[Closed] Pensions, they are a bloody minefield eh?

i'm sure someone can explain it better than me, but...

The idea that you build up a pot of money, and then draw from that during your retirement isn't entirely correct...

Your pension income/amount will be based on an estimate that you'll die aged 78(ish).

Your pension income/amount will be based on the interest/profit that your 'pot' can generate.

When you die, the pension provider keep the/your pot.

if you had £100k in the bank, you'd get what? £3k interest? that's roughly what the pension provider will do.

[i]The other one just sent me out his set of figures. Basically if i retire with a pot of roughly £235,000 I can expect an annual income of £4800. Thats with entering into a medium risk scheme and putting £500 a month away.[/i]

Based on an annuity I presume. Did the adviser completely fail to mention drawdown. So you have your £235k pot, you move it into a drawdown account and take a monthly income from that.

Even without interest that will give you £7800 for 30 years.

You need to give us your age, then we can do the Maths.

I'm guessing early 30's

If he didn't mention draw down, I'd run a mile from who you saw! It is scary how few people are saving now and there is a gap between what they expect to receive in retirement based on what they're saving, and what they will currently get.

The thing with annuities is that the provider is basically hedging the amounts they are paying to you by investing your pot in gilts and very low return (but supposedly safe) investments, hence why they can't pay you much as an annuity. They're also banking on you dying before you expect to, so they make an overall profit.

The draw down means that you can basically dip into it when you want - you won't be fixed into an annuity, and your family and children can potentially receive what is left in the pot (if you take an annuity, what is left stays with the annuity provider unless you have an annuity that pays to a surviving spouse).

The other one just sent me out his set of figures. Basically if i retire with a pot of roughly £235,000 I can expect an annual income of £4800. Thats with entering into a medium risk scheme and putting £500 a month away.

So the monthly income will be £400 a month after you've £500 a month away....

Also don't forget inflation, by the time you retire a pot of £235,000 could be worth chuff all.

Gary_M Based on an annuity I presume. Did the adviser completely fail to mention drawdown. So you have your £235k pot, you move it into a drawdown account and take a monthly income from that.

I have another meeting with him on friday where i will ask him a lot more questions now i have a bit more information. These figures were sent out in an email after our initial meeting.

I am 39 currently and i am in a decent position that i inherited a property that we let out and i have a military half pension. But once you go down the rabbit hole of personal pensions it can be completely overwhelming. I am not a total numpty but the figures for me seemed completely balanced in favour of the pension provider. Not myself.

If he didn't mention draw down, I'd run a mile from who you saw!

It's should only be recommended for medium to high risk takes, it's far from simple. You can probably only take 4% per annum without depleting the find too quickly and the fund will be subject to the market eg if you'd retired in 2007 using drawdown then 12 months later your fund would have halved and only just got back to where it was in the last few months! So your annual drawdown would have halved in 12 months! An annuity would have been unaffected by the crash.

It's complicated. Life expectancy for example. That age 78 is life expectancy at birth. By age 65 you have already dodged some early death bullets so life expectancy at age 65 is longer. In England/Wales it varies according to area from aged 86 (Kensington and Chelsea) to 81 (Manchester). Then again those are averages your lifestyle and genetic luck matter more. My dad is still going strong, driving and walking round the golf course at 87. So I'd be foolish to plan to spend a pension pot anywhere under 90. If you are the same then your £235'000 will need to last 25 years.
Then what about inflation. Taking an indexed link annuity gives protection against inflation but a lower starting point.
Or with the new pension freedom don't take an annuity. Stay invested. Or partly invested. After all 25 years is long enough to smooth out stock market variations.

At this stage making sure you put away (invest) enough cash in the right place(s)is probably the main thing other decisions can be taken later.

