Slap bang in the middle of my attempt to work out a plan to pump up my S&S ISA enough to let me stop work at 60 the Chancellor throws a spanner in the works by reworking defined contribution pensions.
Pensions are the one part of financial planning that I've never really had to plan. I'm a public sector worker with a final salary (soon to be career average) defined benefit scheme that (along with my state pension, rent from our small flat and what's left of the savings) will be enough to let me live comfortably at age 66 (it should be around £12,000 if I manage to keep it intact.) Salary sacrifice, annuties, SIPP's, PPs and stakeholders - all things that I haven't needed to concern myself with. I've only needed to know how LGPS works and what I can expect it to do for me.
However these last few days have been full of "all things pension" as I've had to start reading up and researching due to the changes introduced in the budget last week. Where once personal pension planning was just something that only applied to other people, it now promises to be an opportunity to help me with my early retirement plan.
Actually, I haven't always been totally faithful to my DB pension. Eighteen years ago when I had just started back at work on a part-time basis after spending 10 years at home looking after the kids, the Co-Op men came on their yearly visit. (We are northerners with the kind of backgrounds that mean that, if we were going to do financial business with anyone, it would be the CO-OP). They sold us a Platinum Bond (we had just come into a small inheritance) and, for the lady, a FSAVC. Whether they should have done this is up for debate (and in fact I'm not sure that they would be allowed to do so now considering that I was a Local Authority worker with a final salary scheme which I could have been paying extra into instead), but I'm jolly glad they did.
I've never stopped paying my small monthly sub and it is now worth about £16,000 (predicted £22,000 by 2019 when I can draw it) and it can be taken when I'm 60. The tax-free lump sum already figured in my calculations to buy me free time between 60 and 66 but now it looks as if I will be able to up my payments and use the whole lot during those years. An incredible opportunity, especially given that anything I put in will have a further 20% added to it by the taxman.
In the course of just one week the value of that small monthly payment has increased dramatically. From being worth about £5,000 when I needed it and then £450 pa when I didn't, it has now gone up to £22,000 that can be used exactly when I want it with the added benefit that putting more in gives me even more gain. It just goes to show that the "value" of money and the time that it is needed are woven closely together, they form a whole and are virtually meaningless in isolation. How can you possibly know how much money you need if you haven't plotted your income against your timeline?
Plan B Arrives
After some careful calculations as to what is the optimum amount to put in (around £250 per month I think) I have decided to beef up my payments into the FSAVC to the level that I will have enough at 60 be able to draw just the right amount each year to keep my taxable income below the threshold, and take the rest of what I need to live on from the ISA.
Just to be sure that this is the right thing to do I've spent the weekend researching whether I would be better transferring it into a personal pension as it is one of those rather difficult to understand "with profits" creatures. However from my reading it seems to be invested in a CIS fund that isn't performing too badly at the moment, it's low volatility and not charged too steeply. I've decided to wait for my annual statement which is due any day and maybe ask a few questions but then hopefully be able to avoid the fees associated with moving it anywhere else, up my monthly payments and forget about it (just like I have for the last 18 years).
Sometimes inertia does seem to pay.
How about Plan C - buy a low-cost stakeholder pension. The observation would normally be considered ungentlemanly, but since you may be close to the age you can extract this as cash, you would gain added flexibility. You could use a money-market (almost cash equivalent) to take out all your taxable income as you come up to retirement. I made sure I paid no income tax in my last year of working using my (company) AVC, but the change in the rules means you can take a DC pension out as of 55.
ReplyDeleteThanks ermine, I'll certainly look at that - I always thought that stakeholders were for people who were also getting contributions from their employers. More research needed. Flexibility at my (our :-)) age is a big advantage :-)
Delete> I always thought that stakeholders were for people who were also getting contributions from their employers.
DeleteNo, not at all. Take a look at the forms on Cavendish Online who are frequently recommended as a reasonably low cost place on moneysavingexpert's pensions forum (also well worth a look)
DC pensions come in
basic - stakeholder, usually lowest set-up and running costs, smallest choice of funds but when I looked more than enough to meet any investing strategy including cash
mid-range - personal pension, wider choice of investment funds, fees a bit more
SIPP - full flexibility to put in almost anything stock-market investment you can buy. Fees tend to be highest, so this is more for the well-heeled
As you can see form the forms on Cavendish, your employer can contribute, as can anybody else should you have generous friends ;) and so can you, there's space on the form for all of them, but it can be just you.
I analysed what would happen if I as a non-taxpayer earning n'owt put in £2880 a year for four years into a SIPP - the one with highest costs but available to me next week. Starting this year (ie by next weekend) and hold in cash, depreciating at 3% inflation. I basically gat a real return of 4% p.a on riskless cash after paying annual and exit fees, because of the tax advantage. As an impoverished non-earner HMRC take pity on me and give me £720 a year if I put in £2880 There isn't anywhere else I can go to get a real return of 4% on cash - it's almost as good as the reputed 5% real return on long term equities. I can't not do it. It would be rude.
As an earner you can do better than me ;)
The advantage of a modern DC pension compared to your CIS WP pension is that the underlying investment performance is transparent. A WP fund is basically whatever the WP provider says it is. You can't compare it with anything. Whereas if you put Vanguard FTSE100 into your stakeholder/PP/SIPP then you can compare the performance by looking up the index performance. If your stakeholder is short by more than the entry, platform, annual and exit fees then you can jump up and down and insist it be put right. And you get to know what all those fees are.
Pensions are a bear to get your head round, but they can be understood. I highly commend moneysaving expert's pensions board which has lit up in activity since the Budget
Thanks ermine, you catch me (just) post-SIPP with Fidelity which I signed up for this afternoon. I know you say SIPPs are generally more expensive but this is charged at 0.35% plus any fees for the funds I decide to invest in. I hope this looks competitive?
DeleteI haven't chosen funds yet so my £1,000 initial payment stays in cash for the meantime whilst I try to work out where the pension fits in with the rest of what I've bought/intend to do when my ISA finally gets transferred, but whatever I go for I will be careful not to pay too heavily for it.
This pension fund is never going to grow very large as it's only intended to see me through those tricky years between 60 and 66 so I didn't see the % fee as too much of a problem. Taking a SIPP out with iii (where I have my S&S ISA) would have cost me £120 plus trading fees whereas it looks like I might me able to "swop" funds with Fidelity for free. I'm currently waiting for the paperwork...
My decision regarding the CIS FSAVC is still on hold until I get the annual statement but I totally understand your comments regarding transparency (or lack of it). Maybe it can be transferred into the SIPP and reinvested. I'm moving on.. hopefully in the right direction. Thanks again for your input. :-)