Personal Pension

[Steve vRS]

This thread has saved me starting one!

I am joining a small company that will pay 10% of my basic salary (on top of my salary) into a 'pension'. I can also make tax free contributions (40% tax payer, 39 years old).

I have two other pensions. A frozen final salary one that I paid into for 8 years and a DC plan that I will leave and freeze when I leave my current employer.

I take it I should get a good financial advisor. How are these paid - a one off payment or do they take a cut of the 'pot'.

Steve

[Newc]

Addition to 4 on SIPPs

Because a SIPP is yours and completely separate to your employment, you can hold one at the same time as a company pension if you want to. You would make contributions to it and reclaim the tax back, so it is still tax free. There is a limit on the maximum amount you can put into all of your pension plans per year.





5. If not a pension, what other things should I look at for the long term ?

As we have discussed above, a pension is just a set of rules around one way to achieve long term savings. There are other ways to save for the long term, which is what we’ll look at now. I’ll break them down into investments, savings, and assets.

By investments I mean the things we discussed earlier in pensions – funds, bonds, trackers and so on. All of these things are available outside a pension plan. You can save monthly amounts with a fund manager, you can open a brokerage account and invest in worldwide markets, you can be a direct investor in a business. You should make decisions about market sectors and economies which you believe are worth investing in for your personal timescale and invest purely on that basis, and only then consider ways to make those investments more tax efficient.

The most common tax wrapper outside pensions is an ISA. If you make investments inside an ISA any returns are income and capital gains free. Your initial investments are made from after-tax income though. There are no time restrictions on accessing money held in an ISA, unlike a pension. In fact I would go so far as to say that if you are a taxpayer you should always use an ISA to make stock investments if you can.

At the more spurs-jangling, rifle-totin’ end of the scale are Venture Capital Trusts and EIS schemes. I cannot stress enough that these are strictly for the kind of cash that you would be happy to come home and find had been put on the bonfire by mistake. You cannot access them at all unless you can show you are a sophisticated investor, but if you are then they have two big advantages – enormous tax benefits for higher rate taxpayers, and potentially access to early stage investment that is hard to get to as a retail investor. They are also 8 to 10-years-plus timescales, so are suitable for pension planning.


Savings are just that: cash you put aside. A tenner a week under the mattress for forty years yields a pleasing 21k. Unfortunately, if you factor in 4% annual inflation for that same period, your 21k will be worth about 2.5k in today’s money, which is not going to get your yacht very far out of the harbour.

Cash savings should of course go in to an interest bearing account. The institutions offering cash savings rates will show you no loyalty and will try and give you a kicking on the rate at the end of the period; you should return the favour by shopping around for the best rate, and moving your savings frequently to keep up. Banks and building societies also offer short term bonds, usually for up to three years, which can be useful if you know you will need x amount guaranteed on a certain date to meet a future bill. There are also cash-only ISAs, or you can hold some cash in a shares ISA with the same tax advantages.

Your cash savings will always earn less than the inflation rate. So while you should always try and keep some cash on hand for the short term, it’s not a good way to meet your retirement planning.

There is also now a halfway house between cash savings and market investments; peer to peer lending. The most well known are zopa and funding circle, and these platforms offer a risk / reward ratio which should be slightly better than inflation alongside a feeling that you are helping out businesses and individuals rather than faceless corporations grinding the faces of the workers etc etc. I view these platforms as a minimum 5 year timeline and an interesting place for a small part of your portfolio. There are no tax efficient ways into them as an individual though.

And finally, assets. Traditionally in the UK this has meant property, both domestic and commercial, but we can include agricultural land, physical commodities, and ‘alternative investments’ – things like wine, art, rare cars and jewellery.

Once again, your investment decision into any of these things should be driven primarily by your view of their likely returns and suitability for your circumstances. Their tax situation should be a secondary consideration, and it is worth noting that the further away you move from something that is regarded as an ‘official’ pension holding the more likely you are to have significant changes to tax rules.

All the things in this class share certain characteristics: they cost money to own (insurance, repairs, storage); a significant part of the return has to come from price appreciation rather than yield; they are illiquid and transaction costs are likely to be very high. If you have an appropriate timescale – 10 years minimum for most I would say – then they can be viewed as part of a pension plan. In fact you should definitely consider the more liquid end such as high quality property with a good history of adequate yields as a core part of your planning. What you should not do is put 100% of your pension into a single buy-to-let and assume that house prices only ever go up. If your name was Katsuo and you bought a house for 100k in 1989 in Tokyo as your pension plan, you would be selling it today for about 25k. Hans in Germany and BillyJoe in Florida have similar stories.


Up next
- How do I decide where to put my savings, whether in a pension plan or not
- What happens when I retire

[steve789]

Thanks Newc, your article is very interesting.

