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  • FIRST POST
    • Former MSE Helen
    • By Former MSE Helen 20th Apr 12, 8:08 AM
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    Former MSE Helen
    MSE News: Pension system 'too complex'
    • #1
    • 20th Apr 12, 8:08 AM
    MSE News: Pension system 'too complex' 20th Apr 12 at 8:08 AM
    This is the discussion thread for the following MSE News Story:

    "Pensions need to be made as attractive to consumers as saving into Isas, a report from the Institute of Directors says"

    Read the full story:
    Pension system 'too complex'


Page 1
  • RenovationMan
    • #2
    • 20th Apr 12, 9:33 AM
    • #2
    • 20th Apr 12, 9:33 AM
    A significant improvement in pensions, especially in these days of Money Purchase company pensions and mobile workforces, would be for each person to have an individual pension plan that moves around with them and if they go to a company that offers a pension, the company pays into the individual's pension rather than a group one.

    This would allow the employee to invest as they please instead of having to choose from (usually) a limited number of options within a company scheme. It also gives people motivation as they see a large pension pot growing rather than small 'dormant' ones dotted around in their employment history, poorly invested and forgotten about.

    I believe this occurs in the US with their 401K pensions, but I might be wrong?
    • Reaper
    • By Reaper 20th Apr 12, 10:39 AM
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    Reaper
    • #3
    • 20th Apr 12, 10:39 AM
    • #3
    • 20th Apr 12, 10:39 AM
    A significant improvement in pensions, especially in these days of Money Purchase company pensions and mobile workforces, would be for each person to have an individual pension plan that moves around with them and if they go to a company that offers a pension, the company pays into the individual's pension rather than a group one.
    Originally posted by RenovationMan
    I agree. In theory there is nothing to stop companies paying into your own pension schemes right now but I have never worked for a company that was willing to do it.

    Instead companies typically use an IFA who benefits only from setting up new schemes. I worked for one company, left and returned. The IFA insisted I set up a new company scheme with the pension company even though my old one was still there, presumably so he could get his commission. So now I have 2 from the same employer, one frozen.
    • gadgetmind
    • By gadgetmind 20th Apr 12, 10:44 AM
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    gadgetmind
    • #4
    • 20th Apr 12, 10:44 AM
    • #4
    • 20th Apr 12, 10:44 AM
    Perhaps we need a set of base rules establishing that governments aren't allowed to mess with?

    1) Thou shall be able to put money into your pension without tax or NI being taken away. No ifs, no buts, no complex annual or lifetime limits.
    2) Thou shall be able to take 25% tax free without us constantly threatening changes to this.
    3) Thou shall be able to move money between pension pots at will, which includes partial transfers.
    4) HMG will at all times keep their thieving fingers out of said pots.

    I'm sure we can think of loads more!
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
    • VT82
    • By VT82 20th Apr 12, 11:21 AM
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    VT82
    • #5
    • 20th Apr 12, 11:21 AM
    • #5
    • 20th Apr 12, 11:21 AM
    I don't understand why the article insists on comparing Pensions to ISAs - yes more money was paid into ISAs, but how much of that will still be in ISAs at retirement? Taking money out of ISAs is best avoided if you can, but if you're saving for a house deposit that will clean you out of savings in a few years, there's no harm in saving in an ISA, and there will be plenty of people whose savings are small enough to use ISAs as their easy access/rainy day money, so it won't be their equivalent to a pension.

    A significant improvement in pensions, especially in these days of Money Purchase company pensions and mobile workforces, would be for each person to have an individual pension plan that moves around with them and if they go to a company that offers a pension, the company pays into the individual's pension rather than a group one.
    Originally posted by RenovationMan
    Sounds good to me.
    • Loughton Monkey
    • By Loughton Monkey 20th Apr 12, 11:44 PM
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    Loughton Monkey
    • #6
    • 20th Apr 12, 11:44 PM
    • #6
    • 20th Apr 12, 11:44 PM
    Yes, pensions appear highly complicated. It has always been thus. It's not helped by the topic of pensions being a political football for as long as I can remember.

    Personally, I think that 'blaming' pension complexity for the main issue (that people are not saving anything like enough for retirement) is a very thin argument. [Think back to learning to drive. 99% of us were totally daunted by all the complexities of handling all the controls, reading the dials, remembering the highway code... and we all wondered how we would ever cope. This is a bit like pensions, except that we all want to drive and see it as essential. Sadly, a huge proportion of people don't seem to understand the necessity to put a large slice of money away for retirement].

