web chat archive

Web Chat Archive

Does your pension need attention?

Are you unsure of the best way to save for your future? Are you worried you may not be able to put enough aside for retirement?

Whether you’re approaching retirement, actively saving for your future or haven’t started at all, help is at hand in our live webchat today.

Alliance Trust Head of Pensions, Hyman Wolanski answered your questions about pensions, please see below for the answers.

Transcript

Host: Hello everyone and welcome to today's webchat. Hyman is with now us and getting ready to take your questions.

Hyman Wolanski: Hello everybody...looking forward to your questions...

buy-to-letter: Why can't I hold residential property in my SIPP?

Hyman Wolanski: Actually, you are allowed to hold residential property in a SIPP but there are two main problems with this: 1.There would be a punitive rate of tax charged on the residential property, even if you rented the property out to a third party who wasn’t connected with you. 2.Not all SIPPs are equal and one of the main differences between them is the range of investment options that they permit. Most won’t allow residential property, even if you were prepared to pay the tax. A small number will allow all investments permitted by HMRC. Incidentally, it is possible to hold residential property in a SIPP without incurring the tax problems if this is done through a share in a collective investment vehicle that holds at least 3 properties and satisfies various other requirements.

Ben Adams: My son is 24 and been in his firsrt job for over a yr so has a little money saved. Is it worth him starting his pension yet as he still has £4,000 approx to pay off from his student days?

Hyman Wolanski: There are different views on this but I think that one shouldn’t put money into a pension fund unless one is able and prepared to put this away for the long-term. Personally, I think that youngsters, like your son, should pay off their debts and get on to a reasonably firm financial footing before locking away money in a pension. The last thing that youngsters want is to find that they’ve put money into a pension and, as a result, they’re short of cash for more pressing things, like a deposit for a house.

Hi Hyman: Is it really worth bothering with a pension nowadays? So many schemes seem to have collapsed recently

Hyman Wolanski: The usual tax advantages of pensions remain valid. The failed schemes, which are a terrible problem for those affected, are usually company final salary schemes and there is now some limited protection for members of such schemes.

ML Crosdale: I have approximately £150000 which I will like to invest for my pension which is just under two years away. Excluding all the usual Isas, Premium bonds etc Where can I put it to grow to match inflation without any threat to the capital; and frankly I want someone to convince me that it is financially safe to retire as I feel financially incapable of making that decision. We have a home and one abroad mortgage free

Hyman Wolanski: You’ve really got two separate decisions to make here. The first is how you should invest your money and the second is the vehicle to use for this purpose, e.g. should you invest the money personally or put it into a pension, etc? With regard to the first question, there are index-linked Savings Certificates which are guaranteed to give a return of inflation plus interest. However, the shortest one is for a three year period. There are also Government-backed index-linked bonds. With regard to your second question, the issue is the usual one, i.e. are you prepared to put up with the restrictions that apply to pensions as the price for getting the associated tax benefits.

Nicola: I am single, no dependents, in my late forties and have no pension provision, and no spare funds to save for one. I know many other men and women of my age in this situation. What can you advise us to do please?

Hyman Wolanski: Well, obviously if you do not have the spare money to save for retirement, then pensions are no good for you. Pensions only work really well where you have money that you can afford to lock away for retirement. If you haven't got any personal or company pension arrangements, then you are likely to be dependent on the State pension.

KWD: I have a SIPP with Alliance and am investing the maximun in each tax year, but i'm finding asset allocation between funds a bit of complex - do you provide a service to manage the portfolio?

Hyman Wolanski: I'm glad to hear that you’ve got a SIPP with Alliance Trust. In common with most SIPP providers, we simply provide the ability to invest your pension fund in a wide range of investments and we don’t provide any advice on investments. It’s up to you to decide how to invest your pension fund. And if you need any help there’s no shortage of investment advisers to help you.

