pension.

Next year the rules will change so that any lump sums accumulated like this can be put into a pension later without losing any tax advantages, unlike now.

dunstonh

If you are a basic rate taxpayer and have no company scheme with an employers contribution, you might be best to invest in a maxi ISA, which has far fewer restrictions than a pension.

Next year the rules will change so that any lump sums accumulated like this can be put into a pension later without losing any tax advantages, unlike now.

However, this option would also mean you lose out on the compound effect of growth on the tax relief and ISAs do not increase the amount of working/childrens tax credit you may receive, if applicable. Pensions tend to be more advantageous the further away you are from retirement as the tax relief has a bigger impact on the final value.

EdInvestor

However, this option would also mean you lose out on the compound effect of growth on the tax relief

This doesn't amount to much as it only affects the 25% tax free cash - the rest of the pension is taxed as income at your full rate when you get it, so that part of the pension isn't free of tax - the tax is just deferred.

I've seen calculations suggesting the compounded growth on the tax relief might boost the tax-free cash amount by about 7%.

dunstonh

It would boost the income as well as the overall fund would be higher. There is also nothing in the posts to suggest that the annuity income would be taxed. We dont know if there is a state pension payable to the OP or not. If not, the pension income upto ther personal allowance would have no tax deducted making it far more tax efficient than the ISA.

DavidLaGuardia

dunstonh wrote:

However, this option would also mean you lose out on the compound effect of growth on the tax relief and ISAs do not increase the amount of working/childrens tax credit you may receive, if applicable. Pensions tend to be more advantageous the further away you are from retirement as the tax relief has a bigger impact on the final value.

There is NO compound effect of tax relief (I've noticed this claim on the boards before!). While compounding occurs in growth, other than changes in tax rates, the benefit of the tax relief is a fixed factor.

If you put tax relief on a sum or wait until it is a bigger sum you will get the same figure.

There are however several practical reasons for encouraging it to go into a pension
1. Protection from bankrupcy.
2. Getting into the good habit of putting away money for retirement and not missing this amount.
3. The risk of reduced or lost earnings in the future and not being able to benefit from putting away the amount intended or the same rate of tax relief
4. Not being tempted (or pursuaded by loved ones) to use the funds for other purposes.
Doubtless there may be other reasons

To support pensions, I repeat from a previous posting:

If you compare saving into an ISA with a pension. Ignoring the fact that a pension is inaccesible which may be good or bad (since we are talking about retirement and don't want before anyway)
£1 goes into ISA it is worth £1 x growth
£1 net into pensions is worth £1.28 x growth
Take off the tax free element that is common to each (25% of pension fund)
Pension = 0.96 x growth
ISA = 0.68 x growth
If we assume this part of the pension is fully taxed at 22%
Pension = 0.75 x growth
THAT'S MORE THAN 10% GREATER IF ALL IS TAXED
Compare stakeholder charges to average ISA charge and this 10% can get much bigger (ok that may not be relevant)
Additionally if the pension is drawn long before state pension occurs there may be a significant perioud of benefits drawn tax free (such as phased-drawdown where actual taxable income is maintainined below personal allowance).
ISAs are a good tool but pensions should in most cases be better.

Important additional point:
The benefits are enhanced further for higher rate tax payers (who will not be HR in retirement) or salary sacrifice or tax credits which would all boost the difference significantly

EdInvestor

ISA = 0.68 x growth
Pension = 0.75 x growth
THAT'S MORE THAN 10% GREATER IF ALL IS TAXED

Frankly, this is very poor recompense for the inaccessibilty of the whole of the fund before the age of 50 (to be increased to 55), the strict limitations on the amount of income that can be taken after retirement, and the loss of control of 75% of the capital forever.

None of these restrictions apply to the ISA and nor do you face the risk of rising tax rates when you retire, potentially wiping out the meagre gain from the tax relief.

I accept pensions are worth considering for higher rate taxpayers,and for those with a reasonable employers' contribution. The use of direct investment within a low cost SIPP might change the equation for some investors, but the inability to put the free money from contracted-out NI rebates into a SIPP reduces what would be a small, but positive advantage.

Particularly with the new rules coming in which will enable people to put an entire year's salary into a pension in one hit later, picking up tax relief (such as it is) on the whole of it, there seems little point in people now locking up money unnecessarily for virtually no gain.

DavidLaGuardia

In my humble oppinion the inaccessibility is, in the real world, one of their saving graces.
In so far as the 10% is concerned this is rock bottom even if people get no additional benefits like salary sacrifice, tax credits etc. they might enoy taxfree returns in early retirement through phasing vesting. Stakeholders are less costly with comparible ISA funds. ISAs do not have a guaranteed shelf-life.
My own personal thought to bridge the savings gap i would be to restrict the relief to basic rate tax, reduce the cash but make the whole lot tax free at the other end.

dunstonh

The higher contribution buys more units. The compound effect is the income distributions from those investments. By having more units, you get a bigger distribution, which is re-invested and buys more units and so on. That is where the compounding effect is.

If you invest in a pension as a lump later on in life, you dont get that compounding effect from the distributions over the years.

As I have said before, i do not disagree with ISAs as retirment vehicle. One look at the number of regular ISAS i do compared with regular pensions would verify that and almost make me look like Ed in disguise. However, the point is that there are times when pensions are best and times when ISAs are best. Coming out with a "in my opinion" response could mislead the posters when it should be something like "sometimes pensions are best, sometimes ISAs are best".

However, the minute a "IMO an ISA is best" post is made, we have to post a balancing response which then turns into a ISA vs pension thread which we get every few weeks when in reality, we dont have very many differences of opinion on this at all.

There are other issues to note. ISAs are not guaranteed to remain tax free. Pension legislation is likely to change many times before you retire. Charges on pension funds can be cheaper than on ISAs when comparing like for like. Annuity rates on pensions can be higher than ISA returns. funds in an ISA can impact on benefits, if applicable.

Perhaps the most important thing to note is that most new threads are started by people who know nothing about pensions. The important thing is that they start saving. It doesnt matter in the scheme of things how they do it, as long as they do. Flooding them with information which may or may not be relavent is more likley to put them off. That will harm them more than if they pay into an ISA when a pension would have been better or vice versa.

EdInvestor

dunstonh wrote:

Perhaps the most important thing to note is that most new threads are started by people who know nothing about pensions. The important thing is that they start saving. It doesnt matter in the scheme of things how they do it, as long as they do. Flooding them with information which may or may not be relavent is more likley to put them off. That will harm them more than if they pay into an ISA when a pension would have been better or vice versa.

I would agree, except for the fact that the number of threads started by people who think they want a pension and know nothing about pensions is about equal to the number started by people who want to know how they can cash in their pension, and are then horrified to discover they can't.

Clearly these people should not have been sold a pension, they should have been sold an ISA in which to save up for their old age.

IMHO it's better that they learn the differences at the start and pick the right product.It's much more likely then that they will keep saving long term.

On the other hand they might well be put off pensions for decades if they discover their money is trapped in a product and effectively they can never get it out, if they were sold the product without this being explained.