    I believe the answer (as usual) involves carrot and stick, together with bog-standard modern technology. We have, already, our beloved HMRC who dip their fingers continually into our salaries (code numbers), and benefits (from DWP), and they get voluminous detailed information from every bank, on every account, on every person, every year, in order to check up on whether any of us are declaring all our interest etc......

    All we need is to merge the concept of ISA's and Pension pots, and have a single concept of a 'valid retirement savings/investment account', the balances of which would be electronically fed to HMRC alongside the other more detailed information. Out of this would come the concept of an "Annual Statement" from HMRC. Amongst other things, the key parts of this would say:

    1. Total Income received last year. Total tax paid/payable.
    2. Total net income received during life so far.
    3. Total amount you have in saving so far.
    4. Compared to GAD recommendation of X [calculated as perhaps a % of lifetime earnings...
    5. A projection of pension income at retirement (in today's values) likely to arise from (a) the State, and (b) your own actual savings.

    This would be overlaid with whatever health warnings/traffic lights etc. are appropriate - getting across the point "You're clearly not saving anything like enough. Don't expect any further benefits when you retire. Don't say you haven't been warned...."

    More importantly, the 'carrot' would be some sort of tax break for those 'on track'. Conversely, net money taken out of your total savings would be possible, but come with fairly draconian tax implications.

    To put it more bluntly, I look forward to a formalised system that tells people "Look. Here's the evidence. You've worked for 40 years. You've earned X00,000. You've saved tuppence towards retirement. You've totally ignored 40 warnings so far. So now live on your modest pension and don't expect the taxpayer to give you a penny more!"
  • jamesd
    • #7
    • 21st Apr 12, 1:09 PM
    • #7
    • 21st Apr 12, 1:09 PM
    It's right for ISAs to be more popular than pensions. The extra flexibility makes them a good deal once there are pension contributions sufficient to use the income tax personal allowance. The remaining possible gain from a pension for a basic rate tax payer is from the tax free lump sum.

    The benefits of the pension are under threat from the plan to merge income tax and NI which may cause most of the payments into a pension with basic rate tax relief to have a higher income tax rate when taking money out than when paying money in. With that threat to pension income the ISA with its taxed already and no tax on withdrawing is the superior choice because it provides more tax relief than a pension if tax rates increase significantly.

    Even without that, there is some reason to believe that income tax rates in the future will be higher than they are today and that this may make the ISA the superior choice for basic rate tax payers.

    A significant improvement in pensions, especially in these days of Money Purchase company pensions and mobile workforces, would be for each person to have an individual pension plan that moves around with them and if they go to a company that offers a pension, the company pays into the individual's pension rather than a group one.
    Originally posted by RenovationMan
    You can already transfer out when you leave. It's also possible to ask to be allowed to make partial transfers out and remain part of the scheme, a request I've been successful with.

    One advantage of employer rather than individual scheme is that an employer has more buying power and big employers can negotiate much better charging deals than an individual can with a personal pension. This can make it better to transfer an individual pension into a work pension to get those possibly lower charges while in the job, provided the investments are suitable.

    I believe this occurs in the US with their 401K pensions, but I might be wrong?
    Originally posted by RenovationMan
    You're wrong about that. A 401(k) is a bit like a salary sacrifice pension scheme in how it works.
  • RenovationMan
    • #8
    • 21st Apr 12, 9:01 PM
    • #8
    • 21st Apr 12, 9:01 PM
    You can already transfer out when you leave. It's also possible to ask to be allowed to make partial transfers out and remain part of the scheme, a request I've been successful with.

    One advantage of employer rather than individual scheme is that an employer has more buying power and big employers can negotiate much better charging deals than an individual can with a personal pension. This can make it better to transfer an individual pension into a work pension to get those possibly lower charges while in the job, provided the investments are suitable.

    You're wrong about that. A 401(k) is a bit like a salary sacrifice pension scheme in how it works.
    Originally posted by jamesd
    I always found that the lack of investment options outweighed the benefits of low charges, but I haven't been in a company MP scheme for a number of years now so perhaps this has changed?

