Pensions Advice

[dibbly dobbler]

Gents - am in a bit of a quandry and would appreciate some guidance from any pensions experts out there

Current situation: I am a member of a final salary scheme (for the time being at least!) which is good obviously but I also have about £60k in an executive pension plan with Standard Life from a former career which I am trying to decide what to do with. I am not currently contributing to this policy but am considering it. The money is invested in their main UK equity pension fund.

Options:

1. Do nowt and leave it alone, put the money elsewhere (ISA or some such)
2. Restart contributions to the current policy
3. Transfer it to something else and start paying into that - SIPP maybe, or a Stakeholder (they're cheap aren't they?)
4. Some other option - help?

Thanks in advance, DD

PS - chances are I will go to an IFA in due course but I just wanted to get some initial ideas

[Beardy10]

IF you haven't done an ISA I would definitely do that rather than contributing to the EPP. You don't get tax breaks on the "way in" but you don't pay income tax when you decide to take income and you obviously don't pay CGT.

It's good not just to have diversity in terms of what you are investing in but also the vehicle you invest through. It's unlikely they will change the legislation regarding ISA's...they are more likely to withdraw them and replace them with something else (as they did with PEP's).

I would also check the fees on the EPP and the Fund Performance and see if you can do better elsewhere (no idea what they are like though). Certainly probably a good idea to split the £60k into two or three funds.

Edited by Beardy10 on Saturday 23 October 23:59

[dibbly dobbler]

Thanks for taking the time to reply Beardy

I do have an ISA (not maxed out though) but the thing drawing me to the pension is the higher rate tax relief on contributions - when I do retire I will not be a higher rate taxpayer so there's an instant gain there I think ? (please correct me if I'm wrong!).

I'm leaning towards moving it elsewhere and restarting contributions but where ?!

[Phooey]

dibbly dobbler said:

Thanks for taking the time to reply Beardy

I do have an ISA (not maxed out though) but the thing drawing me to the pension is the higher rate tax relief on contributions - when I do retire I will not be a higher rate taxpayer so there's an instant gain there I think ? (please correct me if I'm wrong!).

I'm leaning towards moving it elsewhere and restarting contributions but where ?!

This is what i keep being told. Still like the idea of maxing out the ISA before the pension though. Just gotta hope the gov don't move the goal posts

[Beardy10]

It's a hard comparing ISA's and Pensions I just think it's good to have both rather than one or the other. It's a good point you make about not paying higher rate tax in retirement....I just think the idea of tax free income is very attractive though obviously you will have you tax allowance to take up too before you pay tax. I always max out my ISA and put a healthy amount into my pension every year.

[dibbly dobbler]

Chaps - I am now looking at the possibility of a SIPP with Hargreaves Lansdown

Anybody got one ? Any thoughts on whether this would be a good idea ?

[Beardy10]

dibbly dobbler said:

Chaps - I am now looking at the possibility of a SIPP with Hargreaves Lansdown

Anybody got one ? Any thoughts on whether this would be a good idea ?

Don't know anything about that specific SIPP but check the fees (including the upfront fees paid on any funds you buy). One thing I do in my SIPP is by iShares ETF's instead of tracking funds as the fees are cheaper than any tracking funds. Definitely check the list of fund managers that you can buy funds from. It might not be for you at the moment but I would check that you can buy things like ETF's. The whole point of a SIPP is that it is Self Invested so you want flexibility in what you can invest in.

I'd still do an ISA as well! HL may do a an ISA as well so you may get lower fees by having them both in the same place.

[dibbly dobbler]

Beardy10 said:

dibbly dobbler said:

Chaps - I am now looking at the possibility of a SIPP with Hargreaves Lansdown

Anybody got one ? Any thoughts on whether this would be a good idea ?

Don't know anything about that specific SIPP but check the fees (including the upfront fees paid on any funds you buy). One thing I do in my SIPP is by iShares ETF's instead of tracking funds as the fees are cheaper than any tracking funds. Definitely check the list of fund managers that you can buy funds from. It might not be for you at the moment but I would check that you can buy things like ETF's. The whole point of a SIPP is that it is Self Invested so you want flexibility in what you can invest in.

I'd still do an ISA as well! HL may do a an ISA as well so you may get lower fees by having them both in the same place.

