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Are you interested in starting a pension? Maybe you are in a company scheme,
but want to put a bit extra away for your retirement. Maybe you are now paying
the top-rate of income tax, and see payments into a pension scheme as the best way
of investing money for the future, because of the tax relief.
Whatever the case, there is a wide and almost bewildering choice of schemes available,
with words like SIPPs and stakeholders being thrown around!!
We have some advice to get you started on your search for a good pension scheme. |
Pension
or
???
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What alternatives to a pension scheme?
The first question you need to ask is whether a pension scheme is better for you
than the alternatives. It's true that you get tax relief to boost your pension
contributions, but are you better to simply put your money in shares,
property, or some other form of saving?
When you pay money into a pension scheme, the scheme also gets from the government
the equivalent of basic rate relief, so boosting your contribution. If you
are a higher-rate tax-payer, you can also claim back the higher tax you paid, when
you fill in a tax return.
It used to be the case, that when your money was inside a pension scheme, and invested
in shares (as it mostly is), it benefited from getting the dividends tax-free. However
a few years back, Gordon Brown famously removed this benefit, with one
of his stealth taxes. This is what cut back the general value and attractiveness
of pensions schemes.
So for standard-rate tax-payers there is a modest boost (about a quarter) to what
you pay in, and for higher-rate tax-payers, a somewhat better deal. So when
you compare with alternatives, you should bear this in mind.
Our view is that for higher-rate tax-payers, who expect to be only paying standard-rate
in retirement, it still makes very good sense to pay into a pension scheme.
However, we think that for standard rate payers, and for those who expect to always
be paying higher rates of tax, the options may be preferable.
So, these are some of the options you might want to consider:
ISAs
and
shares |
The nice thing about ISAs is that any income or gain you make is tax-free.
For cash ISAs, there is no risk, and a good return, and you can draw this out without
charges when you need it.
The downside is that in the longer term, you would
be better off invested in the stock market, so if you have at least 10 years to
go before retirement, you maybe should be in shares, or at least partly so.
A shares ISA gives you the benefit of stock-market returns, but the charges made
by the provider will cut back these returns. When Gordon Brown hit the pension
schemes with his stealth tax, he did the same to ISA's, which made them far less
attractive (the tax relief on dividends used to more or less cover the provider
charges). So for most people you could just as well hold a unit trust or investment
trust shareholding outside an ISA. The people who do get a clear advantage
from ISA's are the rich, or at least those rich enough to keep putting in the maximum
permitted year after year, as the returns are free from capital gains tax. |
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Property |
Property in recent years has performed as well as any stock market investment, and
many have seen that the best way to secure their future is by owning a rental property
or two. This gives them an inflation-linked income, assuming that over the
long term, rents grow at the same rate as other things.
Unfortunately, the boom has quietened down, and in some areas there are
so many buy-to-lets that it is holding down rental income. So probably only
still a good idea if you choose an area carefully, and think of the long-term, without
worrying about further short-term falls in property values or rentals, although
now may be just the time to buy property, where apartments particularly are selling
very cheaply at auction.
For those more cautious, you can invest in property companies, or the new Real-Estate
Investment Trusts (REITs), where professionals take care of the buying/ selling/
management of the properties. |
Spend
It !! |
A good option for some is to spend rather than save. These are the people
who are never going to achieve a large pension of their own, as they simply can't
pay enough into a fund. In their case, the worst scenario is to struggle over
the years to build a small pension, then in retirement to have it taken away by
the government.
Another Gordon Brown trick has been to avoid increasing the basic state pension,
and to instead provide a means-tested top up. So the person who spent their
money and has nothing left gets the top up, and the thrifty person who put it in
a pension scheme does not.
If you put the money in a savings deposit, you'll get the same result, as your interest will block the top-up. (And if you have to go into care in later life, they'll
take your savings anyway!!) |
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Stake-holder
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Stakeholder Pensions
In the bad old days, the main beneficiary from personal pension schemes was the
salesman or the 'independent financial adviser' (IFA) who arranged it for you.
They
got massive commissions, paid for from your premiums, so for the first few
years your payments were simply paying for their commission.
What changed things first were companies like Virgin that sold direct (without a
middleman) and secondly the government's idea of a 'stakeholder' scheme where charges
are (by law) low and conditions favourable to the person, not the pension provider
or the salesman. These two
factors have forced most other schemes to improve so as to compete. All the same,
unless you want a SIPP (see below), we'd suggest choosing a stakeholder scheme rather than
some other, simply because you can buy with confidence, without having to check
the small print.
First check out the government's
rules about stakeholder schemes
Some trusted providers of stakeholder pensions on the web are:
Virgin Pensions Norwich Union
Legal & General
Prudential
Scottish Widows
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SIPP |
SIPPs
If you want to have full control of what your pension fund is invested in, then
you need a Self-Invested Personal Pension, or SIPP. Ordinary pension schemes will
normally invest in a small selection of funds, linked to the stock market, but with
a SIPP, you can have the money in individual companies, and can buy and sell shares
within your pension fund as you see fit. For most people, the SIPP they need
is a low-cost one, without too many frills, but if you have large funds to invest,
and want more flexibility, for example buying property or overseas shares, then
higher-priced SIPPs are available.
For most of us, in looking for low costs, we need to check that charges overall
are low, for setting up the fund, for buying investments in the fund, for holding
the investments, and for selling them. It's handy too to know what flexibility
there is when the time comes to retire. Some trusted low-cost providers of
SIPPs are:
Alliance Trust
Hargreaves Lansdown
Killik
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You can get lots of advice from the web, but be wary
of believing adverts and advice from pension providers that try to sell you something
that isn't a stakeholder or a low-cost SIPP. Be equally cautious if a person giving
advice has something to gain financially. If you want to study pensions in
more detail before making your decision, best
to get a book, and here's an unbiased
source of information:
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The Pension Handbook
A Guide from the publishers of Which magazine
The Pension Handbook takes a realistic look at how you can safeguard your
future. Whether you're deliberating over SERPS, moving jobs, or approaching retirement age, this practical guide
provides accessible advice for navigating the pensions maze.
for more information, or to buy it
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A final thought: if you are have
a final-salary pension scheme, and you expect to stay most of your
working life in it, and the employer isn't likely go bust, then
you are one of the privileged few (and probably work in the public sector!).
For the rest of us, whatever you get in company schemes or through the government's
SERPS, it will not be enough for a comfortable retirement, and you need to be putting
extra money aside while you can. People used to worry that they would die
too soon in retirement, and not get the rewards from their savings. However, the
greater worry now is living longer than your money lasts, and being impoverished
in later years....
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This information is for the UK
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