Page 2 | Pensions / investments thread

amandass · 2023-10-08T12:06:09+00:00

Hello, I can’t find the original threads but some of us were pooling ideas / motivation etc with regard to pensions and investments … and I can’t find the thread anywhere. So my question is - my pensions are all performing less well recently. I’m sure this is universal but erm what’s everyone else’s strategy? I’m 15 years away from retirement… I’m now a low earner due to poor health. I have various pensions totalling about £160k in different places.

YankeeDad · 15/10/2023 10:50

A word regarding gilts and how risky they are: in general, for stocks as for gilts, right after they have gone down a lot they are often less risky. With gilts specifically, when the guaranteed interest rate to new investors was very low, it was possible to lose money but not possible to make money. Now, with initial interest rates for new investors being so much higher, the potential return is higher, and I would also argue that the risk is lower, at least for shorter duration gilts.

messybutfun · 15/10/2023 21:56

About trying to time the market: You may get lucky but historically if you only missed a handful of the best days it would have hugely reduced your gains over the long term.

There are a number of complaints going through FOS at the moment about one pension provider who moved everyone into 100% gilts one year before their retirement date. The first two of these complaints have just been rejected. Due to the provider not giving advice but rather acting as execution only. Some of the people have lost 40% in the last year and are even down a lot over 5 years.

This should be a bit of an eye opener for people who don‘t take advice and don‘t know what they are doing. But of course, they are likely not to read about this boring stuff.

messybutfun · 15/10/2023 22:12

Technically that is correct - if annuity rates double and your fund value halves, you will still get same amount.

However, it ignores the fact that those annuity rates were bad value and very few people opted to buy one.

Pawtucketbrew · 15/10/2023 22:14

YankeeDad · 15/10/2023 10:48

@Pawtucketbrew I cannot give advice what to do specifically, as I do not know your full circumstances, but I can suggest to consider a few factors you may wish to consider:

-As a general rule, for most people it is beneficial to have an "emergency fund" of available cash before starting to invest, in case they have an unexpected expense. The size of this should take into account the amount of available money and the likely scenarios in which cash could be needed. For example, a person who drives to work and has an old, knackered car might want to consider putting aside cash for a car instead of investing it for anything other than the short term.
There are ways of getting some interest on the emergency fund, at very low risk, to partially offset inflation. For example, NS&I offers government-guaranteed savings accounts that can be withdrawn at any time with very little notice.

-Fees are very important for all investors because for whatever risk the investor accepts, the more fees are taken, the less return is left for the investor. For the pension as well as for the savings, make sure you know what all of the fees are. It should be possible to get all-in fees below 0.5% (including fund fees and platform fees) if you choose your own investments, even with a small amount such as £10k. In my personal opinion, anything over 1.5% (including fund fees, platform fees and advice fees) is definitely too much, even if you get advice of some sort (could even be so-called "robo-advice"), and below 1% may be a happy medium. Fees should be compared against the expected total return rather than against the size of the asset pool. So for example, if the hoped-for market return on a certain asset mix is 6% and the fee is 1.5%, then the fee is actually eating up 25% of the hoped for return, while the investor still bears 100% of the risk. Fees cannot be avoided completely because skilled people with expertise are needed to manage money and/or give advice, but they need to be watched carefully.

-As a general rule, most people choose not to invest money into stocks and shares that they think they might need within the short or medium term. Even though stocks have tended to go up in the long term, over a shorter period (anything less than 5-7 years in my view) the risk of losing capital value in the stock market is quite high. However, for the longer term, some people would argue that the risk of losing purchasing power to inflation by not owning stocks is an even higher risk, so some exposure to stocks is therefore needed to have a fair chance to protect the purchasing power against inflation. Also, the main way of making money through stocks is capital gains, which are taxed at a meaningfully lower rate than income, which helps for investments held in a general taxable account (ie not in a SIPP or pension)

-For UK residents who pay income tax in the UK and not anywhere else, saving into an ISA can be an attractive option. There is no tax deduction upon putting money into the ISA, but then within the ISA, the money can earn interest or gains tax free.

-Extra, voluntary pension contributions create restrictions on how and when the money can be accessed, but in exchange for that there are some important upfront tax advantages. It is, however, important to remember that at least 3/4 of the income and gains within a pension will ultimately get taxed as income As a general rule, pension contributions may be worthwhile for individuals who are higher-rate taxpayers or above, particularly if they expect to become basic rate taxpayers in retirement. Again, though, whether this is a good idea or not depends on your circumstances.

These may be less specific than what you wanted but I hope it helps somewhat.

@yankeedad Thank you. That's really helpful. Am going to have a think about what you've said and do some more research.

Woollyguru · 18/10/2023 16:31

@YankeeDad sorry but your information is incorrect.

Basic rate taxpayers on salary sacrifice pensions save 32% on tax and NI when paying into a pension.

You can take 25% tax free. And after that you still use your annual tax free allowance of approx £12500 when drawing from your pension so the overall tax free amount you can take is greater than 75%.

So it's absolutely worth it for basic rate tax payers to pay into a pension. There are plenty of YouTube videos explaining how pensions beat ISAs every time even after paying tax on pension withdrawals over the basic rate threshold.

YankeeDad · 18/10/2023 17:10

Woollyguru · 18/10/2023 16:31

@YankeeDad sorry but your information is incorrect.

Basic rate taxpayers on salary sacrifice pensions save 32% on tax and NI when paying into a pension.

You can take 25% tax free. And after that you still use your annual tax free allowance of approx £12500 when drawing from your pension so the overall tax free amount you can take is greater than 75%.

