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Private Pension

05/11/2018

The Basics

What is a Private Pension?

Pensions are just long-term savings accounts with very appealing tax perks which basically means we get free top-ups from the Government. 

They can now be managed online - you can either choose what sort of investments you have or get an expert to manage it for you. You can start a DIY pension from about £50 a month AND you get free top-ups too. Have a look at our Best Buys - maybe this isn't all as painful as you think!?

In a nutshell

• You get free money from the Government (hallelujah)
• Basic rate taxpayers get a free £20 for every £80
• Higher rate taxpayers get £20 more on top
• Money locked away till you’re 55+
• As always there are caps and limits so read on...

Is It Right For Me?

Good if you ...

  • Can set aside money till you're 55
  • Want freebie top-ups
  • Want to minimise inheritance tax

Not Good if you ...

  • Need flexibility and access
  • Don't pay tax
  • Have expensive debt to pay off

People like you ...

Only

14%

of UK adults have a personal pension outside of their workplace

The Numbers

The Benefits

  • Enforced good behaviour - keep savings locked away till retirement
  • Freebie top-ups from Government
  • Lower tax bills for higher rate taxpayers
  • Use to keep income beneath any higher tax brackets
  • Mostly shielded from inheritance tax

The Detail


Pensions for 40 somethings - An Audio Guide

40-somethings are in a weird limbo. Too young for generous final salary schemes. And too old for the new workplace pensions to have gathered any pace. This guide talks pensions for people who know what ra-ra skirts, Adam and the Ants and Grange Hill are.


Retirement Cocktail

How strong is your retirement cocktail?

You dont have to be a master mixologist to create this triple shot pension highball. In this video Holly takes you through all you need to know.


How much do I need?

Most of us simply don’t have a clue what we need to retire on. Or what the number in our pension savings actually could mean for an annual retirement income.

Here are some basic rough numbers because you often tell us you want some anchor points as a sense-check. The usual caveats apply as we don’t know your situation, what markets will do, what the Government will do, how long you’ll work for blah blah.

State Pension. Take the number of years you’ve worked for and multiply by £4.75. That’s a rough sense of your weekly State Pension. Thirty years? Could be an annual pension of about £7,400.

Workplace Pension. Check out your statements for a projected retirement lump sum. Or use the Money Advice Service pension calculator. As a rough guide, a 40-year-old on £30,000 a year might build up £120,000 based on minimum contributions by the time they retire. All sorts of caveats here folks so a rough guide only.

Private Pensions. The last component. What do you project you will have saved by retirement age based on your contributions today?

We used the Money Advice Service calculator. Based on a 50-year-old earning £50,000 a year, with a pensions saving stash of £70,000 already and assuming minimum workplace contributions, the calculator suggested a retirement lump sum of £125,000. Add this to the State Pension from age 67, and the estimated annual income was £12,750.

Either use the calculator to get your estimate. Or divide your total anticipated pensions savings lump sum at retirement by 20, and add the State Pension to this, to get your total retirement cocktail number.

If it’s not big enough we can delay retirement and work longer, or pay in more to a pension today. Unfortunately there aren’t any other more palatable options!


What is a SIPP?

SIPP is just an off-putting name for a sort of DIY pension which you manage yourself, typically online. It stands for ‘self-invested personal pension.’ As the name suggests, SIPPs were really invented for all those people who were fed up of their pensions disappearing into an information black hole which spewed out an unintelligible 25-page snail mail report at you once a year.

To understand SIPPs, you have to get rid of this idea that a pension is a complete thing in its own right. A pension is just a container with its own set of tax rules and access rules about the money inside it. What actually goes into this container is not necessarily an opaque decision which you hand off to a distant ‘propeller head’. Every time you put some cash into the SIPP, you then decide what investments to buy with your cash, and therefore you control how your retirement savings are deployed.

As a quick reminder on the “why would I bother with a SIPP” question, it’s the bribe of free money from the Government who need to incentivise you to save so they lessen the pain of millions of broke 100 year olds to sort out. Basic rate taxpayers get £20 for every £80 put in. Higher rate taxpayers can claim a further £20 back on their tax returns.

Visit our pensions Best Buy pages where we’ll tell you who we like and also share the feedback from 1,000s of pensions customers today.

 

Reader questions

How much can I pay into a Pension?

