Our First Pensions..

RickMoney

Well, its a little late I guess but me and my partner are looking to set up our first pensions and I am bewildered by the amount of information out there.

I always use this site to ensure I get the best deal etc. but in the realm of pensions, is it really best for us to go to a IFA? My dad had one that always managed his finance but the comission difference that Martin outlined bothers me.

I notice that if I go onto Cavendish they list the providers, and show that they each have a number of funds. If I went through Cavendish, I presume I would need to investigate each fund and then choose a number to be in the pension?

We are young so can afford to go for higher risk funds at this stage. I must admit that I thought it was like buying insurance etc and was a case of choosing a company that had standard high/medium/low risk plans.....

Any points of view advice welcome.

Regards

Rick

EdInvestor

If you have no company pension with an employer contribution and are basic rate taxpayers then best to go for a stocks and shares ISA through a discount broker at this stage.

eg https://www.h-l.co.uk

The investment choice is the same, but the money is accessible.With a pension you can't get any of it out until you're 55.If later it looks better to use the pension because of the tax relief, then you can move the ISA money in .

Either way you'll be saving for retirement.

dunstonh

I always use this site to ensure I get the best deal etc. but in the realm of pensions, is it really best for us to go to a IFA?

Martin doesnt recommend that people go DIY when they dont know what they are doing. You can do far more damage than good if you get it wrong and its easy to get it wrong and going DIY means you have no FOS protection.

My dad had one that always managed his finance but the comission difference that Martin outlined bothers me.

Martins article on pensions is a little out of date. As highlighted in a couple of threads recently, even an IFA on full commission can beat most of the nil commission pensions on offer.

I notice that if I go onto Cavendish they list the providers, and show that they each have a number of funds. If I went through Cavendish, I presume I would need to investigate each fund and then choose a number to be in the pension?

Cavendish, like many of the execution only IFAs, only allow a limited range of products to be bought that way. That list is rather out of date and doesnt include any of the more modern plans with the lower charges.

If you go execution only, you have to pick the funds yourself. You are not allowed any advice.

I must admit that I thought it was like buying insurance etc and was a case of choosing a company that had standard high/medium/low risk plans...

Pensions are very flexible and you have tens of thousands of investment options. The better pension providers have fund choices running in the hundreds. The old days of single fund providers are long gone thankfully although there are some pretty naff stakeholders around that still have that limitation.

If you have no company pension with an employer contribution and are basic rate taxpayers then best to go for a stocks and shares ISA through a discount broker at this stage.

And you base that recommendation on what? It could certainly be the correct thing but it could also be the wrong thing. There is nothing in the post from the OP that gives any hint that an ISA is better. There are pros and cons to using an ISA instead of a pension. It isnt just a case of saying no employer contribution means go ISA.

EdInvestor

If you have no company pension with an employer contribution and are basic rate taxpayers then best to go for a stocks and shares ISA through a discount broker at this stage.

You may reasonably dispute the discount broker bit if you like - the OP may prefer to use an IFA to help with the investment of his ISA.

But for a young investor on basic rate with no employer's conts the ISA is almost certainly the wrapper of choice because

#If he doesn't use the ISA allowance he loses it*, whereas he can access the pension tax relief later with a lump sum
#It will be more beneficial to access the pension with savings later if he is a higher rate taxpayer
#The ISA is far more flexible - once money goes into a pension the vast majority cannot ever be taken out and none at all until age 55.Income is taxed. ISA income is not and the capital can also be taken out tax free.Can the OP say he will never want to use these savings, not for a property deposit, to reduce a mortgage, for instance?
#The pension is taxed in retirement so the basic rate tax relief is not especially worthwhile.

Using a pension reduces your options, using an ISA increases them, and the investment choices are the same. So looks pretty obvious to me.

*It used to be the same with pensions - if you didn't use your annual allowance, you lost it.But the recent change to a "lifetime allowance" swings the balance for many people to ISAs where there is no free money and no significant tax advantage..

dunstonh

#If he doesn't use the ISA allowance he loses it*, whereas he can access the pension tax relief later with a lump sum

Possibly the case but not many "young" investors would utilise the full £7200 allowance each and every year anyway so nothing lose there.

#It will be more beneficial to access the pension with savings later if he is a higher rate taxpayer

A potential positive of using an ISA.

#The ISA is far more flexible - once money goes into a pension the vast majority cannot ever be taken out and none at all until age 55.Income is taxed. ISA income is not and the capital can also be taken out tax free.Can the OP say he will never want to use these savings, not for a property deposit, to reduce a mortgage, for instance?

The ability to spend the money in the ISA early can also be a disadvantage. Some people do not have the self discipline and need the tie in with the pension.

#The pension is taxed in retirement so the basic rate tax relief is not especially worthwhile

75% of the pension goes towards taxable income. The other 25% is withdrawn tax free. The taxable income doesn't mean tax will be paid on all of it though as you have your personal allowance and whilst some people do eat this up from the state pension, many do not. Especially the self employed who only get the basic state pension. They could have a pension fund of nearly £100k and not pay tax on it. Meaning the tax relief was a true benefit.

So looks pretty obvious to me.

You have ignored those that would be in receipt of working/children's tax credits. Especially more likely for the younger investor as you put it. Pension contributions reduce your income and can increase the tax credits paid which gives a potential maximum equivalent tax relief of 72% in the ideal scenario. In reality, most are not going to match that scenario but those getting tax credits will benefit with pension contributions as will those that just miss out and can use the pension contributions to allow them to lower the income so they qualify.

ISA contributions do not increase your tax credits.

Death benefits are better with pensions pre retirement. Bankruptcy is better with pension. Most benefits wont take pension into account but will with ISA.

If you are relying on moving the ISA into a pension later then there is no guarantee you will be able to do this as you only have a small window of opportunity after you stop work. If you have to stop work early for medical reasons you may miss that window.

It is not obvious which option should be used. For all you know you could be telling this OP to use ISAs yet they could get up to 72% equivalent tax relief on pensions.

RickMoney

Thank you very much for your advice. I have decded that I will go with a IFA because as you said, there is more potential for me to make a mess of it with no experience and I don't like to gamble on something that gonna pay for my food later on haha. What you said about IFA's now being able to beat the non comission brokers is a wieght of my mind too.

I do plan to use our full ISA allowance as well each year so I appreciate your comments on that. I don't use the stock option though as I had my fingers burnt with them a couple of years ago, but I will use the cash ISA.

Thank you again, love this site....

Rick

dunstonh

I don't use the stock option though as I had my fingers burnt with them a couple of years ago

That certainly indicates that advice is going to be worthwhile as there is no excuse for an inexperienced investor to lose money a few years ago. Whenever I hear someone say that it nearly always turns out that they invested well above their risk profile. I had one last week who was anti-stockmarket and it turned out the reason was he invested 100% into tech stocks and lost a lot of money. That isnt stockmarket investing. That is an extreme high risk hit and hope. People in that situtation tend to see the stockmarket as one thing when it certainly isnt.