Starting a pension

EdInvestor

I think you'll find that incapacity benefit is not means tested so it wouldn't matter if the savings were in a pension or an ISA.

http://www.askcab.co.uk/money_site/mINCA.asp

Dithering_Dad

EdInvestor wrote: »

I think you'll find that incapacity benefit is not means tested so it wouldn't matter if the savings were in a pension or an ISA.

http://www.askcab.co.uk/money_site/mINCA.asp

Well done Ed, but I think you'll find that he wouldn't have received the other benefits and my point still stands. I've noticed you use this tactic often - trying to deflect the main point by picking up on just a small part of the whole. Dunstonh often pulls you up with 20 points on why you are wrong and you'll find a slight error in one of the lesser points and grab it like a drowning man grabbing a life-raft. Here's a 'heads up for you', you don't fool anyone.

My old man certainly wouldn't have received the income support that kept him going while he obtained the doctor's reports and jumped through all the hoops prior to receiving incapacity benefit (this can take months), if he had his pension in ISA savings.

The main point still stands that if you get into financial difficulties then your ISA retirement savings are in jeopardy whereas your pension savings are not. Financial difficulties do not just happen to poor people or people who are crap with their finances. There are plenty of people on the DFW and Bankruptcy boards who got there not because they couldn't resist buying that handbag, but because they became ill or suffered an injury that stopped them from working, or they had a business where their creditors went bust, causing them to go under.

You spent the first few years (decades?) building up your retirement income via traditional pensions before moving onto ISAs. Basically you built a safe foundation where if you could no longer work, at least you had some fallback. Fortunately, nothing untoward happened to your ability to earn money and so you have been able to build on that foundation with ISA savings.

I'd suggest the OP would be well served to follow what you have done, rather than what you advise others to do.

EdInvestor

Just a warning to anyone reading this who can only afford to make small private savings of whatever kind : this may be a bad idea as it may mean you lose out on means-tested benefits like pension credit/council tax/housing benefit etc.

Anyone who feels they may be in a borderline position should consult their local CAB for advice, especially before signing up for anything irrevocable like a private pension.(Cash savings up to around 6k are not a problem).

This will also apply to low paid people when the Government's new "personal account" pensions come in in 2012, at which point info should be provided to prevent the problem of less well off people investing in worthless pensions.

You would need a pension fund worth 180,000 pounds to get the equivalent income to the single person's pension credit.

dunstonh

Pension credit for a single person kicks in giving a single person a guaranteed minimum income of £6450.

The basic state pension is £4716. That makes a difference of just £1734 a year.

Plus, you have the second state pension which you consistently tell everyone that can give them nearly double their basic state pension which would wipe out benefits if that was the case. However, I will ignore that for now.

So, a difference of £1734 p.a. is a pension fund of around just £35,000 and of course you can only have a limited amount of savings and investments in other means so basically you have to be careful not to plan to get benefits as basically it will be a plan to be be poor.

In real terms, a £35k fund value can be built up by a level payment of £46 per month (assuming 7% growth and 2.5% inflation). Or a payment of £29pm increasing anually with inflation (both assuming 30 years).

Dithering_Dad

EdInvestor wrote: »

Just a warning to anyone reading this who can only afford to make small private savings of whatever kind : this may be a bad idea as it may mean you lose out on means-tested benefits like pension credit/council tax/housing benefit etc.

Anyone who feels they may be in a borderline position should consult their local CAB for advice, especially before signing up for anything irrevocable like a private pension.(Cash savings up to around 6k are not a problem).

This will also apply to low paid people when the Government's new "personal account" pensions come in in 2012, at which point info should be provided to prevent the problem of less well off people investing in worthless pensions.

You would need a pension fund worth 180,000 pounds to get the equivalent income to the single person's pension credit.

You should really have said "Just a warning to anyone reading this who does not already have at least 20k in a traditional pension...". The OP can afford to make large private savings and is certainly not in a borderline position, but could still be in trouble if he fell ill at age 36 and could no longer work. If his 10 years of pension savings were in a pension then he would receive state benefits immediately, meanwhile those pension savings would have 32 years of further growth until he retired. If those 10 years of pension savings were in ISAs, then he would have to use them to support himself until they went down to 6k.

As far as pensions credit is concerned, this (recenti-sh) benefit will eventually be phased out due to the reduction of qualifying years from 44 to 30. Most individuals will now be able to receive a full state pension and so will not require the 'top up' pension credit. Actually, in reality the number of qualifying years required is 27, because you get the years when you are 16, 17 and 18 for free.

jamesd

timberford, as dunstonh wrote, I was thinking of 5k income in retirement to fully exploit the higher personal allowance and get tax relief on the way in but pay no tax when getting the income. That would take 50 a month gross pension contributions, so 40 before tax relief. Assuming 42 years and growing at inflation plus 5%, then an annuity paying 6%. 25 a month before tax relief would have a fair chance of making it - would require 6.5% plus inflation growth, which is a bit too high for prudent planning.

The most significant means tested benefit for many is payments when unemployed for a long time and the related housing benefit. Incapacity benefit for being unable to work due to injury isn't means tested and you can protect yourself against long term illness with a PHI policy if you want.

jamesd

Dithering Dad, the plan to relink the pension Minimum Income Guarantee with earnings growth instead of inflation means that for the timescale timberford is looking at - circa 2050 - the means tested benefit level for pensioners is expected to be around 12,000 a year.