So it's absolutely worth it for basic rate tax payers to pay into a pension. There are plenty of YouTube videos explaining how pensions beat ISAs every time even after paying tax on pension withdrawals over the basic rate threshold.

Thank you for making your very helpful and important point about NI contributions and salary sacrifice. I fully agree that if an individual can have access to the salary sacrifice mechanism for extra pension contribution, they will end up gaining more on the order of 32% at the moment of contributing, and perhaps even more, if the employer is willing to make an additional pension contribution to reflect that the employer NI contributions have also been reduced.

Also, I should indeed have written that "up to 75%" of the money taken from the pension pot gets taxed as income, except for people with pension pots larger than £1.073 million who might end up paying on more than that given the cap on tax-free cash. I do believe that many people who are well below that cap will still end up paying tax on nearly 75% of money coming out of the pension pot, and will avoid tax only on the 25% tax-free portion and perhaps a bit more, because other income sources will use up most if not all of that £12,500 personal allowance. For example, if they have a full state pension, I believe that will be £11,500 from April 2024, leaving just £1000 of the personal allowance available.

I assume you meant that the overall tax free amount can be greater that 25%, not that it is greater than 75%, ie I assume that 75% was a typo. So the effective tax rate on that pension income can end up being 15% or a bit less, for a taxpayer who is at basic rate both while working and also in retirement. Yes, that is better than the usual 20%, even for taxpayer who cannot use salary sacrifice. But against that, if the money had gone into an ISA, instead, the original contribution would have been taxed, but after that all of the gains and income would be totally tax-free. Also, that money will be accessible if needed.

So while I am definitely not saying that extra pension contributions are never worthwhile for a basic rate taxpayer, I am saying that looking at specific circumstances is useful because there are many scenarios in which those extra pension contributions are not the best option for a basic rate taxpayer, and alternatives such as ISAs are worth considering.

On the other hand, for an additional rate taxpayer or higher rate taxpayer who is also perhaps closer to retirement age, on the balance of probabilities, if they are not exceeding the annual allowance (and assuming the penalty charge on accumulations exceeding a certain level does not get reinstated), the net tax relief from making the extra pension contributions is much more likely to be high enough to justify the restrictions and embedded tax liabilities that pensions carry.

My bottom line opinion at the moment would be that for a higher rate taxpayer who is not hitting up against allowances, or for a basic rate taxpayer who can use salary sacrifice, extra pension contributions will often be a good idea if they can afford the lack of access to those funds for a long time. Conversely, for a person who values the flexibility more and/or may be a basic rate taxpayer with no salary sacrifice available,

Thank you again for having pointed out the inaccuracies you noticed, and especially the very important point about salary sacrifice and NI contributions. I really do appreciate it.

messybutfun · 18/10/2023 21:20

Perhaps another important point of pensions needs pointing out: They are outside of your estate.

And if you die before the age of 75, your beneficiaries will get the whole lot tax free. For now.

Woollyguru · 21/10/2023 16:46

@messybutfun I think labour will get rid of that perk sharpish. They're definitely anti passing on wealth to the next generation and anti wealth in general. We're maxing out our pensions but at the same time very much doubt we'll be able to pass it on IHT free. I've read that a tax free threshold may be introduced for pensions. Will have to wait and see.

Woollyguru · 21/10/2023 16:51

@YankeeDad yes that was a typo! And agree every case is individual.

My plan is to take out the tax free lump sum and put into ISAs. Then withdraw personal allowance from pension every year and top up from ISAs until state pension age. Then live off state pension and ISAs and withdraw any remaining personal allowance from pension.

Whether the plan will work in 7 years time when I hope to retire remains to be seen. I'm sure labour will scupper it in some way.

lizkt · 25/10/2023 17:08

@woollyguru, since the state pension will make up the bulk of your personal allowance, do you anticipate you'll need to pay 20% income tax on the remainder of what you take out of your personal pension for that tax year?

This is what I'm trying to get right in my head, what will be taxed. I'm guessing we do not pay NI on anything we take out above personal allowance.

I'm thinking not to take a tax free lump sum up front but to take 25% each time I drawdown.

Woollyguru · 25/10/2023 18:52

@lizkt yes we'll have to pay tax on anything above the tax free allowance. We have BTL which together with state pension will cover our every day expenses.

My plan is to take out the tax free lump sum and put it in ISAs to cover the gap between retiring at 60 and when the state pension kicks in at 67. The BTL income plus ISAs should be enough and the most tax efficient.

You could take the 25% on each drawdown and you can then effectively have around £16k pa tax free which includes your personal allowance. But that will then be used up by the state pension when that kicks in. Unless they raise the threshold which I can't see happening.

The tax burden is only going to keep rising as the UK is in serious debt, has a rapidly aging population and a shrinking tax paying worker base. Not great. We'll gradually pay more and more and more for less and less in public services.

lizkt · 25/10/2023 19:07

Thanks, makes sense. What's BTL?

nomoretoriesforme · 25/10/2023 22:36

Slightly off topic. I read it somewhere that in the future the state pension will be mean tested. What's the likelihood of its happening from your perspective?

Woollyguru · 25/10/2023 23:38

@lizkt buy to let. They are a lot of hassle but do provide a steady income.

@nomoretoriesforme I don't think it will be. But they will keep putting the age up probably to 70. That would be a lot easier than means testing.

I've started JSIPPs for my DC. Tbh I'm more worried about them than I am about myself given the state of this country. They will definitely not have a state pension.