Chris Essery: the teachers pension scheme accrues at a 1/80 th per years service so 1 years service is then valued by multiplying it by 20 giving a value of 20/80ths. Taking 25% of this as a lump sum gives a lump sum allowance of 5/80ths. The pension scheme itself pays a lump sum of 3/80ths. How can I access the other 2/80ths lump sum per years service? Can I start a SIPP and add its value to the teachers scheme value and then take more than 25% of the SIPP as a lump sum? i.e. up to 25% of hte total value

Hyman Wolanski: The amount that you can take as tax-free cash depends not only on what HMRC will allow but also on the rules of your pension scheme. With regard to the Teachers’ pension scheme, you can only have 3/80ths as tax-free cash. You can, in addition, take out a SIPP, or a stakeholder or personal pension scheme, to top-up your retirement income and you can take 25% of the fund you build up in this way as tax-free cash.

Manoj: do you think pension fund managers should be incentivised on performance rather than fixed fees?

Hyman Wolanski: When this has been tried, it generally doesn't work. This is because fund managers generally do their best - as you would expect and imagine they would try to - and it is difficult to perform better than your best! Indeed, there could be a real danger that a fund manager would take higher investment risks if they felt they would potentially make more money as a result.

vic: how to invest £100k not too much risk

Hyman Wolanski: ‘Risk’ is a complicated concept. Most people use it to mean the risk of losing some/all of your capital. Other people use it to mean the risk of your capital not keeping pace with inflation. The least risk in terms of not losing capital is a deposit with a financially strong bank or building society or National Savings certificates or an investment in short-dated UK Government bonds (often called ‘gilts’). In terms of protection against inflation, this can be achieved by investing in index-linked Savings Certificates or Government-backed index-linked bonds.

Derek Cornish: Does it contravene the age discrimination legislation,fora woman to be able to retire on afull state pension on the 6th April 2010. Where-as a woman who has already retired,or will retire,up to the 5th April will get a reduced pension, if she has not made 30 years of national Insurance contribution?

Hyman Wolanski: The answer appears to be ‘no’ but you’d need to consult a lawyer who specialises in age discrimination for a definitive answer.

David: Do you think Gordon was right to abolish ACT and tax credits on dividends?

Hyman Wolanski: The simple answer is no!

roger mcaree: I am retiring this year at 54.Can I put some of my pension lump sum into a SIP and what tax advantage would thsat give me.

Hyman Wolanski: Yes, you can but you’ll need to be careful that you don’t fall foul of the Government’s ‘anti-recycling’ measures that are meant to take away the tax advantages of doing this. You ought to take proper advice on this. The tax advantages of doing this are: 1. tax relief at your top rate of income tax on the amount paid into your pension fund 2.t ax-free growth within your pension fund 3. you can take 25% of the resulting fund as tax-free cash. But remember that there are restrictions associated with pensions, so think carefully before going down this route to make sure that it really works for you.

Steve: Hi Hyman What do you think is the chance of being able to move accumulated protected rights into a SIPP on an unrestricted basis in the near future ?

Hyman Wolanski: Pretty low. It currently looks as if we will need to wait until 2012 for this to be permitted when the Government reviews all the contracting-out arrangements.

John Reynolds: I thought pensions were supposed to be getting simpler! there still seems to be a lost of confusion out there about which investments are the best! has a-day really been a success?

Hyman Wolanski: A very interesting question. In many ways, A-Day has been a great success and has massively simplified the pension rules. However, there are some aspects of the changes that haven’t gone so well, particularly the position on death after age 75 if you don’t buy an annuity. However, none of this has affected ‘which investments are the best’. No-one knows the answer to this and one of the few things that can be said with any certainty about investments is that higher returns are almost always associated with higher risks.‘

anon: What's the best SIPP provider on offer for me? I like the idea of including commercial property in my portfolio and i probably wont buy many funds over the course of a year.

Hyman Wolanski: I’d probably get shot if I said that Alliance Trust is the best SIPP provider for you so all I can really say is that you’ll need to do some fairly careful and painstaking research to find out which SIPPs allow the investments that you wish to make and you’ll then need to get to grips with their charges, how they function in relation to property purchases and how good a service they provide. It’s worth making the point that SIPP investment in property is often not straightforward.

Nicola: Thankyou. How likely is there to be a State Pension for us when we retire? Especially if the age os lifted to 65 and upwards?

Hyman Wolanski: It depends on whether or not you feel you can trust the Government. All the current indications are that there will be a State Pension but it will provide low levels of benefits and won't be enough to live on comfortably.

Stephen in Barnet: I am not confident my employer pays much attention tothe performance of those investments in which they have invested their staff's pensions in. What should i do? go it alone - help please?!

Hyman Wolanski: If the scheme is a company pension scheme then there will be trustees who control the scheme’s investments (not your employer) and you should, in the first instance, discuss the matter with the trustees. If you’re still not satisfied then you should raise the issue with The Pensions Regulator. If the scheme is a group personal pension scheme then there’s not much you can do but there is usually a range of funds in which you can invest your pension fund. If you want to go it alone then you can do this quite easily, using a stakeholder scheme, personal pension or a SIPP. However, you will almost certainly lose the benefit of your employer’s contributions if you were to do this. Also, there may be other benefits, e.g. life cover, that you give up if you opt-out of the company’s scheme.

jj: Could Gordon Brown face criminal charges for stealing £100bn of our pension funds Hyman Wolanski: Unlikely! But it would certainly be interesting to see it happen. Maybe we will see a dramatised television or film version in the future.

Nick Phillips: how is inflation going to affect my pension?

Hyman Wolanski: Unless your pension is fully index-linked it will lose its real value when there is inflation. Final salary schemes are obliged to provide a degree of protection against inflation but are not required to provide full inflation protection since that is considered to be too expensive. People with private pensions can buy an annuity with inflation protection but that will result in the starting level of the pension being much less than if it is not protected against inflation.

Andreas: I have been unemployed for a short while but am keen to keep my pensions payments going. Is it possible that my wife can contribute to my pension - for the short term at least?

Hyman Wolanski: Yes, your wife can give you money that you can use to pay contributions to your pension but you need to watch the tax relief position carefully. Tax relief is available on personal contributions of up to 100% of your annual earnings or £3,600 pa if this is higher. So, if, for example, you have no earnings for a whole tax year then you should not pay more than £3,600 as a pension contribution if you want full tax relief on your contributions.

Michael O'Neill: When I joined my current firm there were only 6 of us. In the past 2 years it has grown to 11 and the numbers look like increasing. How will this affect our SSAS?

Hyman Wolanski: Prior to A-Day, last April, there were special rules that applied to small self-administered schemes with less than 12 members. Following the A-Day changes, there is no longer any significance in the number of members of a SSAS.

Trevor Popple: I am a 29 year old who still rents, can you advise on whether i should invest in a pension or property first?

Hyman Wolanski: I think that you need to decide first whether you want to buy a property of your own or you want to continue renting. If you want to buy a property then you probably won’t have enough money left over to pay into a pension. If you continue to rent and you have spare money that you can afford to save then you can certainly consider paying it into a pension. However, if you haven’t already done so, you might think about having an ISA first, or any other savings scheme where you can get your hands on the money should you need to do so. At your age, I think that flexibility is particularly important.

Ed Latto: Is there a maximum to the amount you can put into a SIPP p.a? thanks

Hyman Wolanski: No, there is no maximum amount that you can pay into a SIPP but there is a maximum amount of contributions on which you can get tax relief. In simple terms the maximum personal contribution on which you get tax relief in the current tax year is the lower of £215,000 (increasing to £225,000 from 6 April 2007) and 100% of your earnings but you’ll need to knock off from this any employer pension contributions for you. The full rules are much more complex than this.

Noreen Lawrie: Is there an age limit for getting a SIPP I am retirement age but would still like to invest? I wish they had been around years earlier!

Hyman Wolanski: As long as you’re under age 75 you can pay contributions to a SIPP and get tax relief on the contributions. However, you’ll need to be careful to ensure that your contributions are within the tax-deductible level and this is only £3,600 pa unless you have higher earnings than this from employment or self-employment.

david riney: i know that if i setup a personal pension that the government will contribute to it, how does that work ? If i pay in 500 per month from my pay (either before or after tax) how does the government contribution get into my pension fund. Do I need to claim it back somehow - or is it paid automatically ?

