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Talk to me about... Pensions?

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bikertomm
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Joined: 03 Jul 2010
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PostPosted: 18:36 - 07 Jan 2014    Post subject: Talk to me about... Pensions? Reply with quote
Alright boys, here to ask trusty BCF about pensions.

I'm 20, self-employed and don't have a clue about them.

Decided it's time to start one really, I've been googling them for a bit and am relatively confused.

I was under the impression I could pay say £150 into a pot a month and the gov' top that up a little, then I get my own little account for my pension and job done.

Is that how it works? Rolling Eyes

How do I start one? Confused

Thankies Thumbs Up Karma
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daemonoid
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Joined: 27 Jun 2008
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PostPosted: 19:16 - 07 Jan 2014    Post subject: Reply with quote
They will not tax you on pension contributions so you can drop £150 in and not have to pay that on your self assessment.

You're in the worst situation really, employers have to match contributions now:
https://www.gov.uk/workplace-pensions/what-you-your-employer-and-the-government-pay

You on the other hand get a lower deal (25%). https://www.moneyadviceservice.org.uk/en/articles/pensions-for-the-self-employed

It's still not bad though. Speak to a company that sells pensions - I use ageonse.co.uk
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bikertomm
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Joined: 03 Jul 2010
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PostPosted: 18:13 - 08 Jan 2014    Post subject: Reply with quote
daemonoid wrote:
They will not tax you on pension contributions so you can drop £150 in and not have to pay that on your self assessment.

You're in the worst situation really, employers have to match contributions now:
https://www.gov.uk/workplace-pensions/what-you-your-employer-and-the-government-pay

You on the other hand get a lower deal (25%). https://www.moneyadviceservice.org.uk/en/articles/pensions-for-the-self-employed

It's still not bad though. Speak to a company that sells pensions - I use ageonse.co.uk


Thanks for that, getting somewhere!

Tom Thumbs Up
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fatpies
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Joined: 01 Mar 2011
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PostPosted: 18:20 - 08 Jan 2014    Post subject: Re: Talk to me about... Pensions? Reply with quote
IIRC if you put in £80 you get tax relief which effectively makes this £100 at the rate you pay tax.

I would however look closely because I know you will be extremely disappointed with the amount which you get out.

While people will talk about compound interest, there is also inflation and discounted future value. Also don't forget pension charges, pensions are subject to relentless pounding by charges.

You thought insurance was bad for changing your address? pension providers are WORSE.

Essentially £10 today is worth more than £10 in the future.

Ask your dad how much a litre of petrol or a load of bread cost, then factor in the increase in costs vs how much you get.
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BrownTrousers
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Joined: 08 Sep 2013
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PostPosted: 18:46 - 08 Jan 2014    Post subject: Reply with quote
fatpies wrote:
While people will talk about compound interest, there is also inflation and discounted future value.

Essentially £10 today is worth more than £10 in the future.


That's true. But its also true of almost any other type of investment.
Pensions mitigate this by easily allowing you to invest in a wider range of assets such as shares or property (rather than just cash, which gets most hurt by inflation) and by offering significant tax advantages over other types of investment.

fatpies wrote:
Also don't forget pension charges, pensions are subject to relentless pounding by charges


Again, totally true - worth shopping round and keeping an eye on charges (usually based on a percentage of amount invested).
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Suntan Sid
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Joined: 07 May 2009
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PostPosted: 00:39 - 09 Jan 2014    Post subject: Reply with quote
Don't bother!

Any, so called, tax breaks you may be tempted by, will amount to sweet FA, once you've been "managed" by your pension provider!

Buy property, buy antiques, works of art, collectables, shares, bonds, anything you can convert to cash when you need it, which, funnily enough, is exactly what pension funds invest in! The only difference being that they charge you for the privilege, year on year on year.

Once you've relinquished your cash, to a pension provider, you won't see it again until retirement, no matter how hard you plead, it's gone until you reach the right age. Even then you can't have the cash, (barring a small lump sum), you are forced to buy an annuity!
Currently annuities, for a pension pot of £100k are paying just over £5k per annum, in other words a fcukin' pittance!

Guess what, that tax free cash, that the gummerment told you, you were getting will be taxed the moment your pension matures!

In the list of slimy, corrupt, shiteness that pervades this country, the pension industry is right there with the worst of 'em!
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Ste
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Joined: 01 Sep 2002
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PostPosted: 00:44 - 09 Jan 2014    Post subject: Reply with quote
No idea how it works but I've got a private pension set up that whatever I pay in, more than that amount gets paid in by the government.

Good financial advice is very useful.
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BrownTrousers
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Joined: 08 Sep 2013
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PostPosted: 05:59 - 09 Jan 2014    Post subject: Reply with quote
Suntan Sid wrote:
Any, so called, tax breaks you may be tempted by, will amount to sweet FA, once you've been "managed" by your pension provider!


Nonsense. Pension charges have been reducing steadily over recent years due to (justified) public outcry and the average management fee on a pension opened in 2012 is just 0.5% of your fund.
Meanwhile as discussed above, you are automatically given 20% tax relief by the government when you contribute, by way of them topping up your £100 to £125. And then a sensible expected rate of return on your pension fund investment might be 7%


Suntan Sid wrote:
Guess what, that tax free cash, that the gummerment told you, you were getting will be taxed the moment your pension matures!



Rubbish. When you finally draw down on your pension, you can usually take up to 25% of the total value as a lump sum completely tax free. You are then taxed on the remaining amount as your draw it down each month. The tax rates may have changed by then, but generally this is still better than being taxed on it when earned since you will have more favourable tax allowances when you are old.

