Pension - Can I opt out?

[helpimcrap]

Im diabetic with neuropathy, retinopathy and Diabetic Cardiomyopathy. I'm surprised im still alive typing this

That sounds really hard but I found your humour very funny.

Like my mate who was 65 at the weekend - "how are you?", "I woke up - it's a good day." lol

 

[D.P.]

It is almost always a great way of preparing for retirement and ensuring a good quality of like, but it really isn't "tax free" , as all you are doing is deffering the tax payment till when you receive your pension instead.

It might be more tax efficient, particularly if you are currently a higher rate payer, but it's not tax free.

The gains are tax free until you withdraw and the initial investment is done tax-free which is where you really gain. When you hit 55 you can then take 25% out tax-free, and you can withdraw the annual allowance tax-free, e.g. 11K currently. Sure if you withdraw above the tax-free allowance then you will obviously be paying tax, but typically you will be withdrawing at a lower tax band and moreover, you have invested money tax-free so that your total pension pot is far larger due to compounding effects.




If you instead opted out you basically get taxed t every step of the way, taxed before it even hits your bank account for starters. And the income tax will be typically at the higher marginal rate.

 

[mejinks]

Fairly wrong here. The details will change wit your particular pension scheme but typically you have full control over how and where your money is invested. You can put it 100% into secure bonds if you want, no gambling at all. The only difference is if you opt in and do it through the pension scheme your 1000 quid is now 2000 instead of 600 if you take it out.

Not how it was explained to me. Nest apparently doesn't allow this.

Whatever you do with your money if you die you wont be around to make use of it. If you take the money out and put it i a savings account you still loose. With a pension your inheritors will get the money, so your wife and children for example. The difference is if you opt in your wife and children will inherit a lot more money than if you opt ou, so the only real loss is if you opt out.

My point was that if you put the money into a savings account, your next of kin enjoys the whole lot, not just a small percentage. If you die, your next of kin only gets paid a years worth of pension.

 

[Glaucus]

My point was that if you put the money into a savings account, your next of kin enjoys the whole lot, not just a small percentage. If you die, your next of kin only gets paid a years worth of pension.

A) if you die before 75 they get the whole lot tax free.
B)even if you die after 75 they'll still get more money, due to far lower tax paid and much higher investment.

You see, to have a very wrong idea about pensions.

 

[mejinks]

Not sure where you got those figures from but that's some fine cherry-picking. April 2001 was conveniently at the market high just before the dotcom crash and 9/11, and April 2012 was a time when the markets still hadn't fully recovered from the 2008 crashes.

Look at how the market performed between April 2002 and April 2013. Your £14,600 number will change wildly.

From Metlife. A UK pensions company.

Whose to say that we won't go through something similar or worse?

 

[mejinks]

A) if you die before 75 they get the whole lot tax free.
B)even if you die after 75 they'll still get more money, due to far lower tax paid and much higher investment.

You see, to have a very wrong idea about pensions.

Experience. When my dad died we got a years worth of the pension he had paid into for 40 years.

 

[Glaucus]

Experience. When my dad died we got a years worth of the pension he had paid into for 40 years.

Things change, laws change.


You are utterly wrong.

 

[mejinks]

Things change, laws change.


You are utterly wrong.

Your opinion trumps fact?

Please provide statement of fact and said law.

 

[D.P.]

Not how it was explained to me. Nest apparently doesn't allow this.



My point was that if you put the money into a savings account, your next of kin enjoys the whole lot, not just a small percentage. If you die, your next of kin only gets paid a years worth of pension.

Speak to your pension provider about the options. I simply go to a website and choose whatever I want to invest in, I can choose individual stock and shares, or simply split the investments into different risk groups and let their financial experts make intelligent decisions. About 20% of my investment goes into bonds.

You also have to figure that since your initial contribution was doubled, all tax free, the stock market can collapse and you still come out way ahead. Even if the stock market halved in value over night and you were forced to withdrawal the next day you are still doing better. But realistically, the stock market over long time periods always goes up, and since a pension isn't a quick flip scheme you are mostly protected from short term recessions.


