stakeholder pensions

dunstonh

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.

So they can fund their over borrowing to support a lifestyle not suited to their level of income? A pension is a retirement vehicle not an emergency fund.

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.

Clearly these people need to sort their priorities out. Puting in a amount that is usually too small is not going to give a good pension and its not there to bail you out when you over spend. The emergency fund, which would often be an ISA is there for that.

EdInvestor

A pension is a retirement vehicle not an emergency fund.

Indeed, and it's very obvious that none of these people are really aware of that.You can't just assume that people know that if you put money into anything referred to as a "pension", you can say goodbye to it forever.

dunstonh

There has to be a little common sense here. When you put money in a pension it does really indicate that its for retirement.

However, these must be the same people that you point out should be doing SIPPs and Drawdown

DavidLaGuardia

dunstonh wrote:

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.

Dunstonh, if you are correct I genuinely don't grasp what you are saying. The way I see it is that both the growth AND the effect of reinvested income per unit is going to be proportionate to whatever sum is invested. Yes they both have compounding effects, but whatever they are, is it not the case that £200 invested in a fund would be worth twice as much as £100 over the same period? I know that some funds offer bonus units or lower charges on bigger funds, but ignore this for the moment. The fact is that if the effect of basic tax relief is to increase a premium by a factor of 1.28, then whether you add this factor at the beginning or end of an investment period you are going to get the same result.

whiteflag_3

Edinvestor

You can't just assume that people know that if you put money into anything referred to as a "pension", you can say goodbye to it forever.

Can you expand on this- in particular "say goodbye for ever". I agree with dunston, if people are investing in a product called a "pension" I dont see that you can do anything else other than assume that they know they are investing for retirement. If you apply your logic these same people must assume "pensioners" can be anyone from age 18 -80!

dunstonh

You are correct that the contributions whether its monthly for 30 years or a single payment in year 30 would be exactly the same (assuming same basic rate tax relief). Plus 4% growth is 4% growth regardless of the balance. I am guilty of over simplifying it and perhaps using the wrong terminology when its the cost of delay where it is more appropriatly used. However, lets look at the end result and that may explain why the benefit of pensions are still valid:

£1200 net contributions a year over 30 years and 5% growth
in an ISA that would be £83,712
in a pension that would be a fund value of £107,320 (which is the 1.28 you mention).

So we are now aged 65 and with the ISA we can get:
£83,712 @ 5% = £4185 a year tax free

Pension gets:
80,490 @ 7% (single man annuity rate) = £5693
26,830 @ 5% = £1341 (from 25% tax free lump sum re-invested)

The personal allowance is £7090 and the basic state pension eats up say £4300. That leaves £2790 of income that can be earned tax free. 5693-2790 = £2903 which is then taxable. £2020 of it at 10% = £202 and £883 at 22% = £194.26

So the net income in retirement on the ISA is £4185.
With the pension its £6637

Just for information, lets do the same with an index linked annuity that ed says no-one buys.

Pension gets:
80,490 @ 4.8% (single man RPI annuity rate) = £3863
26,830 @ 5% = £1341 (from 25% tax free lump sum re-invested)

The personal allowance is £7090 and the basic state pension eats up say £4300. That leaves £2790 of income that can be earned tax free. 3863-2790 = £1073 which is then taxable. all of which at 10% = £107

So the net income in retirement on the ISA is £4185.
With the pension its £5097 in year 1, increasing annually by RPI

So, yes an ISA can allow you to pass on your fund value to your children. But it can result in a lower income in retirement than a pension. Now you need to look at what is your priority. Do you want to pass more on to your children (who will already have the house and everything else in many cases) or are you saving for retirement?

If a husband and wife plan their retirement income together, they can utilise both their personal allowances and earn £14,180 a year at age 65 tax free. So the amounts can be a lot bigger than this example.

Remember, that most people do not save enough money towards their retirement so although these figures may appear low, that is, in reality, the sort of figures the average person is looking at. Indeed, out my way in Norfolk, a £100k pension fund is in the minority.

All that being said, ISAs are still valid but you need to be aware that both the pensions and the ISAs have pros and cons. You pay for that flexibility of the ISA by getting a reduced income.

Ideally, a combination of both is the best solution. Contribute enough into the pension so it eats up your personal allowances. Then start paying into the ISA. You have the best of the both worlds at that point.

EdInvestor

Hi whiteflag

Can you expand on this - in particular "say goodbye for ever".

When you put money in a pension, you can never get the capital out again.You can only access it after the age of 50 - later to be 55 - in the form of strictly limited taxable income.

Currently you are forced to turn this capital over to an insurance company by the age of 75 in return for an annuity income.This draconion requirement will be dropped next year, but you still won't be able to get the money out.

To my mind this makes the ISA/pension income comparison invalid - dunstonh fails to mention that the ISA's capital is available at any time, that the tax free income yield on the ISA can certainly be higher than 5% and that the ISA's capital value can rise, along with its income thus producing a rising income at a higher level than the best annuity.As usual he also picks a 65 year old man for his example - figures for this group flatter his case. Figures for 60 year old and younger men and almost all women will look decidely different.

dunstonh

dunstonh fails to mention that the ISA's capital is available at any time,

Stating the obvious. Next we will be saying one major difference is ISAs start with I and Pensions start with P.

that the tax free income yield on the ISA can certainly be higher than 5% and that the ISA's capital value can rise

And can certainly be lower and the capital value can drop. Please can you provide an example of a solution that is guaranteed to pay 5% or more like the annuity can?

As usual he also picks a 65 year old man for his example - figures for this group flatter his case. Figures for 60 year old and younger men and almost all women will look decidely different.

Of course I pick 65 as the example. Its the state retirement age. More retire at 65 than at 60. Over the coming years, that is likely to move towards 70. There is no point picking age 60 because the reality of retirement planning is that most cannot afford to retire early. (I could have picked smokers rates or impaired health rates if i wanted to increase the figures further but that would have been really unfair).

At age 60, the annuity rate would be 6.3% level and 4.1% with RPI.

However, this again highlights how differences in individual circumstances can impact on the ideal solution. Which leads us to what we keep repeating, no one solution suits everyone.

whiteflag_3

EdInvestor

When I asked you to expand on the following I wanted an explaination on what you meant .

Can you expand on this - in particular "say goodbye for ever".

Im really disappointed that all you gave was a summary of one of the options on retirement and its drawbacks( which we have been round the block on many times on this site).

If I didnt know any better I would be put off investing in a "pension" if I though I was saying goodbye to my capital forever. So please clarify for everyone the circumstances when by investing in a pension will lead to "say goodbye for ever"

carnet

If I was to put, say, £3,000 into a SHP am I not kissing goodbye to my capital forever - apart from the 25% ? I can claw back as a lump sum upon retirement ?

The remainder I have "surrendered" in return for an income.

If, on the other hand, I invest that £3, 000 into, say, an income producing ISA I still get a (perhaps not, initially, as much but hopefully rising) income but, crucially, also retain access to my (again, hopefully rising) capital.

Even with the pension tax breaks I know which one I'd always go for.

Suppose it depends on how long you think you're likely to live after retirement .