Pensions have popped up a few times on the board this evening and they are to many a confusing area of finance,
for instance which is better a personal pension plan or to be part of a company pension scheme ? (what condition etc etc) How many pensions can you have ? Then there is the who serps business and AVPs.
So I guess this is a general pensions chit chat, compare contrast type of thread.
Full Version: Pensions in general
Yeah it would be great if someone with a good financial knowledge of pensions could give a run down of all the available options(including those without the official "pension" stamp) and the advantages/disadvantages of each.
I can't write it all up at once, otherwise I'd be here for the next three years.
Some basics:
There are basically two different types of non-state pensions:
- occupational schemes
- personal pension schemes
Occupational schemes are pension funds run by big employers. The most famous one is British Airways', because it was once said about BA that it is a pension fund that also flies some planes. I do not know much about occupational pensions, but basically, they are run by the employer itself, and contributions are usually taken straight from the pay. They can be final salary schemes or defined contribution schemes. Many final salary schemes have been closed recently. As an employee, you usually have no influence over how the pension funds are invested. It is one big pot run by the employer, out of which all current pension enttitlements are paid. If the employer goes bust, the pension fund is ringfenced, but if there is any deficit (as there is in many), then the ringfenced fund can only pay as much as there is left in the fund. As far as I know, if you are a member of an occupational pension scheme, there are restrictions on also having a personal pension. I don't know the details.
Personal pensions are different from occupational pensions. Putting it simply, they are like a savings account where you put your money in, earn a return on it , and later draw a pension from the savings. The only difference to an ordinary savings account is that there are significant tax benefits, even for non-taxpayers, which will greatly increase the value of your fund (by up to 66%), and, as a trade-off to that, that there are restrictions about how much you can pay in and how much and when you can take funds out. The pension you later receive depends entirely on how much funds you paid in and how much of a return you received. The funds are "yours" in that sense, they do not get thrown into a big pot. Your pension fund is your personal fund, hence the name "personal pension".
If your employer is making a pension contribution as part of your salary package or if there is a matched contribution scheme, this does not necessarily mean that you are in an occupational pension scheme. Many employers use what is called "group personal pensions". These are basically personal pensions, and you are free to do with them what you want once you have left that employer. Group personal pensions are usually a bad deal in terms of charges and performance, because some financial adviser has typically sold a high charges/lousy funds package to the employer. Funds should be transferred out of such pensions into a low cost personal pension plan or SIPP as soon as possible. More about this later.
Some basics:
There are basically two different types of non-state pensions:
- occupational schemes
- personal pension schemes
Occupational schemes are pension funds run by big employers. The most famous one is British Airways', because it was once said about BA that it is a pension fund that also flies some planes. I do not know much about occupational pensions, but basically, they are run by the employer itself, and contributions are usually taken straight from the pay. They can be final salary schemes or defined contribution schemes. Many final salary schemes have been closed recently. As an employee, you usually have no influence over how the pension funds are invested. It is one big pot run by the employer, out of which all current pension enttitlements are paid. If the employer goes bust, the pension fund is ringfenced, but if there is any deficit (as there is in many), then the ringfenced fund can only pay as much as there is left in the fund. As far as I know, if you are a member of an occupational pension scheme, there are restrictions on also having a personal pension. I don't know the details.
Personal pensions are different from occupational pensions. Putting it simply, they are like a savings account where you put your money in, earn a return on it , and later draw a pension from the savings. The only difference to an ordinary savings account is that there are significant tax benefits, even for non-taxpayers, which will greatly increase the value of your fund (by up to 66%), and, as a trade-off to that, that there are restrictions about how much you can pay in and how much and when you can take funds out. The pension you later receive depends entirely on how much funds you paid in and how much of a return you received. The funds are "yours" in that sense, they do not get thrown into a big pot. Your pension fund is your personal fund, hence the name "personal pension".
If your employer is making a pension contribution as part of your salary package or if there is a matched contribution scheme, this does not necessarily mean that you are in an occupational pension scheme. Many employers use what is called "group personal pensions". These are basically personal pensions, and you are free to do with them what you want once you have left that employer. Group personal pensions are usually a bad deal in terms of charges and performance, because some financial adviser has typically sold a high charges/lousy funds package to the employer. Funds should be transferred out of such pensions into a low cost personal pension plan or SIPP as soon as possible. More about this later.
Here's my guide (Pensions for Dummies);
State Pension - pay enough NI during your working life and you will be entitled to a small weekly payment after the age of 65.
SERPS (S2P) - second state pension, related to earnings to some degree (up to a cap). Paid for out of NI. Now replaced by S2P, which is stingier for higher earners.