Thanks again Beardy

I do already have an ISA with H-L (although not maxed out) and they do have a massive choice of funds (although I'm not sure about ETFs) so it may be that this is a winner I have a chum that runs an actuarial consultancy so I'm going to pester him for some free advice then take it from there

Edited by dibbly dobbler on Wednesday 27th October 22:34

[OneDs]

The recent changes to the Annual Allowance & Life Time Allowance may well affect you so your first port of call should be an IFA, especially with your DB scheme,

New Annual Allowance = Max £50,000 increase in benefit a year for a DB scheme.

With out knowing your situation or attitude to risk, I'd say your best trying to make sure you have enough balance in your portfolio, Treasury have even seen fit to wipe out enhanced protection for those opting in before Apr 2006. It certainly looks like the benefit of tax free pension contributions for mid to high earners will completely disappear in the future and you'd thought it would be different with the current govt.

I suppose they are of the opinion that they don't want people saving it and if they must invest it then it shouldn't be tax free.

Funny as I thought the biggest investors in the UK were the institutional pension funds.

Edited by OneDs on Thursday 28th October 10:45

[dibbly dobbler]

OneDs said:

The recent changes to the Annual Allowance & Life Time Allowance may well affect you so your first port of call should be an IFA, especially with your DB scheme,

New Annual Allowance = Max £50,000 increase in benefit a year for a DB scheme.

With out knowing your situation or attitude to risk, I'd say your best trying to make sure you have enough balance in your portfolio, Treasury have even seen fit to wipe out enhanced protection for those opting in before Apr 2006. It certainly looks like the benefit of tax free pension contributions for mid to high earners will completely disappear in the future and you'd thought it would be different with the current govt.

I suppose they are of the opinion that they don't want people saving it and if they must invest it then it shouldn't be tax free.

Funny as I thought the biggest investors in the UK were the institutional pension funds.

Edited by OneDs on Thursday 28th October 10:45

Thanks Peter. My DB scheme is capped at 2% increases and my salary is decent but I'm not a very high earner so I dont believe I'll be anywhere near the allowance maximums even after the changes. Good point though and I'll have to check that

Spreading the risk out a bit is probably the most important thing I need to do, again a good point - thanks

[OneDs]

Is that a 2% increase on the value of the pension from the previous year despite what inflation does?

Having looked at some initial documentation anyone highly paid or medium earnings who gets a decent increase in the year (say 5% or more) will get (using civil service terminology) "clobbered" as follows.

The value of the increase in your pension is calculated as thus:-
16x (((difference in Value of Pension year end to year start)+(any increase in additional lump sum year end to start))- inflation on start values)

So based on that if you start the year on £50,000 20 years service and on a 60/40 with 2xlump sum And lets say you get a not unreasonable (well maybe in a few years) 5% pay increase (part promotion part cost of living)in the year and inflation is 2.5%

Pension Value @ start of year = £15,000 + £30,000 lump sum + inflation = £45,900

Pension Value @ end of year = £16,537.5 + £33,075 lump sum = £49612.5

Difference = £3712.5

£3712.5 * 16 = £59,400, erm that will be £9,400 taxable at 40% so you owe HRMC £3,760.

Apparently you can offset three years allowance so maybe you've had no real increases before and can use some of that to get out of the £3.76k tax bill. but if you get another decent increase at any time in that three year period you'll get "clobbered" again.

So you're a high earner lets say £175,000 with 10 years in the same scheme, but your also putting in £10k a year to AVC's

No increase as your setting an example to the troops in these stringent time.

Start Pension = £26,250 + £52,500 lump sum = £78,750 * Infl = £80,718.75
End Pension = £28,875 + £57,750 lump sum = £86,625

Difference = £5906.25 * 16 = £94,500 + £10,000 (AVC's) = £104,500

50% tax payer so £104,500 - £50,000 annual allowance = £54,500 * 50% = £27,250 tax bill please.

Even if you dump the AVC's as it is now pointless, that still is a £22,250 tax bill from nowhere and certainly not from an immediately disposal source.

If this is wrong please tell me, because at the moment my directors are going absolutely mental, despite being a little simpler that the previous proposal by the bag of ste before, they thought the new Govt might be ever so slightly more lenient?!?

