Stakeholder Pensions/ MoneySavingExpert.com Discussion Area

Milarky

Your husband's age is the likely key factor affecting whether it is 'sensible' (no one can say 'better' or 'worse' because no one can know what 'will' happen going forward) for him to remain contracted out of what is now called 'S2P' (previously 'SERPS').

Pal will know this, but I think there is a cut off just before the start of a tax year to elect to change - and that might be the reason for the letter now. If he changes then this will take affect in the next complete tax year - and each year beyond that.

Thus potential benefits are valued on a year-by-year basis. Any decisions taken are always 'at the margin' so, as time passes, the averaging effect of past years builds up and the decision for a mature person will be informed more by what has happened (past growth or lack of) rather than what might happen.

Since 2002 the potential value of contracting out out has changed - for lower to average earners at least - because the scheme was rejigged from SERPS. If your husband's earnings are average or above average this shouldn't affect him though. It will also affect him less because of the limited number of future years compared to the past years. For a younger person contemplating action it looks quite different.

Rebates are age-related, but the rate of increase in the level of the rebate levels off and this, it is argued, makes the risk too great for those already in their fifties to invest the capped amount and realise the equivalent payout to what S2P will guarantee.

Taking that with the previous point, you might like to consider the following:

1) For how much of his working lifetime has he been opted out?

Generally the less time already contracted out the more sense a change to contract back in makes.

2) Are his other (company/personal) pension provisions apart from the second state pension significant ?

For the same reason, the more he has elsewhere and the less he relies on the second state pension to top this up the less critical a change will seem

3) Does he have strong preferences that might override 'normal' considerations?

Being contracted out he currently enjoys privileges over when to take the benefits and - from April this year - how, whereas contracted-in he can only access thse equivalent benefit when he is able to take the state pension - at a fixed retirement date in other words

dunstonh

There is also political risk. If we do move to a single state pension, anyone that has contracted in will almost certainly lose all benefits from doing so. Whilst those that have contracted out will get to keep their benefits.

So, if you contract in, you may get more than if you contract out if the Govt doesnt move to a single state pension but you would get less if they do.

Also, with contracted out benefits, you get to take a 25% tax free lump sum on the value but cannot from contracted in benefits.

And, if you contract in, you can only commence benefits at state retirement age, whatever that ends up being. If you contract out, you can commence benefits from age 50 (or 55 from 2010).

Death benefits may be more beneficial from contracting out too with certain people.

Its really not a clear cut solution. I have contracted more people out in the last 3 months than I have in the previous 3 years. However, I have contracted more in as well. There is no one answer to fit everyone.

However, I wouldnt contract out with Prudential if you are in with profits. The low potential of the fund which really needs 7% p.a. growth to match benefits as an average in unlikley with that fund. Pru do operate a range of other funds on some of their pensions so that could be an option.

Loadsabob

I'm thinking I should join my work pension scheme, but am kicking myself for having not joined sooner (I've been here five years, I turn 30 this year). It's a Local Government Pension Scheme, its final salary, and while I would have to pay in 6% of my salary (before tax), my employer will pay in about 14% of my salary on top.

Does that make it more than just the "tax wrapper" we're talking about, as it's free money from my employer (and prettymuch counts as the best pay rise I could get out of them!)

Any thoughts gratefully received.

margaretclare

Loadsabob wrote:

I'm thinking I should join my work pension scheme, but am kicking myself for having not joined sooner (I've been here five years, I turn 30 this year). It's a Local Government Pension Scheme, its final salary, and while I would have to pay in 6% of my salary (before tax), my employer will pay in about 14% of my salary on top.

Does that make it more than just the "tax wrapper" we're talking about, as it's free money from my employer (and prettymuch counts as the best pay rise I could get out of them!)

Any thoughts gratefully received.

Join it without delay! As well as the 'best pay rise' you mention, there are also valuable 'death in service' benefits. I know you're not planning to die - neither was my daughter when she joined that scheme on day one of her new job. She died suddenly and unexpectedly 6 weeks later. Her husband got (from memory) 3 months of her full salary plus 2 years of her final year's salary.

Margaret Clare

EdInvestor

Definitely one to join.

The pension is part of the pay at Government jobs, it should never be ignored.It's still a tax wrapper though.

Oh and this has nothing to do with the OP's query whatsoever.

monkeys_uncle

I read Martin's article on pension discount brokers. The company I work for has recently offered me a new pension scheme.

Basically, it is a defined contribution scheme offered by HSBC. My company will pay the equivalent of 3% of my salary into this scheme. HSBC charge a 1% management fee.

We have a pensions adviser coming in to our office later this month so that any employees can discuss the scheme if they wish.

My question is...
Is it likely that if I used discount broker to setup the pension rather than using the pension advisor that HSBC send, will it be just as easy for my company to pay in the 3%. Or, is it likely that they'll only want to pay into the scheme that HSBC setup for me?

Has anyone any experience of this? I'd like to get my facts straight before I approach my employers about this.

Thanks

dunstonh

Is it likely that if I used discount broker to setup the pension rather than using the pension advisor that HSBC send, will it be just as easy for my company to pay in the 3%. Or, is it likely that they'll only want to pay into the scheme that HSBC setup for me?

They almost certainly will only let you pay into their arranged scheme. Could you imaging the amount of admin if everyone chose their own schemes? Whilst smaller companies may be willing to do so, it is unlikely.

Also, don't read too much into that article about discount brokers. Firstly the article is out of date and one of the companies mentioned has just increased their charge on the stakeholder making it quite poor value. Indeed, their personal pension with the same funds is cheaper. Also, stakeholder pensions are not exactly ideal from the point of view of investment choice. Indeed, I am transferring a pension away from HSBC tonight into a hybrid SIPP because the HSBC stakeholder isnt good enough.

Paul_Herring

It's likely that your comapny will stipulate that for you to receive the 3% from them, you must join their scheme.

Is the 1% you mention the charge HSBC is making on the company scheme or the figure you've seen on HSBC literature for 'normal' Define dContribution (DC) schemes?

An alternative for you, if you're set on having your own scheme outside of your companies, is for you to contribute the mimimum required to the company scheme to acquire the 3% they will give (I suspect 3% - which they then match) then any extra you put into your prefered scheme.

Note that your company may have negotiated lower fees with HSBC than you could get yourself, and you may be better off sticking all your contributions into your company's scheme; at least while you're working with them.

monkeys_uncle

Thanks for that.

I won't bother with the brokers then. I think I'll just stick with paying in the 3% contibution that my employers make, then make additional alternative savings arrangements elswhere.

Currently, I pay into a low cost index tracking ISA. I suppose there are better pension offerings out there that I should be looking at instead - where I can take advantage of my income tax being invested in the fund as well.

Are there any decent websites where I can get good info on this. Martin's site is a bit scant on pansion info.

EdInvestor

If you're a a basic rate taxpayer you'd be best to max out the ISA ( 7k a year) allowance than seek extra pension, where the inflexibility isn't really enough to compensate for the 25% tax relief.