Private pension - basically a saving scheme with a few twists. The good twist is that you dodge tax on what you pay in, giving a 22-40% boost. The bad twists are that once the money is in the scheme you can't touch it until you retire, and when it does pay out as a pension, it is taxable. Oh yes, you also carry all the risk on what the pension ultimately pays - it will depend on how the investments performed over the time you were contributing.
Company pension - comes in two flavours;
Final salary (defined benefit) - company promises to pay you a pension related to your salary. Company has to pay in whatever is required to meet the promise when you retire. Only real risk is if the company goes bust. May require contribution from you. On the whole, this is the one to have.
Money Purchase (Defined contribution) - same as a private pension except that your company may or may not contribute.
AVC (Additional Voluntary Contributions) - basically a back-up to a company pension. It is just the same as a private pension in its function, in that you pay money in, get tax relief and get the money back as a pension when you retire.
annuity - an insurance scheme. This is the true pension that you buy with your saving scheme fund. It is a promise to pay you an income until you die. When you die it ceases to pay any more (except if it covers your spouse as well). You are obliged to buy an annuity with your pension fund to stop you spending the whole pot on loose women and fast cars in the first year.
State Pension - pay enough NI during your working life and you will be entitled to a small weekly payment after the age of 65.
SERPS (S2P) - second state pension, related to earnings to some degree (up to a cap). Paid for out of NI. Now replaced by S2P, which is stingier for higher earners.
Private pension - basically a saving scheme with a few twists. The good twist is that you dodge tax on what you pay in, giving a 22-40% boost. The bad twists are that once the money is in the scheme you can't touch it until you retire, and when it does pay out as a pension, it is taxable. Oh yes, you also carry all the risk on what the pension ultimately pays - it will depend on how the investments performed over the time you were contributing.
Company pension - comes in two flavours;
Final salary (defined benefit) - company promises to pay you a pension related to your salary. Company has to pay in whatever is required to meet the promise when you retire. Only real risk is if the company goes bust. May require contribution from you. On the whole, this is the one to have.
Money Purchase (Defined contribution) - same as a private pension except that your company may or may not contribute.
AVC (Additional Voluntary Contributions) - basically a back-up to a company pension. It is just the same as a private pension in its function, in that you pay money in, get tax relief and get the money back as a pension when you retire.
annuity - an insurance scheme. This is the true pension that you buy with your saving scheme fund. It is a promise to pay you an income until you die. When you die it ceases to pay any more (except if it covers your spouse as well). You are obliged to buy an annuity with your pension fund to stop you spending the whole pot on loose women and fast cars in the first year.
Pensions are a con - Governments regualrly change the laws, City boys take commission even if they lose you money each year.
No wonder so many people are cheesed off and why so many have stopped saving for old age - any other country in Europe and we would have had the MPs and City boys' heads on poles by now but not here... Us British just take it up the bottom each and every time....
No wonder so many people are cheesed off and why so many have stopped saving for old age - any other country in Europe and we would have had the MPs and City boys' heads on poles by now but not here... Us British just take it up the bottom each and every time....
QUOTE(Bubble Pricker @ Oct 13 2004, 12:56 PM)
I can't write it all up at once, otherwise I'd be here for the next three years.
Some basics:
There are basically two different types of non-state pensions:
- occupational schemes
- personal pension schemes
Occupational schemes are pension funds run by big employers. The most famous one is British Airways', because it was once said about BA that it is a pension fund that also flies some planes. I do not know much about occupational pensions, but basically, they are run by the employer itself, and contributions are usually taken straight from the pay. They can be final salary schemes or defined contribution schemes. Many final salary schemes have been closed recently. As an employee, you usually have no influence over how the pension funds are invested. It is one big pot run by the employer, out of which all current pension enttitlements are paid. If the employer goes bust, the pension fund is ringfenced, but if there is any deficit (as there is in many), then the ringfenced fund can only pay as much as there is left in the fund. As far as I know, if you are a member of an occupational pension scheme, there are restrictions on also having a personal pension. I don't know the details.
Personal pensions are different from occupational pensions. Putting it simply, they are like a savings account where you put your money in, earn a return on it , and later draw a pension from the savings. The only difference to an ordinary savings account is that there are significant tax benefits, even for non-taxpayers, which will greatly increase the value of your fund (by up to 66%), and, as a trade-off to that, that there are restrictions about how much you can pay in and how much and when you can take funds out. The pension you later receive depends entirely on how much funds you paid in and how much of a return you received. The funds are "yours" in that sense, they do not get thrown into a big pot. Your pension fund is your personal fund, hence the name "personal pension".
