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Explaining pensions to my children

Nimrod103
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Explaining pensions to my children

#455307

Postby Nimrod103 » November 3rd, 2021, 12:22 pm

My children have reached an age when they are wondering about pensions. Two children have good pension arrangements related to their jobs, but my son is in a modestly paid job and his wife is a self employed teacher. I really am not sure what to say to them. In particular for ordinary rate taxpayers is it better to save in a pension or in ISAs?
Whichever route they go, they need a low cost provider, but also advice and direction on what funds to buy - any recommendations?

mc2fool
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Re: Explaining pensions to my children

#455312

Postby mc2fool » November 3rd, 2021, 12:42 pm

Nimrod103 wrote:My children have reached an age when they are wondering about pensions. Two children have good pension arrangements related to their jobs, but my son is in a modestly paid job and his wife is a self employed teacher. I really am not sure what to say to them. In particular for ordinary rate taxpayers is it better to save in a pension or in ISAs?

All else being equal, from a pure numbers point of view, a pension is a little better 'cos they'll get a 20% uplift on the way in, for which they'll eventually pay for by paying 20% tax on the way out -- but just on 75% of their pension ('cos of the 25% tax free sum), so giving an actual tax rate of 15%. With ISAs you get neither the boost on the way in nor pay any tax on the way out.

Having said that, all else is rarely equal .... :D

pje16
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Re: Explaining pensions to my children

#455313

Postby pje16 » November 3rd, 2021, 12:47 pm

agreed with @mc2fool re the tax angle
I have always put a lot in my pension which is now very healthy
and if your pension is in good shape, explaining why and what "dad" did should go down well

Boots
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Re: Explaining pensions to my children

#455321

Postby Boots » November 3rd, 2021, 1:14 pm

You should certainly encourage them that if there is any kind of employer matching, they should max that out - it's just a free pay rise.

Beyond that it becomes much more tricky:
- Long term lock up until some future (changeable) age - could be good or bad, depending
- Lifetime allowance constraints (not really relevant for your description of your children as they are now)
- A LISA may have the edge for some people

Perhaps the key is "it's a bit complicated", and "don't put all your eggs in one basket".

wanderer
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Re: Explaining pensions to my children

#455322

Postby wanderer » November 3rd, 2021, 1:15 pm

I spent most of my working career heavily focussed on saving in a pension for many years and then watching with dismay as access to it and taxation of it is subject to the short term whims of politicians (access age increasing to 57, lifetime allowances being slashed and now IHT planning benefits seemingly targeted for future attack alongside the usual debates about the future of what used to be called the tax free lump sum.)

I would advocate a balanced approach across pensions and ISAs. The flexibility this offers has a value which needs to be looked at alongside any tax savings. The main wrinkle on this is that a higher rate taxpayer does see quite significantly higher tax savings from a pension and higher rate tax relief may be on borrowed time. Opposite that, of course, is that each annual ISA allowance only lasts for 12 months before it's gone, never to be recovered.

I have overallocated to my pension - which I now won't be able to access until 57 - and underallocated to my ISAs and so have an insufficient bridge to allow for earlier retirement. If I could go back in time I would spread my eggs across more baskets.

dealtn
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Re: Explaining pensions to my children

#455324

Postby dealtn » November 3rd, 2021, 1:21 pm

wanderer wrote:
I have overallocated to my pension - which I now won't be able to access until 57 - and underallocated to my ISAs and so have an insufficient bridge to allow for earlier retirement. If I could go back in time I would spread my eggs across more baskets.


I don't know your situation but if what you are describing is a liquidity problem (access to your sufficient wealth to retire) rather than having sufficient wealth to retire, which appears to be what you are describing, then borrowing against your sufficient wealth potentially creates that liquidity, and a solution.

Urbandreamer
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Re: Explaining pensions to my children

#455325

Postby Urbandreamer » November 3rd, 2021, 1:26 pm

It's dificult to disagree with mc2fool, especially as they add the caviet "Having said that, all else is rarely equal .."

If you have enough then both ISA and pension is IMHO the optimum. If not then there is an argument for a standard investment ISA. In pure money terms it's not as good, however it is a LOT more flexible. The trouble is that you lose out on any employer contribution.

I would also argue that no decision should be set in stone. By which I mean that they should review their position every year. If nothing else they will get closer to any government imposed access restrictions. I stopped contributing to my ISA at 50 and instead opened a SIPP for my surplus. I knew that it would only be 5 years before I could access the money if I felt a need.