If you are a 40% tax payer I'd be asking advisers about upcoming changes to pension tax relief. There is a lot of chatter about reducing the 40% relief higher rate taxpayers get on pension contributions. There may be a case for sticking a big amount in this financial year before it gets reduced. The rumours are it may be switched to 33% for everyone to encourage standard rate taxpayers to save more.
It is a one way bet. Either reliefs are reduced and you gain. Or they aren't and you haven't lost anything. You can save a bit less next year if you need to balance things out.

http://citywire.co.uk/money/hargreaves-game-is-up-for-higher-rate-tax-relief-on-pensions/a844004

If you are self employed and not a top rate tax payer then a normal pension doesn't make that much sense IMO. I'd be looking to spread the money round a bit. Cash/shares isa, a managed fund, maybe buy to let (there's a lot of doom and gloom around but the returns are still good and more demand than supply).

One of the reasons your pension will be so small is that the so called advisors (salesman) are taking such a large commission. Do your own research, set up a SIPP and manage it yourself - much lower charges and you'll probably get better returns than the experts anyway.

If you are a 40% tax payer I'd be asking advisers about upcoming changes to pension tax relief.

Totally pointless as no one knows right now, although sticking as much away as possible before the spring budget would be a safe bet (details of the changes have been pushed back from Nov to Spring in the last few weeks, which suggests they're not finalised yet).

I can recommend reading the Telegraph finance pages, they regularly do pension reviews of people and you can see all the different suggestions / strategies. Every week they feature a different person and get 2 or 3 IFAs to give their advice, just food for thought...

http://www.telegraph.co.uk/finance/personalfinance/pensions/11972322/Pension-freedoms-Ive-got-no-kids-how-do-I-spend-every-penny-of-my-500000-savings.html

If you're happy getting an extra £500 a month when you retire at 65 then why bother with a pension at all. Just stick it in an ISA every month.

Remember you will want it index-linked, I'm sure your advisor will be working on that basis. Suddenly burning through that £235k at X per year doesn't look so good. Even 14y of 5% inflation halves the value...

Having said that, it's still a piss-poor return. The only real benefit of a pension (but it is a big one) is that the initial investment is tax-free, so you get a lot for your money if you're a higher rate taxpayer. If you are running a small company cannily, you might not be in that situation. Oh, the other big benefit used to be if you employer makes a big contribution, which they usually don't these days.

There's a lot to be said for just investing your own savings, you lose the initial income tax perk but will almost certainly get a much better return off the stock market both when saving and when retired (ie, about a 3% annual yield in dividends, plus capital growth that outstrips inflation long-term). That's how I have funded my early retirement - I'm due a pitiful pension in the future but am not banking on it being much use.

edit: ah, nickjb says much the same, more succinctly...

Pensions, and indeed investments in general, are very simple, made complicated by vested interests: "wealth managers", IFAs and governments, aided and abetted by associated media. All of them just want to get their hands on your money.

Avoid all these leeches wherever possible, research SIPPs (not complicated), find a handful of funds that you'll be happy with long term. Set it up, then do nothing.

Cheers footflaps, ill have a look at that. The hardest part of all this is trying to get your head around all the pension types, ISAS etc etc to make an informed decision when you have the peter pan syndrome. "Damn it all i am never going to get old". Then one day you wake up and realise. Bloody hell i am nearly there. 😈

Gary_M - Member
If you're happy getting an extra £500 a month when you retire at 65 then why bother with a pension at all. Just stick it in an ISA every month.

At this point in time this seems like my best option, especially when i talk to my dad and grandad and they tell me how much they have lost from their pensions at various times in the past. BUT. is fair to say i have not always made the best decisions in the past regarding money. So getting more opinions is no bad thing.

The other one just sent me out his set of figures. Basically if i retire with a pot of roughly £235,000 I can expect an annual income of £4800. Thats with entering into a medium risk scheme and putting £500 a month away.

Now i am not a mathematical genius but if i do retire around 65 then that pot will last until i am 115

I'm guessing a confusion between "today's money" and what you'll get? £4.8k in today's money would be £8.9k in 25 years time once inflation does it's thing, then retire for ~25 years and 25x£8.9k ~ £230k.

