what advice do i give to my friend about pensions

homersimpson_3

my friend will be 40 next year. Single and no dependants (children).
She has been paying into an employer's pension scheme for about 7 years and is buying back additional years so she will have max pension when she retires. Her pension forecast says she receives an additional state retirement pension- does that mean she has contracted in? She has always worked but in earlier life changed jobs every 2 years and took money out of pension scheme. she has to pay additional years up to retirement and she doesn't miss the money. she wants to start a 'private pension' which does not depend on the stock market- worried about returns etc. she has an isa. in about 2 years her mortgage and all debts will be paid. Lower rate taxpayer (unlikely ever to be high rate taxpayer) and earns about 13k.
a) should she target extra income to put a lump sum into present pension thus reducing length of time she has to pay for extra years? are they any financial advantages in doing this?
b) she has an isa already. is it true she can have a pensions isa meaning she can have 2 isa (exisiting one and one for pension)? if so when can she withdraw money from pension isa?
c) can she manage her own pension? if so how does she do it? does she need to tell tax man? can she pay herself for managing pension and deduct this from tax? (had to ask :rotfl:)
any other ideas greatly appreciated. thanks

dunstonh

Her pension forecast says she receives an additional state retirement pension- does that mean she has contracted in?

If she has been buying extra years she isnt contracted in/out in the same sense that you are meaning. Occupational schemes contracting out is different to contracting out of serps/s2p.

she wants to start a 'private pension' which does not depend on the stock market- worried about returns etc.

Pension is just a wrapper. Where she invests it is important. Most of the decent pension providers offer a range of pension funds which will include non-stockmarket funds. It is important, when investing, not to put all the money into one fund. She should select a range of funds which average out to her risk profile. This should also include stockmarket funds albeit with a small percentage.

Even with the stockmarket crash a few years ago, it is still the best long term solution for obtaining real growth.

Lower rate taxpayer (unlikely ever to be high rate taxpayer) and earns about 13k.

That would make her a basic rate tax payer not a lower rate taxpayer. (22% is basic rate, 10% is lower rate).

a) should she target extra income to put a lump sum into present pension thus reducing length of time she has to pay for extra years? are they any financial advantages in doing this?

Almost certainly the most expensive option but £1 for £1 it is likely to give the most benefits. However, as a single person with no dependents, it may not be the best option as a number of those benefits will not be required and it could be wasted money. (i.e. death benefits, spouses pension, dependents pension are not required but part of the money going into adding years is covering those).

A comparison between the benefits of added years would need to be made against the other options.

b) she has an isa already. is it true she can have a pensions isa meaning she can have 2 isa (exisiting one and one for pension)? if so when can she withdraw money from pension isa?

No such thing as a pension isa. A pension investment has exactly the same tax advantages as an ISA whilst invested. However, a pension has a defined maturity process which may or may not be desirable to the individual.

c) can she manage her own pension? if so how does she do it? does she need to tell tax man? can she pay herself for managing pension and deduct this from tax? (had to ask :rotfl:)
any other ideas greatly appreciated. thanks

She can. They are called self invested personal pensions. Ideal for the experienced investor or those with larger funds. They can be more expensive than stakeholder or personal pensions with smaller amounts. SIPPs can be used to invest in a number of areas but for somoene who doesnt like stockmarket investments, the benefits would not be so great. A sipp investing in property funds, corporate bonds and gilts would probably cost a bit more than stakeholder investing in the same areas.

EdInvestor

homersimpson wrote:

She wants to start a 'private pension' which does not depend on the stock market- worried about returns etc. she has an isa. in about 2 years her mortgage and all debts will be paid.
b) she has an isa already. is it true she can have a pensions isa meaning she can have 2 isa (exisiting one and one for pension)? if so when can she withdraw money from pension isa?

Hello HS

As she's a BRT and a female, IMHO she would be better to put her additional savings in an ISA tax wrapper, not another pension tax wrapper - after she has used extra money to off her debts.

This is because pensions are very inflexible,only a quarter of the money in a pension is tax free, the rest is taxable when you retire, and you can never get access to the capital. The charges are also much higher in a personal pension than a company pension.

In addition pensions tend to be a bad deal for women, because they often retire younger and live longer, thus they get lower annuity rates at the start, and they are more likely to have their (taxed) annuity income depleted by inflation.

