# Pensions



## mba (Jun 17, 2006)

A bit of a what would you do scenario apologies for the length

For the last year i have been paying in 12% of my gross salary through salary sacrifice with my employer adding 5%. Recently we have been taken over by another company who have their own scheme and willing to match upto 6% (happy days ), and i was going to continue paying 12%.....

As pensions are now at the forefront of my mind (even though a long way off retiring!) I was looking at what to expect as a lump sum/regular income if i retired at a set age. I was a little surprised that i could only take 25% (ignorance on my part) as a lump sum tax free at that time with the rest as a monthly income.

So it got me thinking about Stocks & Shares ISA's, with the benefit that i can take all the money as a lump sum if i wished, or once a year take a salary of ££££ and manage that myself into 12 equal amounts.

Now Pension Funds are just big pots of money that are distributed through stocks & shares, gilts, bonds, cash etc, *so what is stopping me investing in a those exact same areas (managed funds) from within my Stocks & Shares ISA *??

Is a better solution to only pay in 6% into a pension so my company matches it and i add the other 6% to a Stocks & Shares ISA that is effectively being invested in the same pot as my pension, but with the flexibility of easy access?


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## Will_G (Jan 23, 2012)

I'd be tempted to go the route you say with 6% in your pension and the rest in stocks and shares isa. The salary sacrifice is a better money saver for the employer than the employee.

I take it you are debt free as in no loans/mortgages?


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## Clkrichard (Nov 17, 2011)

A number of issues here, starting with a detailing forum not being the ideal place for this sort of advice !
In no particular order :
Pension contributions attract tax relief at the highest rate you pay. For example if you are a 40% tax payer it will only cost you £60 to put £100 into your pension. £60 paid from your net pay into an ISA will still be £60. If you do a compound interest calculation on that from now until your planned retirement age the numbers might surprise you.
If your employer is willing to contribute 6% then thats free money and means £106 in your pension at no cost to you. If they operate salary sacrifice and rebate to you some or all of their National Insurance savings then the compounded numbers get even better. They won't pay into an ISA for you and even if they would you would pay tax and NI on that as its just extra pay.
ISAs are designed for shorter term tax efficient savings and pensions for longer term retirement income provision. The price you pay on pensions for the tax relief is the relative inflexibility when drawing benefits plus potential tax on the income. The real point of a pension plan is to capture the tax relief up front.
One other "benefit" is that you can't tap into the pension pot before 55 whereas you might be tempted to raid your ISA.
Charges are much debated. A basic "stakeholder" pension will have pretty low charges and will give to access to a similar fund range to ISAs and the tax relief and your employers contribution will more than deal with the costs.
Ideally you should consider both an ISA and a pension but then there is always that extra tub of Swissvax you know you need !
All that is far from exhaustive but it might help. Go find a good IFA !


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## mba (Jun 17, 2006)

Thanks for the ideas & opinions

Richard i think you under estimate the wide depth of knowledge on this forum. Before i go and see an IFA i like to read around the subject and do my own research and that includes asking others their thoughts. This in turns gives my the ammunition to quiz these IFA's, so i know if i have a "good" one or not.


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## Clkrichard (Nov 17, 2011)

Thanks mba no offense meant to anyone on here. I have no doubt there are lots of good IFAs on DW.
There are websites that will point you towards an IFA but that doesnt mean he/she is good though. 
Good luck in your quest.


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## mba (Jun 17, 2006)

No problem Richard

Will at present i am not debt free as i have a mortgage so over payments might be a better/other option


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## Clkrichard (Nov 17, 2011)

I cant argue with paying off debt from income provided you weigh up the current interest cost against potential growth on investing the money. That of course is pretty much impossible to do unless you have a very very good crystal ball !
The balanced approach is probably as you are already suspecting and put 6 plus 6 into the pension and save the rest into an ISA which you could use for debt reduction. Its really important to have a good "rainy day " fund for which an ISA is ideal.
Does your employer share with you the NI saving on the salary sacrifice ?


