Pension Basics

[d000hg]

I never had a pension and I don't know very much about them at all - like why a pension is better than just putting the money in a long-term savings account for instance, when you as self-employed don't have an employer to match your contributions.

I didn't see an article on CUK about them, and Wikipedia didn't help much. Can anyone recommend a good "from the very start" link? I plan to discuss with a financial adviser to see what's optimal for me and the wife to set up, but would like to know the basics myself first.

[Manic]

Tax relief and growth are the reasons.

[Clare@InTouch]

Motley Fool is a good website for such things, or you could go and chat to an IFA. Your accountant can no doubt recommend one.

[d000hg]

Motley Fool is a good website for such things, or you could go and chat to an IFA. Your accountant can no doubt recommend one.

Yeah we know a decent IFA, just don't like to have him start from the very beginning.

Thanks for recommending Motley Fool - I remember them from years ago actually but had totally forgotten them.

[pmeswani]

I never had a pension and I don't know very much about them at all - like why a pension is better than just putting the money in a long-term savings account for instance, when you as self-employed don't have an employer to match your contributions.

I didn't see an article on CUK about them, and Wikipedia didn't help much. Can anyone recommend a good "from the very start" link? I plan to discuss with a financial adviser to see what's optimal for me and the wife to set up, but would like to know the basics myself first.

With an ISA based savings, you only get tax-free allowance on the interest you earn. With a pension, 25% of the contribution (as a minimum) is provided by the government. All the interest / profits on the pension is free from CGT and can be reinvested during that time. You can take a tax-free lump sum out of the pension upon retirement.

With an ISA, you can't chop and change where your savings are during the year, but with a SIPP based pension, you can choose where your money is invested as often as you like during the year.

Typically, a Pension has a higher rate of return over an ISA.

An ISA has easier access to the money without incuring a stupidly high tax rate.

Downside to a pension is the management fees.

Hope that helps.

[d000hg]

I don't know why but I always thought you didn't 'own' the money you put in a pension... you are paying in to get a guaranteed payment every year after retirement. But now I'm not so sure...

[Ignis Fatuus]

I don't know why but I always thought you didn't 'own' the money you put in a pension... you are paying in to get a guaranteed payment every year after retirement. But now I'm not so sure...

You are confusing the savings part of a pension (the input) with the distribution when you collect the pension (the output).

First you save into your pension, then you withdraw from it. These days when we talk of a pension, most of us here mean a SIPP. That is just a tax-free wrapper for an account or accounts where you save the money.

When you withdraw from it, you can do it in various ways, including but not limited to using your saved-up money to buy an annuity, which will then pay you regularly until you die. You can instead just take it out as a tax-free lump sum (up to 25% of it) and regular (or irregular) payment to yourself out of it, at a rate roughly corrsponding to a generous annuity. Then it remains your money.

A distinct thing would be something called something like a "pension scheme" or "pension plan", where somebody else takes care of both sides of it for you.

You don't own money in a pension plan, and you don't own money in an annuity, but money in a SIPP remains yours (except that some of it would have been the Taxman's if you hadn't put it in there, and that part will become his again if you take it out too early).

[pmeswani]

I don't know why but I always thought you didn't 'own' the money you put in a pension... you are paying in to get a guaranteed payment every year after retirement. But now I'm not so sure...

If you were a permie contributing to a company pension or put your money into a traditional pension plan, then the pension administrator will manage the funds and your money (and your employers money if applicable) on your behalf. They cannot take your money and decide not to give to you when you retire.

With a SIPP, you manage where your money is invested and the provider provides you access to the funds available. The provider is required to provide you with a service based on the Pension regulations for which it falls into.

[d000hg]

Thanks guys, those are both pretty clear explanations.

[pmeswani]

Thanks guys, those are both pretty clear explanations.

So have we convinced you that a pension (preferably a SIPP) is right for you?