New job, unsure if I want a pension

jamtomorrow_2

Hi All,

First post. Have read lots of sensible advice in this forum and am just trying to get a sanity check on my current retirement strategy

I'm a 28-year old higher rate tax payer with no pension so far.

I heard a lot of bad things about pensions from a previous boss so decided to save using a cash mini-ISA (was basic rate tax payer at the time). I also invest in shares regularly and over half my savings are in shares (combination of high yield shares in a shares mini-ISA and a few gambles on some non-ISA'd AIM stocks).

My main concerns with pensions are the ever-rising retirement age and the lack of choice when it comes to taking money out of the pension pot.

Since I started handing over 40% income tax each month (ok, only part of it is at 40%) I've been wondering what the trade-off I should make between being more tax-efficient and locking money away at the mercy of future government legislation.

I've been considering getting a SIPP mainly because I've got a vague notion that there are CGT benefits when trading non-ISA-able shares but I've not been able to find any clear information on this.

Hmmm, seems that rather than gather my thoughts I've just managed to demonstrate my ignorance of all things pension-like

I guess the real question here is what kind of pension / ISA split is sensible for a higher rate tax payer who doesn't have much faith in the pensions system and can a SIPP help if I want to shift my share investing towards more long-term (retirement) benefits.

Thanks in advance,

Chris

p.s. There is no pension scheme at my company and I believe I am over the earnings threshold for a stakeholder pension.

dunstonh

I heard a lot of bad things about pensions from a previous boss

Common error. People hear something about a pension scheme on the news and think all pension schemes are bad. They also mix up bad performing pension funds with good ones and see the stockmarket crash as a bad thing when for long term savings its a great thing to happen.

My main concerns with pensions are the ever-rising retirement age and the lack of choice when it comes to taking money out of the pension pot.

Retirement age has nothing to do with it as the same problem applies whether you have a personal pension or personal savings. How you get the money out the pension is certainly an issue.

I've been considering getting a SIPP mainly because I've got a vague notion that there are CGT benefits when trading non-ISA-able shares but I've not been able to find any clear information on this.

Pensions do not suffer CGT liability.

I guess the real question here is what kind of pension / ISA split is sensible for a higher rate tax payer who doesn't have much faith in the pensions system and can a SIPP help if I want to shift my share investing towards more long-term (retirement) benefits.

First thing is to get rid of your old boss' views as they are totally incorrect. If you buy xyz company shares in a pension or in a self select ISA, what is the difference in the performance going to be? None. A pension is just another investment tax wrapper with a defined maturity process. What you put inside that pension can be the same across many of the other tax wrappers.

So, the focus is on tax. If you put £100 into an ISA, its cost you £100. With the pension, it will effectively cost you £60. Possibly even less if you have children/working tax credits.

Second thing is that there is no split in what you should or shouldnt do. In reality, its good that you have saved some in a Cash iSA. However, that money has missed out on some significant stockmarket growth over the last few years. How you split between an ISA and a pension is up to you.

Personally, I try to make sure that, in todays terms, that the personal allowances of the individual and their partner are used up with the pensions. That makes the tax relief, even at basic rate, quite attractive. What i do after that depends on the tax situation, other funds held and if in receipt of childrens/working tax credits.

Currently, the pension allows you to draw out 25% tax free lump on maturity with the remainder going towards an annuity. There are investment backed schemes which allow this to be deferred but that is often a decision not to worry about until you get there as no doubt legislation will be totally different by the time you get there (we have had 3 major changes since 1988, each one bringing in better terms). ISAs do not have that 25% limitation. However, the income they generate is likely to be lower than that obtained from an annuity. So, you have a bit of a trade off and you need to decide how much you prefer one or the other. Having both is right, but how much in each? your choice.

p.s. There is no pension scheme at my company and I believe I am over the earnings threshold for a stakeholder pension.

No you are not. There is no such thing as stakeholder pension contribution limits. The limits, for those with no occ scheme, are exactly the same with all available pension schemes. This year, that would be a percentage of your earnings. Next year it will be 100% of your earnings upto a limit of £200k odd (not in office so dont have exact figure to hand)

You may also want to investigate contracting out of SERPS or S2P as its now known as. Although it is unlikely that you will be financially better off for doing so. Indeed, you may get more, you may get less income by contracting out. One thing contracting out does allow is for you to take 25% tax free lump sum from the fund from age 55 onwards. If you remain contracted in, you will have to wait until state retirment age (whatever that ends up being) and you cannot take a tax free lump sum from that. There are a few others areas contracted out can benefit as well.

EdInvestor

Hi jt

jamtomorrow wrote:

I've been considering getting a SIPP mainly because I've got a vague notion that there are CGT benefits when trading non-ISA-able shares but I've not been able to find any clear information on this.

You don't pay CGT (or HRT on divis or tax on interest ) within a SIPP, as within an ISA.Not sure that you will find any shares available inside a SIPP that are not available inside an ISA.

There is a 25% tax perk with a pension but you lose control of 75% of the capital and can't access any income before 50 (later 55) in return for it, as you know.

Have you already maxed your ISA allowances?If not, I would do this first - you could try NSI ( often have good deals for higher rate taxpayers) for savings, to free up more ISA space for shares.

Earnings limits are more or less dropped next year.They are the same for stakeholders and SIPPs. After they are dropped, you will be able to sweep large sums into a SIPP or other pension and attract the tax top-up on all the money, instead of the "use it or lose it" annual contributions system as now.

IMHO it may thus be better to accumulate the money within flexible ISAs and then decide about moving it over later if appropriate.

EdInvestor

dunstonh wrote:

They also mix up bad performing pension funds with good ones and see the stockmarket crash as a bad thing when for long term savings it's a great thing to happen.

Really, is that right?

Talk about spin. :rolleyes:

jamtomorrow_2

Thank you for the useful info.

I like the sound of being able to feed an uncapped amount of my salary into a pension and have Gordon Brown chip in for every £1 I put it

I'm going to read up on A-day now and will try to find some more info on investing in shares inside a SIPP.

Is is correct that you can buy AIM shares inside a SIPP, wait for them to appreciate, sell them with no CGT and then hold the proceeds as cash within the SIPP for when the markets take a downturn?

Many Thanks,

Chris

EdInvestor

JT

jamtomorrow wrote:

I like the sound of being able to feed an uncapped amount of my salary into a pension and have Gordon Brown chip in for every £1 I put it

It will be capped - but at the whole of your salary or 215k IIRC from next year.

Is is correct that you can buy AIM shares inside a SIPP, wait for them to appreciate, sell them with no CGT and then hold the proceeds as cash within the SIPP for when the markets take a downturn?

Yes. Check the interest rates offered by the various SIPP providers if planning this.

whiteflag_3

It will be capped - but at the whole of your salary or 215k IIRC from next year.

Is the amount you can pay in capped or the amount you get tax relief on capped?

Pal

There is going to be no cap on contributions but you will not get tax relief above the limits as mentioned above.

dunstonh

Its seen as been very beneficial to "failed" company directors/chairman who are getting the golden handshake to walk away.