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Jason

Starting A Pension (To Avoid 40% Tax)

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With this low level of contribution, and without employer contribution matching at this late age I fon't think you should bother.

You should have started before you were 21 and at a much higher rate of contribution if you were going to. The fees, having to buy a rubbish annuity, the tax been taken when you retire etc mean you may as well blow it on a night out once a year. imho.

If you do bother then get a sipp, buy shares once a year in one trade (and re-invest any dividends).

If I was you then I'd pay off the mortgage first btw. Every £ you pay off the mortgage early will save you another £ i.e. a 100% return.

Starting a pension to save 18% of £790 (40% - 22%) then having to buy an annuity with any gains you may or may not get seems a bit silly. again imho.

Edited by ader

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With this low level of contribution, and without employer contribution matching at this late age I fon't think you should bother.

you may as well blow it on a night out once a year. imho.

I disagree with that totally....buy £700 quid of lottery tickets and spend £90 on a night out once a year.

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Increase your effective tax relief by getting your employer to do salary sacrifice (look it up).

Are there other things you can get your employer to pay for if you have salary sacrificed?

The biggie for me would be my rent, I would be massivle better off if I could do that. Can it be done?

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Basically, assuming you don't spend the money but do invest it for when you retire you xan do it either in a pension or not.

Personally I think having to buy an annuity is what ruins pensions.

If you put the £790 into a pension government tops it upto £1000 but then taxes you when you take it out - which may be 20% or may be 50% : who knows?

If you do fantastically well and on aggregate achieve 5% per year, you will have beaten most professional fund managers and have a pot containing £3200

but you have to be taxed when you take it out and have to buy an annuity with most if it - so you might get £120 a year.

If you just do it yourself outside a pension with after tax money you'll be investing what £500 and with the same level of returns have a pot containing £1600.

When you retire you can spend that £1600 on booze, women and cars in your first year and then get a state pension after you've blown it :)

Edited by ader

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Basically, assuming you don't spend the money but do invest it for when you retire you xan do it either in a pension or not.

...

When you retire you can spend that £1600 on booze, women and cars in your first year and then get a state pension after you've blown it :)

You assume there will be a state pension available when you want to retire

Good luck

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If you have any kids then I'd be inclined to put that £500 (and more) into a their pensions - £500 turns into £1m before 65 years are up at 5% per year compounded. lol.

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That's for him to decide. There might be a point of principle at stake. I started my SIPP to avoid the "40%" tax, and its value today is more than twice my total contributions.

He specifically asked for advice, and is no doubt smart enough to do whatever seems best to him. The potential growth is completely orthogonal to the question of whether to invest in a pension or in some other way, especially for someone with a trivial amount to invest.

A large part of that? A competitive SIPP has charges starting at £0.00, depending on what you hold in the SIPP.

It's complete fiction that you can get a SIPP for free, although I would *love* to be proved wrong. You might think that 0.5% is not much, but it's every year for 20-40 years. It might be capped, but that does not help if all you have is e.g. an opted-out SERPS fund. The bottom line is that if your fund is small then at least 10% of it will disappear in SIPP-specific charges. That in itself will likely negate any advantage.

I know there are funds you can invest in that are apparently free to hold in some SIPPs. However, they tend to be more expensive than unit-linked pensions.

Likely, yes. Though if the contributions stayed that low the pension would be well below the tax threshold (bearing in mind, pensioners get much more generous tax thresholds than working people). And at age 30 he'll be past the worst of the pension squeeze.

To reach 40% would imply a very substantial pension. At today's rates, a seven-figure pension pot.

If there still are means-tested benefits when he retires, it's a safe bet the marginal tax rate will be over 40%. This is not easy to predict.

I don't expect a UK government to do anything more unsubtle with private pension pots (stakeholders or SIPPs).

I didn't expect them to print money either, and that was just a few years ago. With a pension there might be decades to go, and then with an enormous crisis right at the beginning.