    Is the 401K 'portable' though, or similar to UK company pensions in that it stays with the company and needs to be transferred when you move jobs?
  • jamesd
    • #9
    • 21st Apr 12, 11:36 PM
    • #9
    • 21st Apr 12, 11:36 PM
    Really depends what investments you want. A few trackers can be sufficient for some people, or a core for others. I've had three work schemes available in recent years. One SW one had a hundred or so investment options. One had a core of very low cost trackers and offered the option of an SL SIPP. The other is an SL GPP with over a hundred choices and the option of an SL SIPP. The last two both allow(ed) partial transfers out. I didn't ask about the first.

    A 401(k) can often be moved, just as a pension can often be moved. Maybe you're thinking of the IRA, into which a 401(k) can usually be moved, just as a work defined contribution pension can usually be moved to a personal pension? The US also has some defined benefit plans that aren't portable.
  • ani 26
    Perhaps we need a set of base rules establishing that governments aren't allowed to mess with?

    1) Thou shall be able to put money into your pension without tax or NI being taken away. No ifs, no buts, no complex annual or lifetime limits.
    2) Thou shall be able to take 25% tax free without us constantly threatening changes to this.
    3) Thou shall be able to move money between pension pots at will, which includes partial transfers.
    4) HMG will at all times keep their thieving fingers out of said pots.

    I'm sure we can think of loads more!
    Originally posted by gadgetmind

    Love it, particularly point 4)
    Debt free - Is it a state of mind? a state of the Universe? or a state of the bank account?
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    Official Petrol Dieter
  • ani 26
    There's no comparison between pensions and isa's. You're talking about two completely different products, here. I wouldn't ever class an isa as an alternative pension fund. Isa's are a higher rate of interest, tax free, instant access saving mechanism, for those who are in the fortunate position of being able to save. You're never going to get the return you would by having a pension fund, lets face it, with the highest interest rate on an isa currently running at 3.50%. I can remember the days when it was 12%, and thats a compounded AER.

    Lets face it , there isn't enough money in the pot for state pensions, with the growth of the population, people living longer, etc, etc, and HMG wants us all to take responsibility and provide for our retirement. However, they will penalise us by whatever means they can, along the way.
    Debt free - Is it a state of mind? a state of the Universe? or a state of the bank account?
    free from life wannabe


    Official Petrol Dieter
    • jem16
    • By jem16 22nd Apr 12, 8:33 AM
    • 18,718 Posts
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    jem16
    There's no comparison between pensions and isa's. You're talking about two completely different products, here. I wouldn't ever class an isa as an alternative pension fund. Isa's are a higher rate of interest, tax free, instant access saving mechanism, for those who are in the fortunate position of being able to save. You're never going to get the return you would by having a pension fund, lets face it, with the highest interest rate on an isa currently running at 3.50%. I can remember the days when it was 12%, and thats a compounded AER.
    Originally posted by ani 26
    ISAs can be an alternative to a pension but it is not the cash ISA but a S&S ISA. With a S&S ISA the only difference is how the tax is handled.
    • CLAPTON
    • By CLAPTON 22nd Apr 12, 8:46 AM
    • 41,650 Posts
    • 30,691 Thanks
    CLAPTON
    There's no comparison between pensions and isa's. You're talking about two completely different products, here. I wouldn't ever class an isa as an alternative pension fund. Isa's are a higher rate of interest, tax free, instant access saving mechanism, for those who are in the fortunate position of being able to save. You're never going to get the return you would by having a pension fund, lets face it, with the highest interest rate on an isa currently running at 3.50%. I can remember the days when it was 12%, and thats a compounded AER.

    Lets face it , there isn't enough money in the pot for state pensions, with the growth of the population, people living longer, etc, etc, and HMG wants us all to take responsibility and provide for our retirement. However, they will penalise us by whatever means they can, along the way.
    Originally posted by ani 26

    how is allowing tax relief on pension payments 'penalising' you?
    • gadgetmind
    • By gadgetmind 22nd Apr 12, 9:11 AM
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    gadgetmind
    ISAs can be an alternative to a pension but it is not the cash ISA but a S&S ISA. With a S&S ISA the only difference is how the tax is handled.
    Originally posted by jem16
    I regard a health crop of S&S ISAs as being a useful adjunct to a pension as they provide income flexibility that can be used to bridge gaps to both private and state pensions coming on line.

    If I remove private pensions from my planning speadsheets, and instead save into ISAs using the meagre amount remaining after tax, then I'd be worse off in retirement. Similarly, if I delete the ISAs, my situation is also negatively impacted.