Hyman Wolanski: Okay, each £78 that you pay yourself from your net pay goes into your pension fund. The administrator then claims back £22 from the taxman and adds it to your fund. If you are a higher-rate taxpayer then he will claim a further £18 reduction in your tax bill - so that £18 saving is outside your pension fund. This is something that not a lot of people realise - and it's important that higher-rate taxpayers do make a claim from the taxman because this will not happen automatically! With the recent budget announcement that basic rate tax will drop to 20% from next year, each £80 of contribution will attract £20 credit.

Duncan Edwards: How has the budget tax changes affected payments into SIPPS for non-earners and children? Are there any plans to change the limits with the new NPSS scheme?

Hyman Wolanski: The Budget hasn’t really affected payments into SIPPs for non-earners and children, although from April 2008, as a consequence of the reduction in the basic rate of income tax, personal pension contributions will be credited with only 20% tax relief as against 22% at present.

Nadia Taylor: Do I need to pay tax on interst if I use a off shore bank account? i

Hyman Wolanski: I assume that you’re asking the question in the context of a SIPP holding the offshore bank account. In this case, there will be no tax payable in the SIPP. There could be tax payable in the offshore location but this would be unusual.

office-worker: I am 27 yearsold and saving for my deposit. Should I save for my pensions now, or wait?

Hyman Wolanski: Although pensions do have significant tax advantages, they suffer from the disadvantage that you won’t normally be able to have access to the money before your 55th birthday. For this reason, I think that youngsters like yourself should not put money into pensions unless they are pretty sure that they won’t need access to the money early. This all suggests that, since you’re currently saving for a deposit, you shouldn’t be thinking of saving for a pension for the meantime.

Nicola: Thankyou. Given current levels of "trust" in the Government most of my "Baby Boomer" generation really feel we are facing deckchairs on the Titanic. Most are considering trying to "club together" and fund a property - in othr words, looking out for ourselves. Does this make sense to you?

Hyman Wolanski: A lot of people feel that property investment is a better option than a pension scheme. Certainly, it's more tangible and people are comfortable with the idea of property investment. Do remember that property does not always go up in value, and it is not always possible to attract tenants. Also, it might not be easy to sell the property when you need to and you should be careful that you do not put all your financial eggs in one basket. Furthermore, if you are considering clubbing together then remember that this complicates the transaction and could lead to friction if some of the investors want to get out when others don't. Apart from that - it's a great idea (no sarcasm intended!)

Geoff: When the government of the day offered incentives to contract out of serps, I did just that and invested in another Pension with a well known provider. Now at the age of 58, I am being bombarded with suggestions that I should contract back in. Considering that government pensions rarely keep track with inflation, that serps pensions are not transferrable to my wife if I die and that my alternative pension appears to be growing ok and is in my control, is it really good advice to suggest I should contract back in

Hyman Wolanski: Contracting-out is a complicated area, but most experts would say that the way the terms are constructed at your age (and I am even older than you!) you would be better off by contracting back in.

Jeo hardman: I am 40 years old, i have a company pension scheem( i pay 6% they add 8% on top), i rent for now, i have little saving and i am thinking to buy a property should i wait and increase my pension contribution or keep saving for the deposit, i also own a property abroad with no mortgage

Hyman Wolanski: The issue of investing in property as an alternative to a pension scheme often comes up. They are completely different approaches to saving for retirement and as you would expect each has its own set of advantages and disadvantages. You really need to go into these in a lot of detail before making a decision that works for you.

RKennedy: I am putting away 20% of salary (company plus own contributions). I will be retiring in approx 3 to 4 years time. Should I be putting less into my company pension and diverting say 5% into a SIPP? I am in a defined contribution scheme and am not sure that I will want to purchase an annuity on retirement.

Hyman Wolanski: The issue here depends on how much investment flexibility you are looking for and the charges. The answer really depends on how your company scheme works, what investment options it provides and, as I say, the charges. If you really are concerned that your company scheme will take you down the annuity route and you don't want to go there, then it ought to be possible to transfer out of the company scheme and into a SIPP when you are ready to draw your pension. Before any transfer you need to check that there are no penalties involved in the transfer.

Tom: I have a deferred company pension and a stakeholder pension . I plan to retire and take the max lump sum .. Can I take the total equivalent lump some from my stakeholder to max the benefits from the company scheme

Hyman Wolanski: In general, you can take up to 25% of the value of each of your pension entitlements.