[Welshbeef]

Newc - your words of wisdom here are very much appreciated.
Think I could learn a lot from you over a beer or two

[groak]

Newc said:

5. If not a pension, what other things should I look at for the long term ?

..... In fact you should definitely consider the more liquid end such as high quality property with a good history of adequate yields as a core part of your planning. What you should not do is put 100% of your pension into a single buy-to-let and assume that house prices only ever go up. If your name was Katsuo and you bought a house for 100k in 1989 in Tokyo as your pension plan, you would be selling it today for about 25k. Hans in Germany and BillyJoe in Florida have similar stories.......

Sorry to disagree, but...the more liquid end of the property market has never been the high quality end and most certainly isn't now. But one market that's always been fast moving and for many agents right now is the only end that's moving at all is the bottom end (esp to cash buyers). And in my experience, very good rather than 'adequate' yields are what btl investors are after. I'm afraid that, once again, whether it's Mombasa or Manchester, the very good yields are always at the bottom rather than the high quality sector. Let me exemplify. Right now I have a high quality suburban property in Glasgow for sale. It values at £800k. I am hoping that at £725k it will sell within FIVE YEARS. I'd be surprised if it would rent for more than £2500pcm fully and lavishly furnished. OTOH for £725k it would be very easily possible (via local estate agents' windows) to buy 30 market ready lower (not bottom) end properties which would rent for AT LEAST £10kpcm. As INVESTMENT BTL properties what would YOU buy? And which do you think are more liquid? High quality £800k detached houses yielding 4% or £25k lower (not bottom) end letting concerns yielding 15%?

But that raises another point. If the purpose of the btl is to provide an income in retirement (what Joe Punter thinks of as a pension) what does liquidity or sale value matter anyway? The point is to provide INCOME, not capital gain. They say that 90% of retirement annuities are of the fixed rate type. So using your own example, if 65 year olds Katsuo, Hans, and Billy Joe had bought standard annuities in 1989 with £10k they would still be producing, say £75 a month. If 65 year old Jimmy in Glasgow had spent £10k on a lower end flat in 1989 it would currently be producing £350pcm.

Now 88, Katsuo Hans and Billy Joe (and their families) have really only the imminent disappearance of the annuity income to look forward to. Jimmy (being a Glaswegian) died 20 years ago. His flat's income helped his son pay his mortgage, paid the bulk of his grandson's bills during the uni years, and will soon be doing the same for his great grandson. In 2008 it could have sold for £60k. Currently it would go fast at £45k and slower at £50k. But, more interestingly, how much will it be renting for in 2112 and what will it be worth then?

I think you've provided a very good swift structural overview of what's currently available on the 'pension market', but I'm afraid the property understanding isn't really in line with reality.

[Welshbeef]

We may never see such a housing bubble again in our lifetime that bubble was extreme funded by the irresponsible lending. But Mr Magoo who did do that made a lucky choice what if the market had properly crashed he couldn't get tenants for love nor money and it just wasn't selling suddenly zero monthly income.


Lots of different types of investment are the best as that way your spreading the risk and clearly reducing maximum gain if one asset class booms.

[Manks]

Welshbeef said:

We may never see such a housing bubble again in our lifetime that bubble was extreme funded by the irresponsible lending. But Mr Magoo who did do that made a lucky choice what if the market had properly crashed he couldn't get tenants for love nor money and it just wasn't selling suddenly zero monthly income.

Lots of different types of investment are the best as that way your spreading the risk and clearly reducing maximum gain if one asset class booms.

You're referring to the resi market yes? Why do you think a market crash would (have) mean(t) a shortage of tenants? Intuitively you'd think such an event would enhance demand, wouldn't you? Certainly the current subdued market has elevated tenant numbers markedly.

Was buying real estate lucky? For many, yes. But after 2007 for others it was good judgement, in part based upon the correct assumption that government would do everything possible to support the market.

[groak]

Welshbeef said:

We may never see such a housing bubble again in our lifetime that bubble was extreme funded by the irresponsible lending. But Mr Magoo who did do that made a lucky choice what if the market had properly crashed he couldn't get tenants for love nor money and it just wasn't selling suddenly zero monthly income.


Lots of different types of investment are the best as that way your spreading the risk and clearly reducing maximum gain if one asset class booms.

There are a variety of standard misconceptions here apart from the one already pointed out re. tenants. One classic is the 'risk spreading' idea. To use an analogy, it's like installing satellite TV because you think it's impossible to have 150 simultaneous channels of shyte

[Welshbeef]

Manks said:

You're referring to the resi market yes? Why do you think a market crash would (have) mean(t) a shortage of tenants? Intuitively you'd think such an event would enhance demand, wouldn't you? Certainly the current subdued market has elevated tenant numbers markedly.