What assets does your friend want to put the money into? Is she only interested in savings accounts? You can get an additional type of ISA as well as a cash ISA, but this is for investments in the stockmarket. Income from this type of ISA is tax free when you take it out.

dunstonh

This is because pensions are very inflexible,only a quarter of the money in a pension is tax free, the rest is taxable when you retire, and you can never get access to the capital. The charges are also much higher in a personal pension than a company pension.

What charges are you referring to? It should be noted for others reading this (and not so much homersimpson, where it doesnt apply) that charges are not much higher. Often they will be lower but can also be the same or higher depending on the type of scheme.

In addition pensions tend to be a bad deal for women, because they often retire younger and live longer, thus they get lower annuity rates at the start, and they are more likely to have their (taxed) annuity income depleted by inflation.

An ISA paying 5% is going to suffer with inflation exactly the same as an annuity paying 6%. A index linked annuity would make inflation unimportant.

Income from this type of ISA is tax free when you take it out.

At this time. There is no telling what the future of ISAs will be long term.

ISAs are certainly an option but with a single person looking for retirement income, the usual advantages of an ISA are less than those who have dependents.

Basically projections on the ISAs, stakeholder/personal pension and added years need to be obtained and then compared. Otherwise we just revert to the usual debate in this forum which ends up listing all the pros and cons of ISAs and pensions. That doesnt help homersimpson at all.

EdInvestor

What charges are you referring to? It should be noted for others reading this (and not so much homersimpson, where it doesnt apply) that charges are not much higher. Often they will be lower but can also be the same or higher depending on the type of scheme.

According to the Pensions Commission report, charges for occupational schemes average 0.9% , for GPPs 1.25% and for stakeholder PPs using latest charges, 2%. This includes implicit fund management charges of 0.5% for all types, the other charges being admin/management.

Thus in addition to the "free money" in a company scheme there is also a considerable extra benefit in lower charges.

Readers can check stakeholder and personal pension charges on the FSA site:

https://www.fsa.gov.uk/tables

dunstonh

According to the Pensions Commission report, charges for occupational schemes average 0.9% , for GPPs 1.25% and for stakeholder PPs using latest charges, 2%. This includes implicit fund management charges of 0.5% for all types, the other charges being admin/management.

Can you post a link to that information please. I cannot believe the stakeholder charge is that high as an average. It surely has to be incorrect if that is the case.

And it wouldnt be much of a surprise if it was wrong as the FSA tables are not that accurate either due to the number of assumptions made.

EdInvestor

The PC report was written before the stakeholder charge cap went up to 1.5% - it uses the old 1% cap - but that would be misleading to anyone going in now.

The latest FSA tables on the link should incorporate the new rates.

I am not sure why you keep saying the regulator's tables are inaccurate. The figures are given to the FSA by the providers.Do you think they would mislead the regulator?

dunstonh

The PC report was written before the stakeholder charge cap went up to 1.5% - it uses the old 1% cap - but that would be misleading to anyone going in now.

It wouldnt be. Over half the pensions I am currently writing have a reduction in yield of 0.8-0.9%. Even with the 1.5% (when used), the reduction in yield is showing 1.2 -1.3% depending on age, as an average. Only if the term was less than 10 years could it fall back to 1.6%.

Also, if it was written before the change in the potential maximum charge, how come its as high as 2% when the old limit was 1%? And before you say TERs, that would impact on the others equally so that cant be the issue.

I am not sure why you keep saying the regulator's tables are inaccurate. The figures are given to the FSA by the providers.Do you think they would mislead the regulator?

Because they make too many assumptions. Bit like you have here

The 1.5% is a potential charge. Its optional with most providers. So, you can have a provider that offers 1.0% or 1.5% on their stakeholder. With IFAs, you can also alter the annual management charge upto the maxium of 1.5% for 10 years but it doesnt mean you will get that maximum. Then you have providers that have fund based discounts which can apply to the whole amount, the amount above that threshold or no fund based discount. All these things alter the charging structure.

The FSA have published information that shows the average commission taken is much lower than the maximum available (which would utilise the 1.5 over 10 years).

So, the FSA publish tables that say one thing and they publish figures for the charges menu that say something different.

EdInvestor

You can see why Cavendish is having such a problem.:rolleyes: