Stakeholder Pensions and the Stock Market

[Deleted User]

I have a Civil Service pension that will give me a small income in retirement, but now that I'm self-employed I decided I needed to take the plunge and supplement it with a private pension.

To give you a bit of background, I have an absolute aversion to risk taking. I hate the idea of locking money away with the risk that it performs badly and there's nothing I can do. I'm 45, own my own home (no mortgage), have no dependents and a decent bit of money in the bank. My inclination was just to save money to top up my pension. However, the fact that the government pays a contribution into the fund convinced me that I really had to start paying some of my savings into a pension.

So I started cautiously a few months back (previous tax year) and payed £6,000 (£7692.31 gross) into a Phoenix Stakeholder pension. The funds are split as follows:

30% Deposit
60% Managed
10% International

I'm thinking of putting in another £10,000 or so this year, but there's lots of talk of stock market crashes. So....

Should I wait to see if it crashes and pay my money in then - that way my investment can only grow. Right?

dunstonh

I hate the idea of locking money away with the risk that it performs badly and there's nothing I can do.

So two things in that:

1- you have locking money away so that eliminates pension
2 - you dont want risk so you should avoid investing (although it may give you shortfall or inflation risk)

I'm thinking of putting in another £10,000 or so this year, but there's lots of talk of stock market crashes. So....

For someone that is against risk you have chosen a medium risk investment selection in the managed and international funds and a pretty naff option in the cash fund (seeing as you are aged 45). However, you need to separate pension and investment risk.

The pension is just a tax wrapper (like ISA or investment bond). It has no investment risk. The investments you place inside of it contain risk and the risk will vary with the type of investments you put in it.

The risks you need to be concerned with are:
1 - inflation risk
2 - shortfall risk (if you dont pay enough and dont take a sensible level of risk then you wont get the income you are after)
3 - investment risk (obvious but many dont realise that investment risk is not on/off but a whole sliding scale)

Phoenix Stakeholder pension

What made you choose that product? It has nothing of merit. Its more expensive than buying through an IFA on full advice let alone execution only and its investment range is very limited.

now that I'm self-employed

It is worth noting that you do not qualify for the second state pension when you are self employed so your state pensions will be lower. It is more important when you are self employed to make personal provision.

Should I wait to see if it crashes and pay my money in then - that way my investment can only grow. Right?

What about the other areas you can invest in?

[Deleted User]

I have a Civil Service pension that I could get by on already. My partner has already built up a big enough pension fund. We have no dependents, a mortage free house, a business and a couple of hundred thousand pounds in the bank.

My inclination was to stay flexible and not tie any of my cash or earnings up in a pension as:

a) I could get by on the pension I've got already
b) I have a house I could sell to boost my pension fund
c) I have money in the bank.
d) In the line of business I'm in there is no way of knowing what the future will hold. I may go into semi-retirement very soon or I may keep working for many years beyond retirement age.

So if it weren't for the big tax benefit that you get through pensions I wouldn't have considered it. But when I consider that the government will add to the pot every time I do it starts to outweigh the drawbacks of having money tied up and the need to take risks with my money.

As for the decision to go for medium risk - all sources that I've come accross say that with pensions you really need to take at least medium risk when there's years left for the pension to run (20 years in this case). As you get closer to retirement age you can start minimising risk to keep your money safe. So given that I'd taken the plunge with a pension it made sense to go along with that. Presumably I can get the money somewhere safe if at some point it does well and I've got a nice tidy lump sum that's way higher than I could have expected from normal savings. We did that with one of my partners pensions. He had paid a tiny amount into an Alied Dunbar pension when he first started work. It was a very high risk fund but as he had only ever paid pennies into it he didn't bother to do anything about it. IIRC it lost money on lots of occasions. Then last year it did extremely well and went from less than £10,000 to £30,000. Needless to say he pulled it out instantly and put it in a medium risk fund

What is 'naff' about my option in the cash fund? I'm quite sure I could adjust this if it made sense to do so.

As for risk...the only risk from my point of view is that I end up with a pension fund that's lower than what I could have achieved if I'd put the money in the bank with the rest of my savings. Given that the govenment are contributing a HUGE chunk I would guess that this is unlikely. Other than that I'll be happy. If it matches what I'd have got with savings then great. If it does better then superb!

The reason for the choice of pension is that I had already started this pension many years ago but stopped paying into it soon after starting it. So it was worth next to nothing. I'm not sure why, but the fact that I already had this pension meant that the management costs were lower than the other options I looked at (1% I think). Although I didn't put a great deal of time into researching this. I'm not planning on paying an awful lot in. Is it really that bad? Worth changing given that I'll never pay in much?

But the point of my question is, given that I have this pension (or another, better one) and I intend to invest another lump sum this financial year, does it make sense to wait to see if the value of the fund drops and invest while it's low? Or is it best just to get the money in right at the start of the financial year? The way I'm thinking is that if I put £10,000 in now and the stock market crashes it would take a long time to recover. If on the other hand I wait to see if the crash happens and put my £10,000 in then it can only grow...right? Or is this not how it works?

dunstonh

What is 'naff' about my option in the cash fund? I'm quite sure I could adjust this if it made sense to do so.

Nothing if you are coming upto retirement. However, long term it will be likely to beat inflation. You should consider it a holding fund (to see out any volatile periods) or a short term fund. There are other options which could offer better potential (index linked gilts etc for example). A tad higher on the risk scale but some of those would make up for the fact you have none at present.

The reason for the choice of pension is that I had already started this pension many years ago but stopped paying into it soon after starting it. So it was worth next to nothing. I'm not sure why, but the fact that I already had this pension meant that the management costs were lower than the other options I looked at (1% I think).

1% is fine for an advice product but if you arent getting advice and going DIY then you can get 0.5% fairly easily. Even with advice, some of the more modern personal pensions (and your possible timescale with the money) could see 1% beaten fairly easily if costs are a concern.

Is it really that bad?

No. You could have done a lot worse. However, I am just looking at it from what you could have done that was better.

Worth changing given that I'll never pay in much?

Yes. No harm striving for quality or low cost (or best of both as often best is not cheap and cheap can often mean bad quality).

oes it make sense to wait to see if the value of the fund drops and invest while it's low?

Its a crystal ball job and it assumes you put it all into the stockmarket. There are still areas of good potential and more limited risk. You can still put it in the pension and use this years allowance even if you put it in cash for now and phased it across into equities later.

You cannot call a stockmarket crash. Some are saying there will be one. Others are saying there wont be but we will see relatively large ups and downs without any real change as an average. If a crash happens, it could recover within 6 months, 18 months or potentially 20 years. The tech stocks crash if you went 100% into the stockmarket without any rebalancing would have taken 6 years to recover and now gone back into loss again had you used basic UK growth/tracker funds. If you diversified and rebalanced to medium risk then you would have seen recovery quicker (wouldnt have gone down as much either in the first place) and would have outperformed the stockmarket in general. I will tell you in 5 years or so when the best time to invest was

EdInvestor

Roughly how much income do you expect from the combination of your civil service pension and your state pensions?

https://www.thepensionservice.gov.uk will later this year be able to supply a detailed forecast for the latter.

Pension income is taxable in retirement ( they claw back the tax relief you are getting now later) and above certain thresholds there are punitve rates.So it can be better to save in stocks and shares ISAs, where the income is tax free, if you are near the thresholds.

[Deleted User]

I haven't checked on what the state pension will give me, but the projected income from our joint pensions (my partner and I both have pensions) is only about £12,000 p/a.

You see, we don't have dependents and we have a mortgage free house, fairly substantial savings and a business that's bringing in a good enough income but stands a reasonable chance of doing very well for us.

It's hard to predict how long we'll continue to work. Things might start to wind down a bit in a few years in which case we'd want to suplement our income from our savings. We couldn't face employment after the freedom of running our own business and we'd be too young to draw a pension.

However, things could go really well and we could get a huge boost in income for a short period - or even long term. And we may well be drawing an income from the business when we're in our 80's!

So we don't fit the mold that pension plans tend to cater for. Our thinking is get a bare minimum amount into pensions as a safety net (and we've got that). Then use savings/sale of house to supplement it - we've got a detached house now that is bigger than we need. It would be no great hardship to sell that and move into a flat in retirement if we need more money for our retirement fund. If the business does well at any point (and we're hopeful that it will) we'll increase both savings and pension fund and lead a much more afluent life both now and in retirement. But we won't be dissapointed if that doesn't happen as we have enough to live comfortably both now and in the future. We might not last to retirement age so we want to make sure we enjoy a good chunk of our savings and income now!

It's the lack of flexibility that puts me off putting too much into pensions. My only reason for putting more into the pension is the tax benefit. But what you're talking about would no doubt apply if the business does well and we decide to push large sums of money into our pension. Here's hoping we have that problem So what kind of thresholds are you talking about - presumably drawing a big enough pension to put us in the high tax band? We're a long way away from that!

I'm just not keen on stocks and shares. If I made money I'd be happy about it for a day then I'd forget about it. If I lost I'd be miserable about it for years. It's just not worth it!

EdInvestor

Deleted_User wrote: »

I haven't checked on what the state pension will give me, but the projected income from our joint pensions (my partner and I both have pensions) is only about £12,000 p/a.