If your employer is making a pension contribution as part of your salary package or if there is a matched contribution scheme, this does not necessarily mean that you are in an occupational pension scheme. Many employers use what is called "group personal pensions". These are basically personal pensions, and you are free to do with them what you want once you have left that employer. Group personal pensions are usually a bad deal in terms of charges and performance, because some financial adviser has typically sold a high charges/lousy funds package to the employer. Funds should be transferred out of such pensions into a low cost personal pension plan or SIPP as soon as possible. More about this later.
Some basics:
There are basically two different types of non-state pensions:
- occupational schemes
- personal pension schemes
Occupational schemes are pension funds run by big employers. The most famous one is British Airways', because it was once said about BA that it is a pension fund that also flies some planes. I do not know much about occupational pensions, but basically, they are run by the employer itself, and contributions are usually taken straight from the pay. They can be final salary schemes or defined contribution schemes. Many final salary schemes have been closed recently. As an employee, you usually have no influence over how the pension funds are invested. It is one big pot run by the employer, out of which all current pension enttitlements are paid. If the employer goes bust, the pension fund is ringfenced, but if there is any deficit (as there is in many), then the ringfenced fund can only pay as much as there is left in the fund. As far as I know, if you are a member of an occupational pension scheme, there are restrictions on also having a personal pension. I don't know the details.
Personal pensions are different from occupational pensions. Putting it simply, they are like a savings account where you put your money in, earn a return on it , and later draw a pension from the savings. The only difference to an ordinary savings account is that there are significant tax benefits, even for non-taxpayers, which will greatly increase the value of your fund (by up to 66%), and, as a trade-off to that, that there are restrictions about how much you can pay in and how much and when you can take funds out. The pension you later receive depends entirely on how much funds you paid in and how much of a return you received. The funds are "yours" in that sense, they do not get thrown into a big pot. Your pension fund is your personal fund, hence the name "personal pension".
If your employer is making a pension contribution as part of your salary package or if there is a matched contribution scheme, this does not necessarily mean that you are in an occupational pension scheme. Many employers use what is called "group personal pensions". These are basically personal pensions, and you are free to do with them what you want once you have left that employer. Group personal pensions are usually a bad deal in terms of charges and performance, because some financial adviser has typically sold a high charges/lousy funds package to the employer. Funds should be transferred out of such pensions into a low cost personal pension plan or SIPP as soon as possible. More about this later.
Pretty good summary Bubble Pricker.Everyone is good at something in this life and my special subject happens to be pensions! I'm not very good at houses by the way. A couple of points for reference.
Transfers from the worst GPP/PPPs almost always incur penalities. One needs to make a clear assessment before exiting - an immediate transfer might not be wise in all cases. Many SIPPs are not cheap for clients with low fund values - say less than £50K. The price of the transparency is the payment of fixed costs to effect and run the SIPP and one still has to make investments. Many SIPP providers take advantage of the inertia of cash deposits - some pay just BoE base minus 2%!!!!! Also, many 'free' SIPPs are dependent on certain mandatory investments in named funds from the provider ( which happen to pay commission!) so much for cheap!
1. It is no longer the case that GPPs are bad deals as you mention. Stakeholder legislation introduced in 2001 led to a huge improvement in providers' back office systems and most now run PPP/SHP off the same systems at 1% annual management charge or less with no other charges. Many run at 0.5%. This level of charge is similar to that made by non cash ISAs and the majority of institutional investment houses ( those managing the funds for Defined Benefit and Defined Contribution schemes.
Don't forget that OPS are run by Trustees with fiduciary duties - quite separate from the company in law. I'm interested how you quote 66% tax relief. The maximum is at one's highest marginal rate (currently 40%). Were you including tax free cah or something?
Please let me know if you need any tips in future - happy to give you information but not advice. By the way, are you regulated by the FSA? A couple of you last lines looked like advice to me - be careful!! Cheers A
QUOTE(housepricepooper @ Oct 14 2004, 08:18 PM)
I'm interested how you quote 66% tax relief. The maximum is at one's highest marginal rate (currently 40%).
No, I wasn't referring to the tax relief but to the amount by which the fund is boosted as a result of the tax relief. At 40% tax relief, the fund gets a 66% boost. You pay in 60, the fund value after tax relief is 100. That's a 66% uplift.
There are some low cost SIPP options, such as Alliance Trust, which are cheaper even for small funds of only a few k. Alliance Trust is a very low cost broad based investment trust. You can have a SIPP with them, and if you invest all funds in the Alliance Trust, the costs are almost nil. The TER of the trust itself is about 0.2%. The SIPP wrapper has no fixed charge; they charge only for transactions, but in their own trust, they will deal for £1. It is a myth that SIPPs are only for large pensions funds.
