Stakeholder Pensions/ MoneySavingExpert.com Discussion Area

Former_MSE_Dan

This discussion relates to the updated Stakeholder Pensions: Boost your Returns article.

Click reply to discuss.

EdInvestor

From the article:

Put £150 a month into a Norwich Union stakeholder pension bought directly over thirty years and with a 5% annual growth example, the fund would be £105,000.

However, buy exactly the same pension paying Cavendish a £35 fee and it’d grow to £112,000. This is £7,000 more, just by buying it a different way.

If you were able to put the 150 quid in the bank @5% over 30 years with no charges at all, you would get 122,805, so you'd pay 17,805 in charges at the full rate.So the saving of 7,000 is well worth having, it's a 40% reduction.:).

dunstonh

Bad example ed. You have totally ignored the tax relief. Assuming the article is £150pm gross (which it doesnt actually make clear as far as i can see), the net premium is £117pm.

So, put 117pm @ 5% in the bank over 30 years (im not saying no charges as there are. They are just not explicit). The figure will obviously be lower.

Pension projections should also use 7% for projections and only use lower projections where the investment is likely not to achieve 7%. The potential for growth on most pension funds is higher than 5%. So your example is not comparing like for like.

EdInvestor

117pm @5% for 30 years in the bank adds up to 95,788, tax free.

117pm going the direct pension route gives you 105k (ouch).At maturity you get 26,250 in tax free cash, leaving you 78,750 to purcahse an annuity which will produce around 5.1k, just under 4000 pa after tax.Plus the income @5% on the 26,250 = 1,312, for a total of 5,312p.a. plus 26k capital.


117pm going the Cavendish pension route ends up at 112,000.
At maturity you get 28,000 of that tax free in cash, leaving 84,000 to purchase (currently) an annuity, which will produce an annual income of around 5.5k depending on age,say around 4,300 after tax, plus income on the 28k, another 1.4k = 5,700p.a. plus 28k capital..

The other way you get an income of about 4,800 and 96k capital.

Which would you prefer?

I think it should be called "deferred tax", rather than "tax relief" as the latter is rather misleading.

isasmurf

Beginners Guide: What’s the difference between a company and private pension?

err... nothing. Company pensions are Private Pensions. I think you mean what's the difference between occupational pensions and personal pensions. Private pensions are anything not to do with the state. Sorry, couldn't resist been pedantic. :rolleyes:

These used to be the gold standard, and common advice was ‘grab one if you can’. Yet unfortunately not any more, due to underfunding by companies plus a tax measure by Gordon Brown in 1997 that took nearly £5bn a year out of pension funds.

It is very difficult to prove what the effect of the tax measure by Gordon Brown on pension schemes was. Recent estimates, however, have put the cost between £2.5-£3.5bn and possibly lower.

dunstonh

Its not misleading. You are getting tax relief at point of contribution. The fact that some of the income will be liable for income tax at the other end is another issue.

Take a wife who will not get a state pension in her own right, she can utilise her full allowance at 65 and get £7090 tax free income. The tax deferral comment doesnt work in her case.

We know where you are coming from but it doesnt apply all the time so calling it deferred tax would be more misleading than tax relief.

EdInvestor

isasmurf wrote:

It is very difficult to prove what the effect of the tax measure by Gordon Brown on pension schemes was. Recent estimates, however, have put the cost between £2.5-£3.5bn and possibly lower.

Thanks for that (short and informative) link isasmurf, well worth a read, especially as it gives some background to the taxation of dividends, such a vexed question on another thread.

Another aspect that will presumably be reducing the impact of this change is the recent FSA requirement for life companies to back all guarantees with bonds.This has caused a major reorientation of With-profit fund investment allocations, formerly 70% or more in equities, now mostly 40% or less.WP funds account for a massive proportion of total pension investment.

The same change from equities to bonds is occurring at company pension funds though much more gradually.

It seems GB has taken rather more stick than is justified for the "pensions crisis".

Pal

I don't like the wording of the final salary section.

All members of final salary schemes are now protected by the debt on employer rules and the Pension Protection Fund. OK it is only up to 90% of the benefit up to a total limit, but most people will fall below that limit. Given that most members only pay about a quarter of the total contributions that their benefits cost, a Government guarantee that they will get at least 90% of their total promise back means that they cannot possible lose from joining a final salary scheme.

Can anyone name any other investment that has such generous terms?

The only problem now for employees is finding a final salary scheme that will still allow new members to join!

Middle_Sister

Looking at Martin's article I am tempted to open a stakeholder pension for my nephew who is 12. Which is the best one to pick?

Is it the Halifax one?

Also do I need a stakeholder pension or a stakeholder friendly personal pension? HELP

dunstonh

Looking at Martin's article I am tempted to open a stakeholder pension for my nephew who is 12. Which is the best one to pick?

No-one can advise on a company without doing what is known as a factfind. There are differences with the companies and some things will be better with some and not others.

Is it the Halifax one?

I can say with confidence that it certainly isnt.

Also do I need a stakeholder pension or a stakeholder friendly personal pension? HELP

A stakeholder pension is a defined charging structure within a certain set of parameters. A stakeholder friendly personal pension does really exist much now. Its an old term that was used more before stakeholder pensions were introduced but we knew they were coming. In the last couple of years Personal pensions have taken on a new identity and are now seen as being able to offer more funds and a different charging struture that may or may not be more favourable. As a rule of thumb, a personal pension tends to favour younger people and offer a better charging structure than a stakeholder. As short term pensions are not very profitable, the personal pensions are less attractive in those cases and the stakeholder looks more attractive. Chances are your level of contribution would rule out personal pensions anyway. Unless you are being rather generous.

Saving for your nephew is a very nice thing to do and a stakeholder pension is a valid option. However, saving via other methods (such as regular savings OEIC/UT) with a record of a gift (to avoid/reduce any potential IHT) may be just as suitable and offer greater flexibility for future changes that may occur with pensions.

Paul_Herring

dunstonh wrote:

[...]and offer greater flexibility for future changes that may occur with pensions.

Is there anything in particular you had in mind when writing this?