Stakeholder Pension fund

In message , pp writes

What do you mean by 'when'? They have done already.

Forget a pension wrapper, stakeholder or otherwise. You are young. Go for it NOW. Invest in good equity base stock picking Unit Trusts, OEICS and ITs. Avoid index trackers unless you are really boring and like mediocrity.

Avoid 'top down' funds.

Invest in an ISA wrapper if you can. Dont be put off by the flack which says ISAs arent worth it. You'll get the ISA wrapper for free. When you want to take the income though you can switch to fixed interest and take the interest as income free of tax or encash capital free of CGT.

Watch out for high UT & OEIC charges.

Search the group archives as the question of what to invest in regularly crops up -

For information on the likelihood of consistent manager or fund outperformance have a browse of the following -

Making derogatory personal comments like this sounds like the sort of thing a financial salesperson would say to denigrate a better product.

A pension plan would be better than an ISA if the op is made redundant and has to claim benefits.

Daytona

In message , Daytona writes

And would be completely useless if he needed to get at the dosh,

Would a pension not be better because he gets his tax rebated into a pension, therefore getting instant growth on his money?

Obviously no access to it until he retires though.

"Phil Deane" wrote

Don't forget that pensions are taxed when in payment. Hence in fact, if your marginal tax rate is the same, getting tax relief "now" then receiving money back later after tax is removed from the payment, is the same as no relief "now" but also no tax to pay "later" :-

Scenario1: Imagine you put 7,800 into a pension "now", get tax relief of 2,200 giving

10,000 initially, then get (say) 7%pa return over 30 years. You will have a "pension pot" from which your benefits are bought of 76,123 - suppose this buys a pension of 4,000pa. If your marginal tax rate is still 22%, you only receive 3,120pa to spend.

Scenario2: Now, suppose you instead put the 7,800 into a different tax-free investment, but without the initial tax relief being received, although the return is the same 7%pa. You start with 7,800 now, and will have 59,376 at retirement. If 76,123 buys a 4000pa pension, then 59,376 will buy: (59376/76123) x 4000 = 3,120pa - ie same as for a Scenario1!

Hence the only benefit of a pension policy is the tax-free lump sum - the one that some commentators say the government should remove(!); -- unless your marginal rate of tax will be lower after retirement than before, which could easily be the case (eg you are a high-rate taxpayer now but expect that you won't be after retirement!).

"Daytona" wrote

How could (s)he possibly know whether (s)he will "need" some money in ten years time, let alone in 20 (or more) years times? The OP is below age 30 - they will not be able to get money out of a pension policy for at least 20+ years (assuming they are not a professional golfer, a footballer etc etc).

Because they were asking about stakeholder pensions, not non pension investment, and I'm sure they were aware you can't normally get to the money until 50. So they've already accepted that condition.

Daytona

My son who has a disability has hardly worked since leaving school. He has been on many training courses, held a couple of temporary factory jobs and is currently at college yet again trying to get a basic NVQ. Whether it will lead to a job I know not.

He is now 27 years old and has two daughters by a relationship which has now split. He remains on good terms with their mother and has regular access.

I am concerned that he has as yet no pension provision other than whatever the state may provide in 20-30 years time, and I would not like to fall off the perch myself thinking he would have an old age spent in relative poverty.

He is hopeless at managing money so it would have to be a provision that would not be whittled away beforehand.

I have thought about Stakeholder pensions but receive so much conflicting advice that in the end I/he have done nothing.

What do the good people here think?

They may have accepted the condition but that isn't the same as knowing whether they will need it.

Peter Saxton from London snipped-for-privacy@petersaxton.co.uk

What rules do they use to determine which proportion of the pension counts as returned capital? I'll bet it's not as generous as saying the first £59376 you draw are capital (i.e. you get 19 years' pension tax free) and if you live longer you start paying tax. :-(

The annuity rate posited by Tim is much less than the investment growth rate. Since scenario 2 does not require you to buy an annuity, why not simply leave the investment in place, and live off the 7% tax free growth? That way you'd get £4156pa tax free for life and still have the full £59k pot to leave to the cat&dog home when you snuff it.

Well, apart from "because the 7% is not guaranteed"? And who says the annuity *is* guaranteed? :-)

"Ronald Raygun" wrote

The regulations require you to calculate an "expectation of life" - which is essentially just an annuity rate at an interest rate of zero. They prescribe the mortality basis to use - this was "a(55)" last time I was involved in these, but as that was a table designed to be valid in the year

1955, they may well have prescribed a new mortality basis by now!

So, if the annuity rate is 20.0 and expectation of life is 25.0, then for

10,000 used to buy an annuity you get 500 per annum of which 400pa is classed as "capital content". You would get taxed (normal marginal rate) on the extra 100pa.

Nope, afraid not that simple!

Well, they were just figures put in very quickly to try to illustrate the point - you shouldn't be comparing them or taking any other conclusions from such arbitrary figures!

Well, that is a possibility that you don't get with a pension policy!

"Ronald Raygun" wrote

LOL!

If you want to provide for him after your death, then you need to make provision in your will. Perhaps a trust fund to be set up from which he can be given a regular income after he has reached a certain age? If he dies before you, then you have retained control of the funds.

Actually it's not £122, it's £128 and a bit, you get £22 for each £78, not for each £100.

But that's not how it works. You earn £100. You either put it all into a personal pension (the taxman taxes £22 away, you put the £78 into the pension, and the taxman puts the £22 there too), or you let the taxman keep the £22 and you put the £78 into the ISA.

Now you sit back and do nothing for 30 years while your money grows.

30 years growth at 7% means your money multiplies by a factor of 7.6 so the pension fund would have grown to £760 while the ISA would have grown to £593.

Then you convert the cash mountain into an actual pension. If you use the pension fund, it will buy you a fully taxable annuity. If annuity rates are 5%, the £760 will buy you £38 per year minus tax, i.e. about £30. If you use the ISA fund, you can buy an almost tax free annuity, so the £593 will buy you about £30 per year.

OK?

How can this be? You put £100 into an ISA you have £100.

You put £100 into a Personal Pension, and you have £122, as your tax is refunded. A gain of 22% instantly?

Agreed

In message , Phil Deane writes

Its £28.20. I.e. 28%.

No, the tax free lump sum currently biases it in favour of pensions, and obviously it depends on what the tax rates actually are.

On the face of it it might be suitable. Another possibility would be a trust, but you'd need expert advice for that.

Understood, However, how about the amount of our personal allowance? Depending on the pension you might have a portion of it tax free anyway.

And a similar number of people get out more than they paid in by living longer. It's a gamble, yes, but which way of "losing" is preferable? (a) lying on your deathbed thinking "drat, I wish I hadn't bought that annuity, I didn't get very good value out of it." (b) still being in perfect health and coming to the end of your savings, thinking, "if I'd bought an annuity 20 years ago, I'd still have an income and not be facing destitution".