If you did not want to invest in shares, you could still use the Allliance Trust SIPP wrapper to buy gilts, where the dealing charge will be hogher, but still attractive. Once low cost strategy would be to save up about £1000, pay into an Alliance Trust SIPP wrapper, then buy long dated gilts to mature in the year when you plan to take retirement. Apart from the initial dealing fee, there will be no further charges, vs. 1% every year in a conventional fund.
QUOTE(Bubble Pricker @ Oct 14 2004, 08:34 PM)
No, I wasn't referring to the tax relief but to the amount by which the fund is boosted as a result of the tax relief. At 40% tax relief, the fund gets a 66% boost. You pay in 60, the fund value after tax relief is 100. That's a 66% uplift.
There are some low cost SIPP options, such as Alliance Trust, which are cheaper even for small funds of only a few k. Alliance Trust is a very low cost broad based investment trust. You can have a SIPP with them, and if you invest all funds in the Alliance Trust, the costs are almost nil. The TER of the trust itself is about 0.2%. The SIPP wrapper has no fixed charge; they charge only for transactions, but in their own trust, they will deal for £1. It is a myth that SIPPs are only for large pensions funds.
If you did not want to invest in shares, you could still use the Allliance Trust SIPP wrapper to buy gilts, where the dealing charge will be hogher, but still attractive. Once low cost strategy would be to save up about £1000, pay into an Alliance Trust SIPP wrapper, then buy long dated gilts to mature in the year when you plan to take retirement. Apart from the initial dealing fee, there will be no further charges, vs. 1% every year in a conventional fund.
Sorry, didn't mean to upset you! Have you ahd a long day? I thought your response was a bit tetchy but maybe it's me that's had the long day! I,ve had a quick look at the site - pretty good but:
1. Investment Trust? These can gear up to invest - have you checked the capital structure of the IT in question - this sounds like a higher risk investment than, say an FTSE Tracker or Long Dated Gilt tracker where no gearing applies.
2. Deposit rates:
up to £9,999 2.50% 2.52%
up to £24,999 2.75% 2.77%
up to £49,999 3.00% 3.02%
£50,000 and above 3.25% 3.28%
Not good! BoE base rate 4.75%. you'd be amazed about how many people invest in a SIPP and leave the money in cash - good moneymaker!
3. Sundry charges
All sorts of small print about commissions and their ability to change terms etc.
Final points: Who is the custodian? Is the SIPP and/or investments covered by the Policyholders Protection Act (broadly covers 90% of guaranteed benefits at date of insolvency) or the Investors Compensation Scheme (only £48K max in same circumstances)?
Like the idea with the Gilts - low risk wrt payment of principal and coupon by could be a big duration risk if you are youngish though
When all is said and done, a transparent SIPP with decent service still costs money somehow - it really does!
all the best and I enjoyed the read
A
There are some low cost SIPP options, such as Alliance Trust, which are cheaper even for small funds of only a few k. Alliance Trust is a very low cost broad based investment trust. You can have a SIPP with them, and if you invest all funds in the Alliance Trust, the costs are almost nil. The TER of the trust itself is about 0.2%. The SIPP wrapper has no fixed charge; they charge only for transactions, but in their own trust, they will deal for £1. It is a myth that SIPPs are only for large pensions funds.
If you did not want to invest in shares, you could still use the Allliance Trust SIPP wrapper to buy gilts, where the dealing charge will be hogher, but still attractive. Once low cost strategy would be to save up about £1000, pay into an Alliance Trust SIPP wrapper, then buy long dated gilts to mature in the year when you plan to take retirement. Apart from the initial dealing fee, there will be no further charges, vs. 1% every year in a conventional fund.
Sorry, didn't mean to upset you! Have you ahd a long day? I thought your response was a bit tetchy but maybe it's me that's had the long day! I,ve had a quick look at the site - pretty good but:
1. Investment Trust? These can gear up to invest - have you checked the capital structure of the IT in question - this sounds like a higher risk investment than, say an FTSE Tracker or Long Dated Gilt tracker where no gearing applies.
2. Deposit rates:
up to £9,999 2.50% 2.52%
up to £24,999 2.75% 2.77%
up to £49,999 3.00% 3.02%
£50,000 and above 3.25% 3.28%
Not good! BoE base rate 4.75%. you'd be amazed about how many people invest in a SIPP and leave the money in cash - good moneymaker!
3. Sundry charges
All sorts of small print about commissions and their ability to change terms etc.
Final points: Who is the custodian? Is the SIPP and/or investments covered by the Policyholders Protection Act (broadly covers 90% of guaranteed benefits at date of insolvency) or the Investors Compensation Scheme (only £48K max in same circumstances)?
Like the idea with the Gilts - low risk wrt payment of principal and coupon by could be a big duration risk if you are youngish though
When all is said and done, a transparent SIPP with decent service still costs money somehow - it really does!
all the best and I enjoyed the read
A
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