If you die before 75 your next of kin get the whole, and it will be many times larger. If you die after 75 your next of kin will almost certainly still get more back from the pension than if you opted out since the pension pot ill be some much bigger after matched investments, tax-free investments etc. If you die at 76 say your pot can be given yo your beneficiaries but will be taxed at 45%. If we go back to that same 1000 pound scenario, if you opt in and get matched you have 2000, assuming no growth and you die at 76 then your beneficiaries get 1100. If you opted out and paid the 40% marginal tax rate you have 600, if you die at 76 your beneficiaries get the 600.
However, your beneficiaries can simply draw down and pay their marginal tax rate, equivalent to 1200-1600. all of which is far better than opting out.

And if you really have a big pension pot and are worried about death soon after the age of 75 you can withdrawal 25% tax-free form the age of 55.


Moreover, the pension re-distribution is tax free. So lets say you die over 75 and your pension is taken as a lump sump minus the 45% tax, that is 1100 on the 2000 investment. If you had oped out then the 600 will be subject to inheritance tax, if you are above the inheritance tax threshold then your 600 pounds is now only 360 inheritence to your beneficiaries, vs a minimum of 1100 if you opted in.

 

[Glaucus]

http://www.telegraph.co.uk/finance/...ension-death-tax-your-questions-answered.html

 

[StudentDavid]

I don't quite understand this. Are you against free money? I can guarantee that the select few millionaires are maxing out their pension allowances every year, whilst having savings elsewhere.



I can draw one of my company pensions at 54, my French pension at 56, my current work pension at 60 and my state pension at god knows when.

And the problem with having access to when you want it, not when you retire is exactly part of the problem!

Just don't need it mate.

 

[peige]

Much as I agree that we need to look after our pension I too am sceptical about the future with it, having been through the whole opt out and then stakeholder thing with Mr Brown having a fiddle with the funds too you have no idea what the situation will be in another 30 years.

 

[D.P.]

Much as I agree that we need to look after our pension I too am sceptical about the future with it, having been through the whole opt out and then stakeholder thing with Mr Brown having a fiddle with the funds too you have no idea what the situation will be in another 30 years.

eh?? your private pension contribution is your own, the government can't touch it in the slightest.

 

[dowie]

My point was that if you put the money into a savings account, your next of kin enjoys the whole lot, not just a small percentage. If you die, your next of kin only gets paid a years worth of pension.

nah they'll get the whole lot tax free if you've not retired

then again if you've not got many assets(you were talking about housing benefit and low pay) then they'll get everything from you tax free anyway... but the pension at least will have extra employer contributions too

 

[Amp34]

This thread, and every one we see in GD always pains me to see.
The general understanding, misunderstanding and plain right nonsense that people talk about pensions is just horrible.

If your a tax payer (especially higher) and if your employer also contributes (which they pretty much must now) then its hard to beat the returns on a pension over a sensible period of time. You have to make the disclaimer of time as with them usually heavily stock market invested they can go down as well as up.

Take a normal rate tax payer, with an employer who matches. Say he contributes £100 a month from his wage. This £100 is paid to the pension fund, who automatically make up the basic tax, so they credit an extra 100/0.8 - 100 = £25. The employers £100 also goes in, so the net pot is £100+25+100 = £225, a return of 125% on day 1.
As mentioned compounding then takes place, assume 3% growth annual for 25 years and the £225 is now worth around £470. Thats a real return of over 6% per annum against the initial £100 saved.

There is a small group of people who realistically will be worse off by saving for a pension, those on very low wages who would CURRENTLY have pension topped up to a higher level to meet basic minimum levels of income. They will not benefit from a higher pension they would receive a lower top up, and also be worse off due to paying the contributions rather than having a slightly higher monthly/weekly income. Teh gamble of not contributing for people in this scenario is that the rules can (and probably will) change on minimum income.