Edited by OneDs on Friday 29th October 11:26

[ringram]

I believe its mainly intended to claw back the massive haemorrhage of public funds into public sector DB schemes.
Sadly private sector will also get hammered. Simple answer is to change from DB to DC scheme. Job done. Simple £50k max per annum and total pool cap of £1.5M

Thats my understanding anyway.

[OneDs]

Private or Public, it makes no difference the 16* factor on DB scheme is frankily criminal.

The public sector burden is an unfunded pension, ie. the contribution deducted from civil servants are not invested they just go to cover some of the pension bill of retired civil servants, so any possible profit that might have come from the investment is lost, ok I know that brings risks but at least it brings opportunity.

So HMRC are increasing income tax revenues from tax revenues (paid to civil servants who pay tax) and also Mid to Higher earners in decent private DB schemes, or just very prudent high earners in good DC & PP/AVC schemes, they are reducing the funds going into pension funds some of which have huge liabilities and actually prop up a significant amount of the investment and growth in the UK, absolutely comical. Oh well I though Labour was bad, but watch this lot go tits up in a bonfire as a significant proportion of investment capital goes offshore.

[OneDs]

UPDATE:- Apparently any lump sum available is not to be multiplied by 16 just the pensionable income, which will significantly reduce your exposure. The lump sum is just added at a straight value minus any inflation (Using current CPI at 3.1% on these new scenarios).

Plus my calculation of the accrual rate on a 60/40 was incorrect and inflated the effect of a years service.

The combination of my errors changes the impact significantly as follows: -

Mid earner scenario: at £50,000 on 60/40 with 20 years and a 2x lump sum;
you'd need a 14.5% increase in anyone year to trip over the £50k allowance.

High earner scenario: at £175,000 on 60/40 with 10 years and a 2x lump sum;
you'd need a 0.65% increase in anyone year to trip over the £50k allowance if you had AVCs of £10k and 2.4% with no AVCs.

Still think it will completely dry up the AVC market for higher earners.

Edited by OneDs on Friday 29th October 12:57

[dibbly dobbler]

Peter thanks for the above - it's interesting stuff!

Say I am on roughly £50k pa on a DB scheme that pays a pension of 1/60 of final salary (no built in lump sum)

My *pensionable salary* is capped to 2% annual increases after recent rule changes and I currently have 10 years service. (This is a bit of a bummer - hence why I am looking to start contributing to my other pot of money!)

Current year = 10/60 * £50k = 8,333 annual pension
Next year = 11/60 * £51k = 9,350 annual pension (assuming max 2% increase)

So the pension benefit has gone up by around £1k (maximum given the cap!) which I presume is then mulitplied by 16 to give £16k - well below the £50k annual limit.

That seem about right ?

Thanks again

[Welshbeef]

The changes are coming and may well get harsher less beneficial in the future, as such get in what you can now while the concessions remain.

Once they are gone you'd certainly wish you had got in "balls deep"

[OneDs]

dibbly dobbler said:

Peter thanks for the above - it's interesting stuff!

Say I am on roughly £50k pa on a DB scheme that pays a pension of 1/60 of final salary (no built in lump sum)

My *pensionable salary* is capped to 2% annual increases after recent rule changes and I currently have 10 years service. (This is a bit of a bummer - hence why I am looking to start contributing to my other pot of money!)

Current year = 10/60 * £50k = 8,333 annual pension
Next year = 11/60 * £51k = 9,350 annual pension (assuming max 2% increase)

So the pension benefit has gone up by around £1k (maximum given the cap!) which I presume is then mulitplied by 16 to give £16k - well below the £50k annual limit.

That seem about right ?

Thanks again

Yep that is it (except you need to add inflation to the start year figure if it's more than 2% you'll end up with a negative figure), from your language it would seem as your DB scheme now closed to current members, if that is the case you would have to add on to that any employer & Employee DC contributions, so say you put 4% into a DC & the employer matches and in puts a few themselves say 6% (10% total (£5k))you add another £5k so your now on £21k annual allowance used up.

Edited by OneDs on Friday 29th October 14:20

[dibbly dobbler]

Right - great, thanks once again

[Welshbeef]

I wonder once the new pensions for all goes live and auto enrolement happens how many opt out?
I'm worried what happens to the economy suddenly there will be a cut in spending so GDP falls.

Don't get me wrong in 100% on the same page that we all need to save more for retirement but annoyingly right now could cause a slowdown.