Stephen in Barnet: also, would you advice to tell me the various merits (or otherwise) of investing in a final salary scheme? many thanks

Hyman Wolanski: You can’t invest in a final salary scheme but you can join a final salary scheme if your employer offers you membership of such a scheme. Generally, these are good schemes to belong to since they provide a pension based on your salary near retirement and this usually costs quite a lot more than the contributions that the members have to pay. So, you get a benefit that’s worth more than it costs you. There are problems if an employer operating a final salary scheme fails and the scheme doesn’t have enough money in it to pay all the benefits that the members have earned but there is now the Pension Protection Fund that provides limited protection in these circumstances.

Martin.H: Hi Hyman Why are annuity rates from pension funds much lower than cash purchace annuities and if this is due to tax might it not be more benifisial not to save into a pension and retain contol of your cash and not lose it to an annuity?

Hyman Wolanski: Hello there Martin! Annuity rates are worked out by insurance companies based on the yields available on Government bonds (Gilts), assumed life expectancy, and charges (or expenses). They provide a guaranteed income and, in general, annuity rates are reasonable in relation to the factors mentioned. The big problem that many people have with annuities is that the fund is lost on their death, but this is actually allowed for in the annuity rates themselves. Guaranteed products, like annuities, are expensive. Another major problem with annuities is that they are very inflexible - once you have bought them, that's it, you cannot change your mind. The Government is very keen on annuities because they provide certainty in relation to retirement income.

David: Do family SIPPS work? Ie the wealth passes down generations IHT free?

Hyman Wolanski: No. The current regime imposes 40% inheritance tax when someone who has not bought an annuity dies after age 75. It was announced in the recent Budget that the total tax take in this scenario is going to be increased from the 40% level to a whopping 82% tax rate. This, in my view, and that of many others too, is outrageous. Please, don't get me started on this one!

R.Cheshire: Hi. My father retires this year (age 65). He's got around £200k in a personal pension plan and wants a lump sum at retirement, but buying an annuity looks to us like a poor deal at the moment. Are there any options or does he just have to accept these low rates? Thanks Hyman.

Hyman Wolanski: Yes, there is an option and that is to transfer the money to a SIPP and go into income drawdown instead of buying an annuity. This is a more complicated option, and more risky, than buying an annuity - so he really should get proper advice on this before taking any action.

James Palgrave: does it make sense to change from AVC to SIPP in terms of access to alternative investment funds and greater flexibility(age 51)

Hyman Wolanski: It depends, as always, on the investment options available under your AVC arrangements, and the underlying charges. If they are acceptable to you, then that's fine, otherwise you can look at alternatives which include stakeholder schemes, personal pensions, and, for the widest range of investment options, a SIPP.

julian: hi. i suspended my pension payments about three years ago, but am unsure whether or not to reinstate them. would you recommend i do that or look at other areas to invest for the future?

Hyman Wolanski: There are two separate issues here. One is, how should you invest your money e.g. shares, property, cash savings. The second is, which vehicle should you use for the purpose e.g. personal savings, ISA or pension. You need to address these as separate issues and ensure you have a proper understanding of these alternatives.

ede: I'm 21 and have a £15k studnet loan. I need to save £30k for a deposit on a pokey one bedder in east London. I earn £18k in a sales job. It will go up to £25k in 3 years. I pay £450 a month rent. How can I think about pensions when I've got loans and a deposit to save for?

Hyman Wolanski: I think a pension is certainly not for you at the moment. I think you have far more pressing demands for your money. Although, pensions have got good tax advantages, they also come with many restrictions, the main one of which is you normally can’t get your hands on the money until you’re 55 at the earliest. So you can come to thinking about pensions at a later date.

Camilla: I'm 27 and in the happy position of earning more than I spend. But, after years of scrimping to pay for AVCs and other pension contributions, my mum now gets less each month from her pension than she paid in each month while she was saving. Is she desperately unlucky, or am I likely to be better off spending to my little heart's content now and waiting for the state to bail out me and the feckless rest of my generation?