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I am fortunate enough to have a defined benefit scheme and I consider my meagre contributions to be a gamble on it being worth at least some of what I've been promised. Following on from others' line of thought I probably will be making additional pension arrangements from 2013 onwards to counteract the effect of the change in Child Benefit rules. I saw an IFA back in January and obviously the numbers from him looked very appealing :D. I understand the risks of assuming pension rules stay the same for next 30 years but losing out on 2 kids CB is worth nearly £3K of pre tax salary. I'm going to be losing something, I may as well just take the CB cash and put my >40%allowance wages into a pension. Its got to the stage where even if I get nothing back I won't have lost anything, such is the perverse incentive caused by those CB changes.

Probably have to use salary sacrifice and AVCs to make the PAYE tax accounting easier. Oh well.

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It's complete fiction that you can get a SIPP for free, although I would *love* to be proved wrong. You might think that 0.5% is not much, but it's every year for 20-40 years. It might be capped, but that does not help if all you have is e.g. an opted-out SERPS fund. The bottom line is that if your fund is small then at least 10% of it will disappear in SIPP-specific charges. That in itself will likely negate any advantage.

SIPPdeal run by AJ Bell will do the SIPP wrapper for free each year

You have to pay dealing charge to buy and sell of course

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SIPPdeal run by AJ Bell will do the SIPP wrapper for free each year

You have to pay dealing charge to buy and sell of course

If they can do it for free, then the rest of the pension industry is overcharging.

Thats how Neverland earned his fortunes.

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SIPPdeal run by AJ Bell will do the SIPP wrapper for free each year

You have to pay dealing charge to buy and sell of course

They seem to have a £12.50 quarterly charge (however, many thanks for mentioning them as they are cheaper than the alternatives I was aware of). BTW, I get 404s on the FAQ, so could not check if there are any non-obvious investments the charge would not apply to.

http://www.sippdeal.co.uk/Sipp/Charges/

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I thought about doing this for a bit when I tipped the threshold but the amount wasn't enough to make it worth my time to investigate.

Not sure I get the child benefit arguments, I get my £20 a week even though I tip the threshold. I understand this will change in 2013, so no rush? There is a little to gain in childcare vouchers if you joined after April 2011. But those on the old scheme save more by being a high rate payer.

What is actually lost by going over the threshold?

Personally, I think I'd rather have the money in my pocket.

For what it's worth, Id suggest starting a pension sooner rather than later, I'd also suggest diversifying investments. Who knows whether it will be property, gold, or tulips that will be booming in 40 years time. I just don't want all my eggs in one basket.

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+ I'm 30,

Not too old to start but dont leave it any later. If you are starting to pay tax at 40% now, I would imagine you will be paying more 40% tax in years to come.

Look at it this way, get 40% tax relief now, tax free growth and only pay tax at basic rate in retirement. Personally I would not bother if you are a basic rate tax payer, probably ISA's are better, (if you can trust yourslef not to spend it)

++ my employer doesn't contribute,

Find one that does, or better still start a business and skim off all the profits into pensions. I know some people that have beeing doing this for a few years and are projected to going over their lifetime allowances well before they are 55.

From 2012 employers will have to contribute, starting at 1% andf rising to 3%. If you contribute yourself and have a decent employer who tops up with their savings on employers NI (13.8%) you will be surpised how much you can build up.

++ I don't trust pensions

Pensions are just a tax wrapper, as long as you have a SIPP you can control your own investments. In my opinion, you would not go far wrong buying good dividend paying funds right now, get the income ones that buy mre units out of the quaterly / monthly payments. Make sure the TER is low and try not to line an IFA's pocket.

Good luck.

Edited by Crazy88s

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Thanks for all the advice as it's also relevant to me. 29 no pension but just had a pay rise to 45 with a 3% contribution. Will start something next year.

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Anyone know how that works from an employer's contributions point of view? Website just says open it, we'll sort the details out - does that mean they'll close off/transfer in any other accounts i've got, and arrange with employer to put contributions into the SIPP instead?

Short answer, no it doesn't work like that. At the very least you'll have to ask your employer to pay into the SIPP rather than the existing scheme, and they may choose not to and don't have to.

You might find it difficult to transfer the accumulated funds to a SIPP without closing the existing pot and so creating difficulties with the existing employer conribution.

I think you need to look into this a lot more before doing anything.

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You don't avoid tax with your pension. Instead you just delay the taxation till you retire.

Personally I only pay into my stocks and shares ISA. That way I can get my money when I want it and don't have to pay any taxes on profits even if we have a mega bull run over the next 3 decades.