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## mba (Jun 17, 2006)

Clkrichard said:


> I cant argue with paying off debt from income provided you weigh up the current interest cost against potential growth on investing the money. That of course is pretty much impossible to do unless you have a very very good crystal ball !
> The balanced approach is probably as you are already suspecting and put 6 plus 6 into the pension and save the rest into an ISA which you could use for debt reduction. Its really important to have a good "rainy day " fund for which an ISA is ideal.
> *Does your employer share with you the NI saving on the salary sacrifice *?


Yes we benefit from what they are calling "Pension Uplift" but i do not know if this is the whole saving that the employer gets as a result or is giving us or a %. Will certainly ask them


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## Will_G (Jan 23, 2012)

I'd be tempted to clear debt now rather than ISA it and pay off in future but as CLK says you should have a rainy day fund as you never know whats round the corner. I'm sure they recommend 6 months salary as a good rainy day fund just in case something drastic happens.

To me any potential income/growth in investment from the ISA would be small unless you invest in a riskier profile which of course could then reduce your pot of money rather than increase it. Debt reduction (as long as you are not penalised) would certainly be the way to go for me


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## Gruffs (Dec 10, 2007)

Well, I can confirm a rainy day fund is handy. 

If it were me, I would either overpay or combine my savings and mortgage into an offset. Where can you get a guaranteed 4% minimum (depending on mortgage rate) and you're saving compound interest on the mortgage. Do a compound interest spreadsheet in your mortgage, it'll scare you. 

Pension laws change, they get ****ed by everyone, except the person that owns the money. 

I'm not a fan. They exist as a tax break and to earn others money at no risk to them.


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## Clkrichard (Nov 17, 2011)

Sound advice Will. One of the reasons why this is hard to deal with on here is not knowing all of the circumstances lf the OP. All the uual stuff needs to be explored including job security, fluctuation in income, health, goals and aspirations, future inheritance, attitude to risk and capacity for loss and a hundred and one other things.
In addition before looking at pensions and savings/investments a proper look needs to be taken at any protection (life assurance needs). No point in having an all singing and dancing pension savings programme if you die or become ill before the fund is big enough thus leaving dependants exposed.


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## Clkrichard (Nov 17, 2011)

Gruffs I totally agree the politicians should leave alone the rules governing private and company pensions. Since Pension Simplification in 2006 they have tinkered in every single subsequent Finance Act and often in a multiplude of ways that sometimes conflict with each other.
That simply leaves people thinking pension plans are bad news and for a grossly under pensioned nation that is a very bad thing.
Have a think about life in retirement on a State Pension and benefits alone especially when you arent busy at work and have time to spend the money you now dont have ! All one needs to do is look at whats available today and relate that to current lifestyle and living costs - many people wont even be able to afford a car to detail !


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## Gruffs (Dec 10, 2007)

No pension is only a problem if you don't have an alternative. But, no govt would allow pensioners to go completely unaided, I won't die at least. 

I don't see why my money should be used by others for their investment. Then they limit how I used my money when it matures. 

Screw that, it's my money, I'll do what I like with it. 

We have other investments. 

Our house is one, with the plot size, location and the sq ft. It'll be worth a fortune by the time I'm ready to sell it. 

The quicker we get the mortgage paid, the quicker it starts making me money. 

I know by overpaying, I'm not only reducing my mortgage by that amount but saving 20+ years of compound interest. If we offset, we would have access to our savings still but still save that amount of interest. If you offset AND overpay, you get both. 

Savings at your mortgage rate, compounded. 

It makes your money work harder for you.

And you benefit not someone else. The lender actually gets less.


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## mba (Jun 17, 2006)

Excellent advice guys appreciate it 

Agree Rich you cant give proper advice without knowing all of my background and if i put that all down its a pretty boring read :lol:

I have already paid into 7 years of a Council pension scheme which is now frozen and i expect will remain there for a little while but i will get IFA on that.

I currently joint own/mortgaged 2 rental properties 50:50 with my brother and as time goes by we are looking to expand on that through collateral in the house - these are low value properties where we get a low LTV so our exposure is limited 

I have readily accessibile cash ISA with about 4 months salary in it and 1 Stock ISA with £5.5k in it which is in effect my savings. My wife is a teacher and has been for 8 years so job security/wages are better than mine by a good way and she pays the mortgage while i pay the rest of the house bills (thats just how we work).