Suntan Sid wrote:
Buy property, buy antiques, works of art, collectables, shares, bonds, anything you can convert to cash when you need it, which, funnily enough, is exactly what pension funds invest in! The only difference being that they charge you for the privilege


Again, rubbish I'm afraid. In reality the key difference is the various taxes you will be paying on these investments compared to the nil tax you would be paying on a pension fund.

Earn money - Income tax.
Use whats left to buy property - Stamp duty land tax
Use whats left to buy shares - Stamp duty reserve tax
Use whats left to buy other assets? Maybe VAT
Going to wait for these assets to appreciate in value then sell them - Capital gains tax
Or if you die whilst still holding some - inheritance tax.

Also, keeping track of these investments and knowing what they are worth is much harder than with a pension fund, where you receive annual statements. Pension funds are also protected by the PPF whereas if you really want to save up for your retirement by buying expensive stuff, the costs of insuring it all would need to be factored in too.

suntan sid wrote:
Once you've relinquished your cash, to a pension provider, you won't see it again until retirement, no matter how hard you plead, it's gone until you reach the right age.


This one's true. This is seen as the main drawback of a pension, although you could argue that this removes the temptation to blow it all on a mid life crisis and end up living out your retirement in poverty.

Ste wrote:
Good financial advice is very useful.

This.
There are many different types of pension and many other types of investment too. In reality everyone is different and a mix of pension and more accessible investments (cash ISAs etc.) and paying off debt is probably best, especially if you are self employed.
As ever with pensions, the younger you start to contribute, the less you need to contribute to maintain a decent standard of living upon retirement, so you are in a decent position.
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angryjonny
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Joined: 01 Sep 2006
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PostPosted: 10:21 - 09 Jan 2014    Post subject: Reply with quote
Spread it around a bit. Savings, ISAs, pensions, shares, property, safe deposit boxes etc. Hopefully by the time you retire at least some of it will be left.
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Aff
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Joined: 05 May 2011
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PostPosted: 10:29 - 09 Jan 2014    Post subject: Reply with quote
Whilst I agree that pensions aren't really worth it unless you get significant employer contributions. My main reason for not having one (apart from the minimum amount I pay into the auto enrollment scheme) is that I want my money when I am most likely to use it. I don't see myself needing much money when I'm 70 (if i make it that far) but I will defiantly want money before then. Having invested money that I can choose when to draw out is what I want, so I can spend it when I will actually enjoy it.
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fatpies
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Joined: 01 Mar 2011
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PostPosted: 10:43 - 09 Jan 2014    Post subject: Reply with quote
BrownTrousers wrote:

7%




Which is a similar figure advertised to many, the actual growth was around 4% nominal, of which 2% was real growth. This was the trend for the past 19 years in the US.

Similarly Gordon Brown's famous -26% pension 'growth' during his tenure.


BrownTrousers wrote:

This one's true. This is seen as the main drawback of a pension, although you could argue that this removes the temptation to blow it all on a mid life crisis and end up living out your retirement in poverty.


Pension or not most of us will be living in poverty.

£100K pot nets £5K a year, so you need twenty times the pension pot. More pessimistic figures put this at fifty times.

The OP will be putting in £2160 inc tax relief.

On a linear basis he will put in £86400, any growth is cancelled out by discounting future value and inflation. Hell my pension pot, was worth less than I put in after a few years...

But lets humour you and say over 40 years it doubles in value to:

£172800

So he gets £8640 a year not bad.

Except by 2054, at 5% inflation this £8640 is worth £1170

Except inflation is NOT 5% I think its somewhere around 13%which means he gets out about £32 a week in TODAYS money in terms of purchasing power.


Life hacker commonly writes articles and talks about the power of compound interest, discounted future value makes their articles nonsense.
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daemonoid
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Joined: 27 Jun 2008
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PostPosted: 13:41 - 09 Jan 2014    Post subject: Reply with quote
Aff wrote:
Whilst I agree that pensions aren't really worth it unless you get significant employer contributions. My main reason for not having one (apart from the minimum amount I pay into the auto enrollment scheme) is that I want my money when I am most likely to use it. I don't see myself needing much money when I'm 70 (if i make it that far) but I will defiantly want money before then. Having invested money that I can choose when to draw out is what I want, so I can spend it when I will actually enjoy it.



They are worth it as stated above. People who are self employed get 25% top up from the government and tax free at point of deposit. Where else do you get an instant 25% increase in your money?

In the longer term, my pension seems to've been bobbling around the 5.5% mark after charges - I have a spreadsheet and everything.

fatpies calculations are a good point though, they show things from the worst case. They are a stark reminder that you should not rely solely on a pension... Assets are important too... property (particularly your own) as well as alternative physical investments (art, gold or anything rare really) an ISA should be seen as an emergency or savings fund of sorts rather than an investment fund. Oh, and avoid premium bonds unless you have all the above covered Wink
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Aff
World Chat Champion



Joined: 05 May 2011
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PostPosted: 15:09 - 09 Jan 2014    Post subject: Reply with quote
daemonoid wrote:


They are worth it as stated above. People who are self employed get 25% top up from the government and tax free at point of deposit. Where else do you get an instant 25% increase in your money?


I would rather take the 25% hit and have the money when I will enjoy it.

Going by my family history, I wont be much use when I'm 70.
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daemonoid
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Joined: 27 Jun 2008
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PostPosted: 16:21 - 09 Jan 2014    Post subject: Reply with quote
Aff wrote:
I would rather take the 25% hit and have the money when I will enjoy it.

Going by my family history, I wont be much use when I'm 70.


You can retire at 55 with a personal pension. You can get it earlier if you get ill and at the contribution rates of only a few percent of your income you'll never notice that extra money anyway.

I've never quite understood the argument "I'll enjoy it while I still can", for most people it means "I'll do nothing special with it and never even think of it as an enjoyment"
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