There are far better pension freedoms coming so a significant portion of the shackles on a pension pot are being removed, and I think now that George has started this process we will only see more freedoms come. The industry is lagging behind still, its changed some of their business models and they aren't actually all that happy about it, but they will change and then the true flexibility will come through.

What happens if the employer doesn't match, or only pays in the minimum (which I think is about 1% isn't it?)

I remember last time I checked if the employer wasn't matching I would have to pay in something stupid like 20-30% of my salary each month to get the recommended 66% retirement pot, for a 20 something. Makes the sums far more difficult...

When companies don't contribute the only benefit of a pension over savings was the tax free part.

 

[dowie]

There are far better pension freedoms coming so a significant portion of the shackles on a pension pot are being removed, and I think now that George has started this process we will only see more freedoms come. The industry is lagging behind still, its changed some of their business models and they aren't actually all that happy about it, but they will change and then the true flexibility will come through.

any idea if or when employer matched contributions will be able to be put into a SIPP?

at the moment there doesn't seem to be much choice at all - we just have some big company that manages pensions which our employer chooses sell us their product essentially... I don't see why there couldn't be more flexibility on this - it shouldn't matter to employers where they pay the contributions

 

[EvilRob]

Not how it was explained to me. Nest apparently doesn't allow this.



My point was that if you put the money into a savings account, your next of kin enjoys the whole lot, not just a small percentage. If you die, your next of kin only gets paid a years worth of pension.

I guess you are typical of the people who don't invest properly for the future - ignorant, and therefore either you will become a burden on the state or your beneficiaries won't get nearly what they could have.

As others have mentioned, if you die before you buy an annuity your beneficiaries will get 100% of your pension value. We don't have to buy annuities when we retire anymore, but if you want to, you can choose one that is more generous to your family if you die early in retirement - it's up to you.

Regarding your other comments about money being "safe", schemes "failing" etc, all rubbish. You can make very low risk investments if you like, but that aside, look at how the FTSE has performed over the long periods of time you would have your pension invested rather than a snapshot of the worst possible period.

 

[MrMoonX]

Experience. When my dad died we got a years worth of the pension he had paid into for 40 years.

this can't be true, my dad died in 1987 and my mum to this day still gets his pension each and every month. There will be a death in service element in all pensions.

People who don't pay into pensions are either loaded with a property portfolio to keep them in retirement or they are narrow minded short term idiots, who when they get to old age are a burden on the rest of us because they didn't save for later life!

 

[El Pew]

From Metlife. A UK pensions company.

Whose to say that we won't go through something similar or worse?

We probably will. If you expect perfectly linear returns then you're going to be disappointed.

The whole point is that by taking some of the risk you get a higher return. If you try to take less risk by opting for fixed-interest savings account or the like, you will unwittingly expose yourself to another risk - shortfall risk, where you won't make enough money to be able to live comfortably.

Literally decades of experience has shown that retirement savings are best held in appropriate funds of risky stocks and bonds. There is no long-term period (20-30 years) where cash or cash-like instruments beat a mixed stock/bond portfolio.

 

[estebanrey]

People who don't pay into pensions are either loaded with a property portfolio to keep them in retirement or they are narrow minded short term idiots, who when they get to old age are a burden on the rest of us because they didn't save for later life!

Not really. My mother didn't put into a pension (my dad did but it's not great one) and she can happily live on the £116 a week she gets from the State Pension.

My parents own their own home, go on two cruises a year, keep up with the bills and don't struggle for money.

Of course this is partly due to the money my dad gets from his private pension but most of their incoming are from the State pension.

A bloke retired from my work last month with a £25k a year pension and my first thought was "why does a man in his late 60s with his own home need nearly £2,000 a month income?" It's actually more than that when you add in the State pension on top.

I opted out of my pension due to wanting to pay all my debts off and get into a position of having 3 months wages as savings. I'm nearly there now and I'll opt back in but I'm really not bothered about attaining my current wage level after retirement. As long as I have enough to cover my living costs and the odd holiday I'll be happy.