For those on very low incomes it may be quite challenging to affordably make sufficient pension contributions to get above that level and anything that just topped up the basic state pension to a level below that would gain them nothing because they would still get only the minimum income guarantee top-up. The capital part of the MIG means test is also extremely punitive for those who use ISAs for extra retirement income, so that doesn't provide a useful alternative.

This is a significant long term concern since it'll very strongly discourage people on lower incomes from even trying to improve their life in retirement by investing for it.

Whether this turns out to be affordable and actually happens is a rather different question but it won't matter much to timberford, who looks likely to be able to end up with far more than just the minimum.

Dithering_Dad

jamesd wrote: »

timberford, as dunstonh wrote, I was thinking of 5k income in retirement to fully exploit the higher personal allowance and get tax relief on the way in but pay no tax when getting the income. That would take 50 a month gross pension contributions, so 40 before tax relief. Assuming 42 years and growing at inflation plus 5%, then an annuity paying 6%. 25 a month before tax relief would have a fair chance of making it - would require 6.5% plus inflation growth, which is a bit too high for prudent planning.

The most significant means tested benefit for many is payments when unemployed for a long time and the related housing benefit. Incapacity benefit for being unable to work due to injury isn't means tested and you can protect yourself against long term illness with a PHI policy if you want.

Perhaps it's because I'm a 'glass half empty' sort of person, I personally feel that while I wholeheartedly agree with you on building a pension to take full advantage of the increased tax free allowance I don't agree with the approach of £50pm investment. Better to put the money away early (and know that you're safe) and then switch to ISAs once the pension pot is there. It's all just about how risk adverse you are I guess.

jamesd wrote: »

Dithering Dad, the plan to relink the pension Minimum Income Guarantee with earnings growth instead of inflation means that for the timescale timberford is looking at - circa 2050 - the means tested benefit level for pensioners is expected to be around 12,000 a year.

Aren't they reinstating the link between state pension and average earnings, (http://news.bbc.co.uk/1/hi/business/6147610.stm) which means that combined with most people receiving the full state pension most pensioners will not require a top-up.

Surely the twin reforms of reducing the contribution years to 30 (27 in reality) and linking the state pension to earnings means that onyl a very few will need the MIG, and that will only take you to the level where everyone else is - namely receiving a full state pension?

If this scenario is the case, and I can't see why it wouldn't be, then we will finally be away from the ridiculous position where low income UK citizens are better off not saving for pensions.

The BBC article states that due to the reduction in qualifying years, 9 out of 10 females will now receive a full state pension - I'm assuming that very few males will not receive a full pension. If virtually all pensioners are in receipt of a full state pension that is linked to average earnings, how then can it be justified to pay a 'top up'?

EdInvestor

dunstonh wrote: »

Pension credit for a single person kicks in (at 60) giving a single person a guaranteed minimum income of £6450.

The basic state pension is £4716. That makes a difference of just £1734 a year.

Plus, you have the second state pension which you consistently tell everyone that can give them nearly double their basic state pension which would wipe out benefits if that was the case.

Quite so.

So, for anyone who is not getting free money from an employer, and is not a high rate taxpayer who will be on basic rate tax in retirement, step no 1 if considering a private pension is to get a state pension forecast to make sure you are on target to be well beyond the pension credit benefits level of 6,450 when you retire.

[Note to DD: this is not the same as the basic state pension level of 4716, apologies to other posters for the need for repeated corrections]

If you are already forecast to get around 10k in state pension income, this will all be tax free under the new age allowances.

Pension income on top of that will be taxed at basic rate.

You may prefer to top up your state pension with ISA income which is not taxed.

jamesd

jeepjunkie, how to provide for retirement has elements of personal opinion in it, like Dithering Dad preferring to get the pension contributions in early in case of major ill health, while EdInvestor and I would instead go for the more efficient minimum now and more later, with ISA for the long term investing now if someone isn't getting employer matching or higher rate tax relief and might later. Worse, all of this depends on the circumstances of the person asking the question and their own preferences, so there's always scope for different opinions. Then you move on to how to invest the money and that's another bit of work and understanding needed. Get a decent IFA is the easiest thing to suggest.

The government is expected to try a different approach with the planned pension personal accounts: opting everyone in by default and picking some basic investments if they don't do it themselves. That should help those who just don't know what to do and don't want to learn. Won't be optimal for those who do and that's when it can start to get more complicated as people try to maximise their possible gains. But at least it may help a fair number who end up doing nothing because it's too complicated.

Dithering Dad, the MIG is also to be increased with wages instead of inflation. The expected result of that change and no others was 70% of pensioners receiving it. That's being countered mainly by flat-rating the state second pension contributions (taking S2P NI money from higher earners and using it to increase the benefits of low earners), delaying retirement and introducing the personal account pensions. Those changes are expected to leave median earners with about 12.5k in pensions, just enough to keep them above the MIG (also called State Minimum Guarantee) level.

If you're curious you can find much more detail about this sort of thing in the Pensions Reform Factsheet and Pensions Bill 2007-2008 that's currently with the House of Lords.