I am currently taking the stance of not factoring in inheritance into my plan, no grandparents left but do have a mum and dad, but i do not want to be dependent on something that is not mine if that makes sense. 

Gruff i know compound interest is a ****** of thing and even though i am on a fixed rate mortgage of 4.49% i can make over payments of upto 20% of the outstanding balance every year without penalty. 

PLAN

Pay 6% into my pension so company match it
Pay the other 6% off my mortgage
I already have a regular cash saving plan anyway so will continue to squirrel away into that 

Just hope i live long enough to benefit


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## kh904 (Dec 18, 2006)

Gruffs said:


> No pension is only a problem if you don't have an alternative. But, no govt would allow pensioners to go completely unaided, I won't die at least.
> 
> I don't see why my money should be used by others for their investment. Then they limit how I used my money when it matures.
> 
> ...


Spot on Gruffs!

I often get frowned apon when i say we shouldn't be as taxed as we currently are and reduce the benefits paid out. The Government shouldn't be involved in looking after people, just maintain national security & protect individual civil liberties & freedoms & maybe some basic infrastructure

The problem when government tries to look after people, the policies don't make long term sustainable sense, there's fraud & corruption (where the government hands out money to spend there's people/companies waiting to take advantage), dependency on benefits, poor value for money etc
Look at their track record and it speaks for itself!

Let the person who has earned the money do what they like with it, chances are they would use it more wisely than the government (if they know they wouldn't be bailed out with benefits etc).

How useful is it planning for retirement when the government always move the goal posts anyway, and the effects for inflation etc? And people like you Gruffs who've worked hard, saved, invested & done well for themselves are the ones who get 'punished' by the system at the end!


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## Gruffs (Dec 10, 2007)

Quite,

I've been working 15 ish years and pensions have been devalued (for whatever reason) twice. 

Stands to reason it's going to happen at least 3 more times before I retire. 

Why would I let that happen? I'll provide for my future myself and not entrust it to someone who is only interested in making themselves wealthier.


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## Tricky Red (Mar 3, 2007)

Never underestimate the power of the offset mortgage. You can also link ISAs to an offset and whilst you will not earn interest on the capital, it will retain its tax free status.

If you can save within an Offset, the Interest saving on a mortgage can certainly add up.

Do not underestimate the tax relief on personal pensions subscriptions too. If you are higher rate tax payer, please do a self assessment, rather than just PAYE. It is up to you to do this. Then you will get the difference in basic and higher rate tax relief either as an adjustment to your Tax code or by cheque paid to you.


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## Clkrichard (Nov 17, 2011)

Mba that sounds like a good plan to me. Property is a good addition to a pension plan albeit with its own risks. Voids, running costs, CGT on disposals, income tax on rent, market slump when wanting to sell etc.
As I said previously the main attraction of a pension plan is its tax efficiency and the effect of that on compound growth. Having said that all ones eggs in one basket is never a good idea so do diversify.
Given what you say about your wife paying the mortgage I trust you have insured each other ?
Gruffs I hear what you say and we will have to agree to differ which is what makes this country so great !


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## mba (Jun 17, 2006)

Clkrichard said:


> Mba that sounds like a good plan to me. Property is a good addition to a pension plan albeit with its own risks. Voids, running costs, CGT on disposals, income tax on rent, market slump when wanting to sell etc.
> As I said previously the main attraction of a pension plan is its tax efficiency and the effect of that on compound growth. Having said that all ones eggs in one basket is never a good idea so do diversify.
> *Given what you say about your wife paying the mortgage I trust you have insured each other ?*
> Gruffs I hear what you say and we will have to agree to differ which is what makes this country so great !


Mortgage is in both our names and we are both insured for critical illness/death insurance for the full amount of the outstanding mortgage. This is the same setup as i have with my brother regarding the rentals.

i suppose i am trying to plan for the unknown so need to diversify my savings. Im sure whatever i do there would have been a better way of doing it, but i need to feel comfortable and secure in what i do.

My only gripe with the pension was the fact i could only have 25% as a tax free lump sum at retirement  But i still feel i should put some away as my company are prepared to add £££ so i would be daft not too.


