Pensions.....Why bother? Pensions.....Why bother?
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  1. #1

    JohnBarnard

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    Default Pensions.....Why bother?

    Is it worth bothering to provide for a pension?

    Annuity rates are so low at the moment that each £100,000 in your pension fund commonly buys a retirement income of about £5,000 to £6,000 per year. Of course, the actual amount depends upon factors like age at retirement, whether you want income to continue until death of spouse, and have inflationary increases. But you would probably want about half-a-million to buy a decent income.

    Unfortunately, building this half-a-million is costly, even with the advantages of avoiding top-rate tax and NI when making contributions. Suppose it cost you £200,000 in actual contributions over 20 years; this is £10,000 per year you are spending. A worry to me is that funds typically charge 1% to 2% per year for management. Does this mean over 20 years that 20%+ will get nibbled away?

    What are the alternatives? Can one do better investing take-home money? Do pension funds have to be used entirely for annuity purchase, or are there types of funds where some or all money can be taken as cash on retirement?

    I have the questions, but no answers. I shall be interested to see how other contractors are planning for retirement.

  2. #2

    Simon SJDaccountancy

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    ISA's are an alternative - chat it over with a decent IFA - they will be able to give you all the details.

  3. #3

    Darren U

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    John......another alternative would be a SIPP. Have a number of clients who have these schemes, all of which are outstripping the values of a similar pension fund. They seem to be working as there are a number of bargains on the stock market at present (naturally you have to know where to find them), also you have more control over where your funds are being invested.

    As Simon's stated previously, a decent IFA should beable to sort it out.

  4. #4

    ededdandeddie

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    DarrenU

    the points yoou make about a SIPP are valid, but a SIPP in itself does not address the concerns raised regarding pensions (cost/annuity purchase). In fact, with a lot of insurance company badged SIPPs the cost increases without necessarily providing a similar increase in benefit.

    To throw in a couple of thoughts on the original post, one is that income drawdown has improved the position regarding annuities, if not solved it completely. The second is that, taking a personal pension viewpoint and a 40% taxpayer, the net cost of 60% of the contribution and the availability of 25% tax free cash, mean that the effective cost of each £1 being used ot purchase an annuity (ignoring any tax free growth) is 47p.

    ISAs are good as a supplement, but the 7k limit is very restrictive and annual costs are not necessarily going to be better than an equivalent pension investment.

    Of course, the situation becomes different if youo have gone down the EPP route with a genuine corporate set up so........... ask a decent IFA (and ignore the posts that will now crowd this forum about them all being commision hungry sharks blah blah only us contractors are decent people blah blah)

  5. #5

    TheyThinkItsAllOver

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    I've been to see a couple of so called "independant" financial advisors about EPPs, SIPPs, etc. The whole pensions thing is so complicated it defies belief. I'm bottling out now because I don't like investing in something I don't understand 100%. Where's that mattress...

  6. #6

    NeilW

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    Default

    <!--EZCODE QUOTE START--><blockquote>Quote:<hr> In fact, with a lot of insurance company badged SIPPs the cost increases without necessarily providing a similar increase in benefit.<hr></blockquote><!--EZCODE QUOTE END-->

    Which is why you would instead use something like the nice cheap shell offered at SIPPdeal www.sippdeal.co.uk.

    <!--EZCODE QUOTE START--><blockquote>Quote:<hr> Of course, the situation becomes different if youo have gone down the EPP route with a genuine corporate set up so<hr></blockquote><!--EZCODE QUOTE END-->

    Which would be idiotic for anybody contracting in an IR35 environment, precisely because the individual is likely to be dipping in and out of permanent work.

    Any contractor on IR35 advised to take an occupational pension scheme out would in my opinion not have received best advice.

    <!--EZCODE QUOTE START--><blockquote>Quote:<hr> ISAs are good as a supplement, but the 7k limit is very restrictive and annual costs are not necessarily going to be better than an equivalent pension investment.<hr></blockquote><!--EZCODE QUOTE END-->

    But the money coming out at the end is tax free and not limited by the annuity problem. Self-select ISAs are available at a cost of only £20 per year over and above the normal cost of investment. With many funds the wrapper comes free.

    And of course we always forget that there are usually two people in a household (£14K limit on ISAs), and that there is this wonderful thing called the Capital Gains Tax allowance which everybody seems to ignore. By my estimates a couple need a portfolio of abour £250K before you would start to run out of CGT allowance.

  7. #7

    MidnightOil

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    I couldn't agree more with you Neil.

    I'm not a financial expert by any means, but the way this government (and previous) treat Joe Public, I would never leave my retirement fund in their hands. However, you should take a cautious approach to your alternative investment strategy. I keep, and view, my "pension" fund totally separate from my investment fund and only take higher risks with the investments.

    Who hows whether this is the right approach, but it's got to be better than the 50K I used to have with Equitable Life from my permie days. The trustees decided not to transfer the fund when the sh*t hit the fan and my fund is now worth significantly less !!! It hurts too tell you how much its now worth ;-(

  8. #8

    stitchedup

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    as mentioned, typical contractors pay 47p to invest £1 in a pension.

    The income tax charged when you draw the annuity depends where you live. In Cyprus it's 6% or so. I can think of worse places to retire than Cyprus (ermmm Berkshire?)

    As far as I know, all the other investment techniques are after income tax has been paid now, so you invest half of what you can in a pension.

    Clearly, few people will pay 40% tax on their annuity, but you'd pay 50%+ on money to put in PEPs etc now

    Oh yeah: Friends provident do an online stakeholders that charges 0.8% p.a. - but the funds are a bit limited, and you can only contribute £3600 gross at the minute (to make their admin easier this year).

  9. #9

    IR35 Avoider

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    Doesn't the UK government still charge UK tax rates on a British pension even if you live abroad? Presumably double taxation treaties will ensure that you don't pay more than the higher of the two rates, but if it's possible to pay less than UK rates I'd like to know.

  10. #10

    stitchedup

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    my mate's dad was on a 40k pension,
    and emigrated with his wife to Cyprus,
    and he was very sure about what tax he was paying:
    40% is very different to 6% !!!!!!!!!!!

    BTW only a few places do this low tax, but Cyprus is a good one:
    except for 3 facts:
    the number of Turkish tanks on the other side of the island
    The heat in the summer
    the number of nouveau riche Russians with wealth of doubtful provenance (and I don't mean lottery winners)

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