    Of course, I also have NS&I linkers and cash layered at different access periods.

    People need to look at the whole dish rather than focussing on a single ingredient.
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
    • jem16
    • By jem16 22nd Apr 12, 9:23 AM
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    jem16
    People need to look at the whole dish rather than focussing on a single ingredient.
    Originally posted by gadgetmind
    Totally agree.

    I use pensions as I have a defined benefit scheme plus also have a SIPP to mop up any 40% tax. I then use S&S ISAs, unwrapped investments (which are bed&ISAd each year) plus index linked certificates and ordinary cash accounts.
  • jamesd
    There's no comparison between pensions and isa's. You're talking about two completely different products, here. I wouldn't ever class an isa as an alternative pension fund. Isa's are a higher rate of interest, tax free, instant access saving mechanism
    Originally posted by ani 26
    If you're writing solely about cash ISAs there's a little bit of truth there. A cash ISA and a pension with the money invested in a deposit account would still be very close to a cash ISA in risks and returns, though, and savings accounts are permitted investments inside a pension.

    You're never going to get the return you would by having a pension fund, lets face it, with the highest interest rate on an isa currently running at 3.50%.
    Originally posted by ani 26
    Of course you can. An ISA can hold unit trusts and such, just as a pension can. You do need to use the stocks and shares ISA version and not stick to just the cash ISA for this.

    Because of the flexibility of the capital access and rate at which money can be drawn, investments within an ISA are often an excellent substantial part of planning for retirement income in conjunction with a pension. As well as achieving pension levels of growth they provide protection against the possibility of higher income tax rates in the future because there's no tax to pay on income.

    Lets face it , there isn't enough money in the pot for state pensions, with the growth of the population, people living longer
    Originally posted by ani 26
    This is being taken care of with changes to the state retirement age and a range of other measures. There will still be some increase in tax burden, peaking in the 2040-2050 sort of range when the retired baby boomer generation is at its peak and the working population near its lowest.

    One other remedy is to seek a significant increase in immigration from those who are under thirty years old because those people, immigrating gradually over the next twenty years or so, will still be earning and paying taxes during the peak need time for workers. So they will help to smooth the difference in generation sizes.
    • gadgetmind
    • By gadgetmind 22nd Apr 12, 6:18 PM
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    gadgetmind
    There's no comparison between pensions and isa's. You're talking about two completely different products, here.
    Originally posted by ani 26
    No, you're talking about two different tax wrappers.

    Isa's are a higher rate of interest, tax free, instant access saving mechanism, for those who are in the fortunate position of being able to save. You're never going to get the return you would by having a pension fund, lets face it, with the highest interest rate on an isa currently running at 3.50%.
    The only part of that statement that's accurate is "instant access". I have pensions and ISAs with *exactly* the same underlying assets, so they will increase and decrease in value in exactly the same way. Never ever confuse tax wrappers with asset allocations.

    As for "tax free", pensions are better on the way in, and ISAs better on the way out. People need to understand and model their own situation, and that of their spouse, and plan accordingly.
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • RenovationMan
    As for "tax free", pensions are better on the way in, and ISAs better on the way out. People need to understand and model their own situation, and that of their spouse, and plan accordingly.
    Originally posted by gadgetmind
    Not always the case, especially for high rate taxpayers who receive 40% tax rebate on the way in and, in most cases, will pay 20% on the way out. Even for basic rate tax payers, they can withdraw 25% completely tax free and have a pension income largely free from tax (depending on how large the pension income is).
    • gadgetmind
    • By gadgetmind 22nd Apr 12, 8:48 PM
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    gadgetmind
    Not always the case, especially for high rate taxpayers who receive 40% tax rebate on the way in and, in most cases, will pay 20% on the way out.
    Originally posted by RenovationMan
    Sadly, that 40% is subject to lifetime and annual caps, there are threats to the 25% lump sum, and the age related allowance can mean that pension income is taxed at 30%.

    But yes, pensions tend to have tax advantages (and enjoy employer contributions and NI boost) whereas ISA are more flexible.

    I have both and would part with neither!
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
    • jem16
    • By jem16 22nd Apr 12, 8:53 PM
    • 18,718 Posts
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    jem16
    and the age related allowance can mean that pension income is taxed at 30%.
    Originally posted by gadgetmind
    That will be going soon.
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