The maximum amount you can pay into your pension scheme in a tax year, assuming you are earning more than £3,600 per annum, is 100% of your earnings. But for tax relief purposes, the current annual allowance for most people is £40,000, so you can’t go beyond this. This is what is known as a first world problem, along with Waitrose running out of avocados.   

If you get your hands on a lump sum of money – inheritance, sell a business, get a whacking bonus – then you can use previous years’ allowances and contribute more, so read up on that.

The rules for higher earners are more complex. Anyone whose total income is over £150,000 a year will get a reduced annual allowance. For every £2 earned above £150,000, the allowance tapers down by £1, resulting in anyone earning over £210,000 receiving an annual limit of £10,000 in tax relief.

Higher earners take note – the lifetime allowance is currently £1,030,000 (rising to £1,055,000 from April 2019). This means there is no point in saving more than this into a pension before you retire or you get taxed to the max.

Although this lifetime limit sounds like loads, if you start saving early and your investments do well, it could impact you. Middle managers in the public sector, for example, are not immune! A senior teacher? High up the healthcare career ladder? Worth thinking about whether this will impact you.

If you’re 40 now and saving into stocks and shares in your pension, don’t forget to factor in stock market growth! For example, £350,000 over 20 years with an average return of 5% will get you to the million pound mark.


At the lower end of the earnings spectrum, don’t be put off by these high numbers. You can also start a pension with a direct debit for a relatively small amount such as £50 a month – sometimes less. It really is worth starting as early as you can – even if you think that your tiny little dribbles won’t make much difference.


How much should I pay for a pension these days


There are three basic elements to the charging structure:

  • Admin fees – annual administration fee for providing the pension - this will usually be between 0.35% and 0.5% each year and will be levied by the company you open up the account with.
  • Dealing charges – fees charged when you buy or sell funds or shares. It’s normally about a tenner to buy a share and buying funds is usually less or free.
  • Fund manager fees – an annual charge from the fund manager for managing your investments. This will apply if you buy managed funds inside your pension which is the typical structure. This is usually about 0.75% every year.

Most people wonder why it can’t just be bundled together as a single and simple fee but the regulator has been clear that it wants people to know what they are paying for what parts of the overall service. Much like the Ryanair model where you pay to have a sandwich and a pee!

All in, I don’t think any of us should be paying more than about 1.3% a year. So £13 on every £1,000 invested. The biggest variable will be the investment charges and these will vary from lower-cost ‘passive’ funds to higher cost ‘active’ funds. If you’re in what is called a ‘passive’ solution then you should be paying less than 1% all-in.



What can I put into my SIPP?

You are allowed to put some cash, shares, investment funds and other assets into your SIPP. The whole concept is to deliver choice. You can’t put residential property in there – like a holiday house – but you can sometimes include commercial property. At that point it all gets horribly complicated and you’ll need a good financial adviser.

Most of us will be happy to choose a decent range of funds. It depends on how much money you have in here, but as a rule of thumb between 8 to 12 investment funds should be enough. Enough to spread the risk around different sectors, regions and asset types – but not so many as to completely dilute the decisions or value a fund manager is adding.

Confident savers may prefer to choose their own range of individual shares but we wouldn’t suggest this path for the newer investor.

If you don’t want to research a pool of funds and you aren’t sure what to do, look at using a single multi-asset fund. This is a great way to start for the less confident who are starting to save small(ish) and regular amounts into a SIPP.


Help me choose

 

Our Best Buys page will show you who we rate and why. We also segment the providers according to who is the most helpful for less experienced and less confident investors.

www.boringmoney.co.uk/best-buys

 

In our recent Consumer Investment Awards co-hosted with The Telegraph, AJ Bell Youinvest took the prize for the Best Online Pension Provider as voted by consumers.

 

In our recent Consumer Investment Awards co-hosted with The Telegraph, Hargreaves Lansdown took the prize for the Best Communications in Pensions as voted by consumers.

Where Can I Get One?

Our independent team has scoured the markets, set up test accounts and really put these companies through their paces. Hargreaves Lansdown score well on service – reassuringly pricey and the Waitrose of pensions. AJ Bell Youinvest are more like Sainsburys – decent, solid and everyday. And Aviva is probably the Morrisons – a large brand, low on frills, which will offer a decent and simple service for people who want a household name.

 

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