Hyman Wolanski: This is the usual 'spend now versus retirement income later' question. These days, there is a great temptation to live for the moment and worry about retirement much later on. That's perfectly understandable but the balance needs to be drawn somewhere and everyone has their own line in the sand on this. Money saved in a pension scheme does build up - free of tax - and does get paid out over your lifetime. For some people, it turns out to be tremendous value for money, particularly if they live a long time, but for others who may die shortly after retirement without leaving any dependents it may not turn out to have been such a great deal.

S Gough: Can you tell me what are the main criteria as to whether to stay with my current personal pension or change to a SIPP. Is it financial awareness, value of personal pension to transfer etc.

Hyman Wolanski: It boils down to a matter of investment options and charges, and the extent to which you want to be involved in choosing your investments. Personal pensions, these days, offer quite a wide range of investment funds which will be suitable for many people but if you want something outside that range then you could consider a SIPP. Also, you need to have regard to the different charges in the two arrangements. SIPPs work well for people who want to be actively involved in their pension investments or want to appoint someone to run their pension fund portfolio.

Darren Pavitt: Hello, I have the opportunity to invest in a plot of land and would like to understand the possibilties regarding using a SIPP to procure the purchase. My current pension fund holds more than would be required to purchase the land.

Hyman Wolanski: In principle, SIPPs are permitted to invest in land, but you need to ensure that your SIPP provider will permit this, since not all SIPPs do actually allow the full range of investments allowed by HMRC (the Revenue). You should also be aware that any property transaction can be complicated and doing this in a SIPP adds further complication. For these reasons, there are additional charges when land or property is bought within a SIPP.

Chris: Hi, I currently split my pension contributions 50/50 between a SIPP and ISA, as I am concerned that Mr Brown or his successors may be taxing income at more than the 22% (soon to be 20%) current tax relief, when I retire in 15 years time. Whats your view on this?

Hyman Wolanski: Obviously, one never knows what future tax rules are going to be!

Geoff: Many thanks for the advice.You have just stated that generally at the age of 58, under the current regulations it is better to be contracted in rather than contracted out of serps. You also stated you are older than 58. If so, -- are you contracted in or out?

Hyman Wolanski: Glad you are still there Geoff! For the record, I am contracted in.

JohnJ: I'm 56(Heart attack & bypass at43 ( Both parents died young) my wife is 52 (4 years remision from Breast Cancer) we are in good heath at present but??. Wife no pension benefits I've a Part Final Salary part defined contricbution. ( ok with that ) but How do I work out "best" age to retire from the other pension ie how can I get a reasonable graph of pension to be drawn from say 58 to 65?

Hyman Wolanski: It's a tricky situation, but you can get hold of annuity rates for different ages to get a feel for what they make look like. Do bear in mind at least two things. Firstly, annuity rates can change quickly without notice so today's rates won't necessarily apply tomorrow. Secondly, the longer you put off buying an annuity, the more your current fund should grow (hopefully).

Karl Pistol: Can I hold property in my personal pension plan? If so can it be a residential dwelling or just commercial property?

Hyman Wolanski: In principle a SIPP can hold any sort of property, both commercial and residential. However, investing in residential property will normally invoke such high tax charges that it won't make sense to do so. The definition of residential property is quite complicated, for example, beach huts count as residential property, hotels don't. You may be pleased to know that prisons don't count as residential property - so your SIPP can invest in a prison!

JohnJ: Thanks for your reply you obviously understand my problem? Could / Should I try to get annuity Quotes from Companies at present to get a feel of what I might get with differnt Pot sizes over the future years? How muck luck do you think I may have getting a quote for last one surviving. Many Thanks

Hyman Wolanski: In your circumstances I really would suggest you speak to a financial adviser who specialises in this market, particularly as it's possible to get improved annuity rates for so called 'impaired lives'.

Host: Unfortunately, that is all the time we have for today. Thanks to everyone who submitted a question.

Hyman Wolanski: Pensions are rarely out of the headlines these days - as Gordon Brown will be well aware - and the number and range of questions that you have asked today shows how much interest and concern there is over pensions. I hope that my answers have helped clear up some of your concerns and queries.

Web Chat Archive