Was buying real estate lucky? For many, yes. But after 2007 for others it was good judgement, in part based upon the correct assumption that government would do everything possible to support the market.

Well lets give an example that as many are buy to let landlords on SVRs (I am) what if rates escalate notably ? Rents are already at all time highs it means sucking some yield which could be for the long term.

I too bought right at the lowest time in the market in 2009 also in the dip in 2005 also in the dip in 2003 and I rode the wave well in 2000 and earlier. Hand on heart this was very lucky and I'd estimate buying at the right time on the houses I have has paper money cleared me a tidy £380k+ upside though I would say that the last two I was watching the market very sharply and decided that's really good value ad hopped in it just happened to be the bottom if the market at those times.

I also bought some woodland years ago... Now call that foolish roughly the price of a nice M5 new yet selling well how? What's its use? Nothing. Does it gain value? God knows there appears to be no market. Did consider setting up a paintball comoany in it but doubt I'd be permitted as its a lovely quiet walk I the trees

[Manks]

Welshbeef said:

Well lets give an example that as many are buy to let landlords on SVRs (I am) what if rates escalate notably ? Rents are already at all time highs it means sucking some yield which could be for the long term.

A lot of true BTL loans are on reversion rates that we are unlikely to see the like of again. From memory, a lot of Mortgage Express stuff is at 1.5% OBR, I have got some 25 year stuff at about 1.8 over 3 months LIBOR. If rates rise markedly, and I don't think they are going to for some time, I will be surprised to see them rise above the level they were at when these loans were taken out. So if they could be serviced back in the middle noughties, they can certainly be serviced now that rents are up 40%.

Are we going to see rents under pressure? Nothing would surprise me anymore. But based upon what we know at the moment, I doubt it. I can see the UK being a magnet for immigration for some time to come and I don't see houses being built quick enough to mop up the demand.

[Newc]

The purpose of my postings was to describe as simply as possible the various retirement savings options available to people, because I see the same questions coming up repeatedly. I’m explicitly not trying to suggest that one route is better or worse than another, because that’s what I see as the core of most of the questions – people are searching for ‘the one right answer’ and I don’t think there is one, there are too many variables based on individual circumstances.

My point on the housing, which I absolutely stand by, is that there is a cultural belief in the UK that the only thing you need to consider for retirement planning is to buy as many BTLs as you can get your hands on, because property is a one way bet and it’s all you’ll ever need. I think that’s a dangerous belief.

There seems to be some interest, so I’ll crack on with the next couple of points.

[Manks]

Newc said:

My point on the housing, which I absolutely stand by, is that there is a cultural belief in the UK that the only thing you need to consider for retirement planning is to buy as many BTLs as you can get your hands on, because property is a one way bet and it’s all you’ll ever need. I think that’s a dangerous belief.

Agreed. Real estate is my business and when my wife says, "ooh, James and Samantha are coming over on Saturday, they want to pick your brains because they want to get into property for their pension" my heart sinks.

Newc said:

There seems to be some interest, so I’ll crack on with the next couple of points.

Yes, very interesting stuff, carry on.

[GBB]

Manks said:

Newc said:

My point on the housing, which I absolutely stand by, is that there is a cultural belief in the UK that the only thing you need to consider for retirement planning is to buy as many BTLs as you can get your hands on, because property is a one way bet and it’s all you’ll ever need. I think that’s a dangerous belief.

Agreed. Real estate is my business and when my wife says, "ooh, James and Samantha are coming over on Saturday, they want to pick your brains because they want to get into property for their pension" my heart sinks.

+1. I've looked at BTL quite a bit over the last decade but the yields going into the market (certainly round here) were paper thin if any, yet people are still buying. There must be a price correction due at some point, as I can't see what's keeping prices so high (other than people still believing property is a one way bet, lack of returns elsewhere and artificially low interest rates (reads like "what have the Romans done for us there!)).

I'm luck that I bought my property close to the bottom of the early 90's house price crash, I lost £2K on my first one but that was small beer relatively, 35% increase on the following one after 3.5 yrs!

[Manks]

GBB said:

+1. I've looked at BTL quite a bit over the last decade but the yields going into the market (certainly round here) were paper thin if any, yet people are still buying. There must be a price correction due at some point, as I can't see what's keeping prices so high (other than people still believing property is a one way bet, lack of returns elsewhere and artificially low interest rates (reads like "what have the Romans done for us there!)).

I'm luck that I bought my property close to the bottom of the early 90's house price crash, I lost £2K on my first one but that was small beer relatively, 35% increase on the following one after 3.5 yrs!

I think there are various facets to it, including "you cannot go wrong with bricks and mortar", flight to something familiar in bad times and not understanding the maths.