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If you factor in inflation, it means that you will never see a return on even the capital paid in. In contrast my bog-standard BS accounts increased yearly, the cash is ALL MINE and pretty much beyond government dirty tricks or insurance company collapses, well, I'll get the £50K back if it all goes belly up.

Well, after 40% tax, actually you've only got "all" of the remaining 60%. So whilst the BS account may have done OK, it starts with £60 for every £100 the pension starts with.

I stand corrected - but is it not still the case that you can only take 25% as a lump sum? What are you allowed to do with the other 75%?

You can only tak 25% as a TAX FREE lump sum. The other 75% can be drawn as income or other irregular smaller lump sums subject to tax.

lots of people forget the recent stealing going on. However I can only vaguely remember the points/dates:

+ The government changed the law forcing pension funds to buy 'safe' assets, of which mainly consists of government bonds.

+ The BOE then flooded the market with new capital by buying up these bonds, artificially creating competition and pushing returns to record lows.

+ The BOE are about to do it again.

Where on earth do people get that rumour from? Pension funds can invest in whatever they like.

ANNUITY PROVIDERS have to invest in safe assets, which is one reason annuities are so expensive. However, there is now no longer any compulsion to buy an annuity.

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It's complete fiction that you can get a SIPP for free, although I would *love* to be proved wrong. You might think that 0.5% is not much, but it's every year for 20-40 years. It might be capped, but that does not help if all you have is e.g. an opted-out SERPS fund. The bottom line is that if your fund is small then at least 10% of it will disappear in SIPP-specific charges. That in itself will likely negate any advantage.

I know there are funds you can invest in that are apparently free to hold in some SIPPs. However, they tend to be more expensive than unit-linked pensions.

Hi. I'm new to the SIPPS concept. I have 10% employer contribution and am in the 40% bracket.

If I opted for a SIPP is it likely my employer would not contribute? I realise you can't answer for sure but in general...

How much would you say you need to be earning to make a SIPP worthwhile?

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Was looking at http://www.hl.co.uk/pensions/sipp/charges-and-interest-rates - from what i can see potentially no charges from the SIPP provider, only on what i choose to invest in?

Yep. Zero charges if you keep your money in cash. Competitive charges for other things.

I have a H-L SIPP and actually pay their maximum charges of about £16/month, as I hold equities above the top threshold in it. To balance that £16, this month's dividends are about £400.

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The SIPP provider gets kick backs in up front and tail commission from the unit trust provider

Hargreaves Lansdowne are raking in hidden fees from the fund management companies

Half-true. They rebate 100% of the up-front commission to you, their income comes from the trail commission. And that's only for unit trusts (and a few specialist assets like VCT new issues) - there's no trail commission on regular equities or bonds.

It's part of the charging structure built into unit trusts, and H-L have done a lot to bring those charges down from the outrageous levels of a generation ago. That's how they built the business: by bringing the costs to clients down, they attracted lots of clients. Now of course they're one of a number of low-cost providers.

Would you rather they lived off trail commission, or gambled your money on their own account like a bank?

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Not too old to start but dont leave it any later. If you are starting to pay tax at 40% now, I would imagine you will be paying more 40% tax in years to come.

When I was 30 pensions were an unattractive proposition:

  • we didn't yet have SIPPs (or stakeholders)

  • personal pensions really did have outrageous charges

  • company pensions looked ropey, and likely to hit trouble before I hit pension age

  • final-salary pensions, even if they didn't go bust, were useless if you move job

The coming of low-cost SIPPs changed all that: we now have a way to get the full tax advantage while keeping full control, and without pooling the money with anyone. And (if you keep it in cash) a big fat £0.00 in charges.

I started my pension at 47. Now at 50 I've put in £90k and it's worth well over £200k. Never too late!

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Short answer, no it doesn't work like that. At the very least you'll have to ask your employer to pay into the SIPP rather than the existing scheme, and they may choose not to and don't have to.

You might find it difficult to transfer the accumulated funds to a SIPP without closing the existing pot and so creating difficulties with the existing employer conribution.

I think you need to look into this a lot more before doing anything.

Thanks - will talk to HR before doing anything too stupid :)

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  • 293 Brexit, House prices and Summer 2020

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