I was probably being a bit flippant when I said run a mile if he hasn't mentioned draw down, but what we do now have is a lot of flexibility in terms of how we use our pension pots.

If you have a defined benefit military pension, this can complicate how much you can contribute into a pension over your lifetime, as they convert the expected pension payment into a lump sum pot for the purposes of calculating your "lifetime allowance". The chances are you still have lots of capacity, but its worth checking with who you are talking to.

ISAs are more flexible than pensions and are tax free when you take the funds, but they are subject to IHT if you still hold them when you die and your estate is above the IHT threshold. Pensions are favourable regarding IHT, but you pay income tax when you take the funds out - and pensions come out of gross income now, rather than ISAs, which come out of net income.

If you have a lump sum, you might consider a number of options, covering ISAs and pensions - but remember, those are just "wrappers" - what they invest in is very important and the fees /commission can be hidden in those investments.

Who you are talking to should be asking lots of questions so that they can give the right advice. - don't assume the "independent" adviser is more independent than the others - it has become really complicated who can call themselves independent and I know plenty who are fine with not being able to call themselves independent.

All savings forward planning schemes have drawbacks (and advantages). "Don't let the tax tail wag the investment dog" is a clunky expression, but it can help sort out 'schemes' where the main selling point is "tax relief" and the main beneficiary is the IFA (sorry, commission-led product salesman).

There was a guy used to float into our office a while back, trying to sell investments into Friendly Societies - on looking at the figures, the headline rates were good, tax relief, the usual, but the fees and commission made it a piss poor investment really.

As above, if you have the ready cash, a good spread of property, bonds, stocks and so on, in vehicles such as direct investment, ISA and SIPP will stand you in good stead. All good in their own way.

I set up a Hargreaves Lansdown SIPP when I was contracting. Still got it now, even though I also have a company pension too.

Usefully, pension contribs can be offset against Corp Tax so it's a good way of getting money out of the company without upsetting the taxman or the accountant.

Edit: Do your sums carefully if you consider ISAs as you will have additional Emprs NI etc on any taxed income.

OP yes it can be a confusing minefield choices made more complex by the fact that government tax / pension policy can change and investment returns can vary significantly.

The good news is you are thinking about it and getting started.

My 2 pence is that the differences you will see in projections / pension will be driven as much by the investment / return assumptions as anything else. There are government rules as to what figures they can show you.

As above one of the key things is at retirement you can under current tax policy take 25% of your pension pot as a tax free cash lump sum. In most cases you should definitely do this. The balance you would normally buy an annuity - you can buy this for a company of your choice - this pays a monthly income, either fixed or index linked until you die. On your death the annuity has no value (unless you die within 5 years typically). If you don't buy an annuity you can often wait a further period and do another tax free lump sum.

To confuse matters further you should think about what provisions your company offers. I imagine they have a scheme into which you are enrolled. Typically any additional amounts I have out away have been into the company scheme not least a my employer covered scheme costs and put in matching payments upto a certain amount. You should certainly look into this. If/when you move jobs you can move your pension too if you wish.

The final thought is whether investment outside a pension makes sense, here you probably won't have the same tax benefits but you are likely to be less restricted as to what you do with the money and possibly less at isk of tax changes. These options includes ISAs (inc ones invested in the stock market), putting more money into your own property or a buy-to-let. Whilst you may not get the same tax reliefs you have flexibility.

My personal view is that if you are a 40% tax payer then pension contributions to get hat tax relief are well worth it, if you are a lower rate tax payer having savings outside a pension may make more sense provided you are disciplined and don't spend them.

Pensions are favourable regarding IHT, but you pay income tax when you take the funds out - and pensions come out of gross income now, rather than ISAs, which come out of net income.

Although you'll pay less tax when you take the money out than when you earned it as:

a) you can take 25% tax free
b) you'll probably earn less in retirement than you do when working, so pay less tax

I've managed to drop out of the 40% tax bracket this year and last by paying everything above 40% into my pension! I'll get 25% of it back tax free from age 56.