But if someone is buying a property in cash or with low gearing, in an area they know and are prepared to drop cash into it when needs be, where'e the harm.

[ringram]

Indeed, if thats the mindset then thats where the money will flow and by implication the capital gains.
Nothing but a horrendous route will change it.

Forgive the following cliche attack..

Its all based on the bigger fool theory, if the next fool has no money the merry go round stops and bobs your uncle the emperor is standing there in his birthday suit.

[Manks]

ringram said:

Its all based on the bigger fool theory, if the next fool has no money the merry go round stops and bobs your uncle the emperor is standing there in his birthday suit.

Can you explain how you think bigger fool theory applies to buying property as a pension?

[GBB]

Manks said:

ringram said:

Its all based on the bigger fool theory, if the next fool has no money the merry go round stops and bobs your uncle the emperor is standing there in his birthday suit.

Can you explain how you think bigger fool theory applies to buying property as a pension?

Guessing the answer is it doesn't if your yield is healthy, if you're relying on prices or rents to rise then it's a gamble.

Affordability on property is pretty low, implying high "greater fool" risk.

As the sage of Omaha said (well close to it) - "the time to be be fearful is when others are greedy, and to be greedy only when others are fearful."

Assets are best bought at the bottom to maximise returns - the difficult bit is spotting when that is. I'm probably better at spotting it with cars than the property market.

[jonny70]

groak said:

Sorry to disagree, but...the more liquid end of the property market has never been the high quality end and most certainly isn't now. But one market that's always been fast moving and for many agents right now is the only end that's moving at all is the bottom end (esp to cash buyers). And in my experience, very good rather than 'adequate' yields are what btl investors are after. I'm afraid that, once again, whether it's Mombasa or Manchester, the very good yields are always at the bottom rather than the high quality sector. Let me exemplify

But that raises another point. If the purpose of the btl is to provide an income in retirement (what Joe Punter thinks of as a pension) what does liquidity or sale value matter anyway? The point is to provide INCOME, not capital gain. They say that 90% of retirement annuities are of the fixed rate type. So using your own example, if 65 year olds Katsuo, Hans, and Billy Joe had bought standard annuities in 1989 with £10k they would still be producing, say £75 a month. If 65 year old Jimmy in Glasgow had spent £10k on a lower end flat in 1989 it would currently be producing £350pcm.

Now 88, Katsuo Hans and Billy Joe (and their families) have really only the imminent disappearance of the annuity income to look forward to. Jimmy (being a Glaswegian) died 20 years ago. His flat's income helped his son pay his mortgage, paid the bulk of his grandson's bills during the uni years, and will soon be doing the same for his great grandson. In 2008 it could have sold for £60k. Currently it would go fast at £45k and slower at £50k. But, more interestingly, how much will it be renting for in 2112 and what will it be worth then?

I think you've provided a very good swift structural overview of what's currently available on the 'pension market', but I'm afraid the property understanding isn't really in line with reality.

On a 40k property yielding 350 a month ,10 percent . What would be the average running costs? Assuming mortgage with 25% /agent fees /repairs ,what would profit be as you said the money is made when the property is bought from the yield.

Im looking at a 60k 2 bed flat property yielding 500 pm so that 10 % if I put 25% down , how much beer money approx would i have at the end of the month is £150 unrealistic?

[groak]

jonny70 said:

On a 40k property yielding 350 a month ,10 percent . What would be the average running costs? Assuming mortgage with 25% /agent fees /repairs ,what would profit be as you said the money is made when the property is bought from the yield.

Im looking at a 60k 2 bed flat property yielding 500 pm so that 10 % if I put 25% down , how much beer money approx would i have at the end of the month is £150 unrealistic?

Johnny there are so many possibilities with the scenario you outlined that a genuinely informative answer would be next to impossible.

BUT

My missus has owned a 40k property that makes 350pcm for about 15 years. It was decently set up and is well managed and maintained. After all costs and without financing she netts about £3kpa.

I notice you're in east ren. If you're really interested you can drop into my office at our agency in Dennistoun and rake through the computerised records of my own properties on the CARL system. That'll show you exactly pretty well to the penny what the realtime figures on btl are.

[Manks]

groak said:

Johnny there are so many possibilities with the scenario you outlined that a genuinely informative answer would be next to impossible.

BUT

My missus has owned a 40k property that makes 350pcm for about 15 years. It was decently set up and is well managed and maintained. After all costs and without financing she netts about £3kpa.

I notice you're in east ren. If you're really interested you can drop into my office at our agency in Dennistoun and rake through the computerised records of my own properties on the CARL system. That'll show you exactly pretty well to the penny what the realtime figures on btl are.

How long have you been using CARL, Groak?