You are not going to get a low cost provider that offers "Advice". The closest that you can get from a low cost provider is guidence. As it happens we are likely to open up a SIPP for one of our daughters and her child.Their situation is such that pensions are the better choice. Vanguard is one of the cheapest places for an adult, though they don't do pensions for minors.

As for recommendations, I think that it's fairly hard to go "wrong" with what Vanguard offers. There is also plenty of opinions out there. I like what this guy has to say, though personally I'm not a passive investor.
https://occaminvesting.co.uk/best-vangu ... r-fund-uk/

My SIPP is with A J Bell, which has slightly higher fees than Vanguard. It does however allow me to indulge my hobby of picking things to invest in with far fewer restrictions than Vanguard.

Nimrod103
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Re: Explaining pensions to my children

#455329

Postby Nimrod103 » November 3rd, 2021, 1:34 pm

I have two good DB pensions, the like of which are just not available nowadays, so I can hardly say look at what I have done. I don't know the details yet, but my son's pension is a none too generous DC scheme. I think he contributes enough to maximise the company contribution. But I suspect these modern DC in relatively small companies areally not at all generous.

He may be better off putting more into that DC scheme (if he is allowed to) because the charges are likely to be lower than if he set up a new pension arranged through a broker or high street chain. Any views on that?

Urbandreamer
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Re: Explaining pensions to my children

#455340

Postby Urbandreamer » November 3rd, 2021, 2:26 pm

Nimrod103 wrote:I have two good DB pensions, the like of which are just not available nowadays, so I can hardly say look at what I have done. I don't know the details yet, but my son's pension is a none too generous DC scheme. I think he contributes enough to maximise the company contribution. But I suspect these modern DC in relatively small companies areally not at all generous.

He may be better off putting more into that DC scheme (if he is allowed to) because the charges are likely to be lower than if he set up a new pension arranged through a broker or high street chain. Any views on that?


I can't really comment as there is not enough info about your son's scheme. I have a DC scheme with my employer in addition to my SIPP. The HR department have increased my contributions to it when asked. This is actually more financialy advantagious as it's a salary sacrifice scheme. The only reason that I also have a SIPP is for my hobby investing.
My employers scheme is administered by Aviva and I can login and change what funds I'm invested in from Aviva's available options. Hence I can adjust the risk/reward of the scheme.

However you also mentioned his wife is self-employed. She might need to set up a SIPP.

Loup321
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Re: Explaining pensions to my children

#455600

Postby Loup321 » November 4th, 2021, 2:27 pm

My ex had a DC pension with his former employer. The payroll department automatically deducted the correct amount and put it into the pension provider that they chose. However, the amount they deducted was pathetically small (£11 a month on a £30k salary at first), because it's only the amount over a certain threshold that's applicable, and hence the employers contribution was equally pathetic. I checked their calculation, and it appeared correct, although I wasn't sure that the way they were applying the rules was correct. The pension provider was the People's Pension, and there was no choice of funds, and it was performing pretty badly when I looked into it. However, when he comes to retire, he can probably buy an annuity that will pay a couple of quid a month. Don't assume all employer DC pensions are equal!

My SIPP is with Hargreaves Lansdown, and they have a tool where they will suggest funds you can invest in for your SIPP, based on your portfolio style and amount you have available each month. https://www.hl.co.uk/funds/help-choosing-funds/master-portfolios If you try it out, remember to put the gross amount in part 2, or you'll just have to recalculate everything again. It only suggests funds on the HL Wealth Shortlist, and I've not had a problem with them so far. Occasionally, a fund is removed from their Wealth Shortlist, and then you can decide whether to transfer to another fund or leave it.

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Re: Explaining pensions to my children

#455607

Postby terminal7 » November 4th, 2021, 2:45 pm

Before deciding the platform for a SIPP - particularly if the time horizon is measured in decades - do carefully compare costs. The difference between costs on a low cost platform and, say, HL is dramatic when accumulated over say 30 years. The availability of the majority of funds etc are the same on most platforms. Therefore unless you are intending to invest in a fund etc that is only available on a higher cost provider, you are simply paying higher costs that will eventually cost you thousands. You should also be wary of the funds that are 'pushed' by platforms - DYOR - remember HL and Woodford.

T7


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