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## Bero (Mar 9, 2008)

Tricky Red said:


> Do not underestimate the tax relief on personal pensions subscriptions too. If you are higher rate tax payer, please do a self assessment, rather than just PAYE. It is up to you to do this. Then you will get the difference in basic and higher rate tax relief either as an adjustment to your Tax code or by cheque paid to you.


Can you explain please, I'm in the 40% bracket and for Additional voluntary contributions and £100 extra only costs be £50-60 off the bottom line.



mba said:


> Mortgage is in both our names and we are both insured for critical illness/death insurance* for the full amount of the outstanding mortgage.* This is the same setup as i have with my brother regarding the rentals.


I queried this with providers when I got my 1st mortgage, you're effectively getting less cover every month but it' still costs the same. i.e. if you stayed with them for the full term of the mortgage your final years cover would be insignificant. The insurance I was considering was for a payout of the initial mortgage value, i.e. if you had a £200k mortgage paid over 24.9years then diagnosed and you get £200k cheque, not one for under £1,000! In the end I stuck with my general principals of 'insure nothing' unless legally required or would have immediate huge financial impact (like going fully comp on the car)


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## Clkrichard (Nov 17, 2011)

Bero,
Tricky Red is correct in respect of contributions to personal pensions. The product provider will add on Basic Rate Tax Relief so if you give them £80 they will gross that up to £100 for you. If you pay a higher rate than 20% you have to tell HMRC what you are doing so they will give you back the additional tax due to you. You can tell them by letter or by Self Assessment and they will send you a payment or adjust your tax code or offset it against other tax you owe. For a 40% tax payer a further £20 comes back to you creating a net cost of £60.
Mba your voluntary contributions are via salary sacrifice so in fact you dont make that contribution, your employer does. By reducing your pay that automatically delivers to you tax relief at whatever rate you would otherwise would have paid on the foregone income.


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## mba (Jun 17, 2006)

Bero said:


> Can you explain please, I'm in the 40% bracket and for Additional voluntary contributions and £100 extra only costs be £50-60 off the bottom line.
> 
> *I queried this with providers when I got my 1st mortgage, you're effectively getting less cover every month but it' still costs the same*. i.e. if you stayed with them for the full term of the mortgage your final years cover would be insignificant. The insurance I was considering was for a payout of the initial mortgage value, i.e. if you had a £200k mortgage paid over 24.9years then diagnosed and you get £200k cheque, not one for under £1,000! In the end I stuck with my general principals of 'insure nothing' unless legally required or would have immediate huge financial impact (like going fully comp on the car)


This is something i asked about and the premium i am on reduces per month as the amount owed on the mortgage gets less. There may well be a time in the future that i do not need the insurance as the mortgage reaches an "acceptable level" or as i become more comfortable in my savings/lifestyle


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## Tricky Red (Mar 3, 2007)

Clkrichard said:


> Bero,
> Tricky Red is correct in respect of contributions to personal pensions. The product provider will add on Basic Rate Tax Relief so if you give them £80 they will gross that up to £100 for you. If you pay a higher rate than 20% you have to tell HMRC what you are doing so they will give you back the additional tax due to you. You can tell them by letter or by Self Assessment and they will send you a payment or adjust your tax code or offset it against other tax you owe. For a 40% tax payer a further £20 comes back to you creating a net cost of £60.
> Mba your voluntary contributions are via salary sacrifice so in fact you dont make that contribution, your employer does. By reducing your pay that automatically delivers to you tax relief at whatever rate you would otherwise would have paid on the foregone income.


This, exactly. Personal pension contributions, not through a company scheme.


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## Gruffs (Dec 10, 2007)

mba said:


> This is something i asked about and the premium i am on reduces per month as the amount owed on the mortgage gets less. There may well be a time in the future that i do not need the insurance as the mortgage reaches an "acceptable level" or as i become more comfortable in my savings/lifestyle


On that note, we are insured for the full value of the house.

We reasoned that if the worst were to happen, the house would be paid for and as we get older, our reduced ability to earn without the other would be offset by the surplus.

If we both go, our daughter will have no financial worries.

Though she will have married into aristocracy by then of course


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