You will both have separate tax allowances of 10k p.a. when you reach age 65 so pension income up to that level will be tax free.But sounds like your allowance will already be accounted for by state pensions plus civil service pensions.It may however be worth paying into an additional pension for your wife. Make sure you fill up both allowances.

All pension income above 10k will be taxed - and thus the tax relief will be clawed back when you retire (apart from the 25% tax free cash.).IMHO your stocks and shares ISA will be a better bet for your own additional savings.

It's the lack of flexibility that puts me off putting too much into pensions. My only reason for putting more into the pension is the tax benefit.

Quite so, and there may be very little of that.

But what you're talking about would no doubt apply if the business does well and we decide to push large sums of money into our pension. Here's hoping we have that problem So what kind of thresholds are you talking about..

The next threshold up is the age allowance clawback level of around 21k.At this point they start withdrawing your extra age aloowance progressively until it drops back to the ordinary personal allowance of c.6k. This is done at a punitive rate of around 33%. So keep taxable income below this level.The next threshold is the higher rate band.

I'm just not keen on stocks and shares. If I made money I'd be happy about it for a day then I'd forget about it. If I lost I'd be miserable about it for years. It's just not worth it!

What exactly do you think your private pension is invested in, if not stocks and shares?

If you were a bit older, you'd know that the thing you really need to worry about is not volatile share prices (for the long term trend over more than a century is very clearly up) but the ghastly effects of inflation on cash.

[Deleted User]

What exactly do you think your private pension is invested in, if not stocks and shares?

Sure, but as I've pointed out earlier, the fact that the governement adds to the pot makes me worry less about the risk. We could afford for it to loose a lot without loosing any of our money. But we don't intend to put much into pensions even despite this 'bonus'.

Thanks for the info though. I'll sit down and figure out all of the implications. It *MAY* be highly relevant if our business does well

As for investments. I understand all the arguments, but things can and do go wrong (it happened to my dad - he was stung by the stock market crash in the 80's). If these investments were safe they'd come with guarantees. But at the end of the day it IS gambling. The thing is, we've got *enough* already. It comes down to whether we're prepared to gamble that *enough* because we're likely to end up with more. If we didn't already have enough it would be a no-brainer. If a time comes when we're unable to keep our cash fund growing faster than inflation we'll reconsider our options.

EdInvestor

Deleted_User wrote: »

Sure, but as I've pointed out earlier, the fact that the governement adds to the pot makes me worry less about the risk.

As mentioned earlier, as you will already be using your tax free allowance, the govt will take 75% of the money back by taxing the pension when you retire so there's no extra security there.

Long term investing is not the same thing as trading or speculating..Suggest you learn a bit more about it, then you might not be so scared of it.

[Deleted User]

I realise that long term investment isn't as risky as short term. But the risk IS still there. So I'm only prepared to put a certain amount of my money into long term investments (and it's all being used up by pensions because of the money the government pays in). But what you've told me is news to me....

So your advice to anyone with a private pension worth more than £6,000 p/a is to stop paying into it and switch to long term investments as above that level you pay too much tax. So much tax that paying into a pension beyond this level negates the benefit of the governments contribution?

So I guess if you're right, then before stopping paying into a pension you need to consider how much you can get back in a tax free lump sum. My partners pensions and my current one allow 25% I think.

Now if long term investments wrapped in ISA's are as safe as you say, then there must be at least a few available with guaranteed minimum returns? Could you give me an example of the type of product you have in mind....and perhaps a link to a website with full details? I'd certainly go for something that was both guaranteed and not tied up for more than a few years if the guaranteed return was close to what I could get in cash ISA's and savings.

EdInvestor

Deleted_User wrote: »

Now if long term investments wrapped in ISA's are as safe as you say...

The investment options in ISAs are virtually the same as the investment options in pensions ranging from high to low risk.

... there must be at least a few available with guaranteed minimum returns? I'd certainly go for something that was both guaranteed and not tied up for more than a few years if the guaranteed return was close to what I could get in cash ISA's and savings.

Guaranteed products are expensive - you get charged for the guarantees - and thus returns are low. It is better to reduce risk IMHO by structuring a portfolio that has a combination of equity, bond/cash and property components in proportions which match your attitude to risk.

To practise, start with a small amount, eg your annual S&S ISA allowance of 7.2k p.a . Choose 7 funds, 1k each, of which (for a cautious profile) 4 should be equities, 2 bond/gilts and 1 property.

Check out consistent funds here:
https://www.citywire.co.uk/Funds/Home.aspx

Open the ISA with a discount broker which rebates charges such as https://www.h-l.co.uk
Observe your investments and see how they behave, bearing in mind you need to take a five-year view. Adjust asset mix to suit your risk level if it changes.

If this is all too much, I recommend NS&I index linked certificates, which will at least protect you against inflation, unlike most other cash investments.