Reply to: What's the issue with Company pension contributions?

[IR35 Avoider]

Incidentally, 15 year gilt yield currently 4.52%, annuity rate for 65-year old male currently 7.5%, so the annuity currently gives 65% higher income, though of course the premium is rewarding you for surrendering your capital.

(15 year gilt is the appropriate thing to compare ordinary annuity to. If you want to compare with the rate on a savings account, then the only fair way to do it would be to compare with the self-invested annuity, which can invest in a savings account, in which case the annuity yields 0.75% less. But this would be a bizzarre use of a self-invested annuity.)

[IR35 Avoider]

I agree insurers costs/profits are an issue. Another issue is what your money is invested in, for people who want their income to be backed by something more adventurous/lucrative than government bonds. Both problems are solvable, you just have know what you're doing and shop around.

One product I saw had as much investment freedom as a SIPP, the insurance company took 0.75% (additional to any management charges on any funds you might choose, though you don't have to choose funds) and the use of mortality tables was only so they could estimate a safe rate of withdrawal and comply with HMRC rules re. withdrawal. 100% of "profits" from unused capital when people died were redistributed as "mortality bonuses" to others in the scheme. So, invest how you like, pay only the investment management charges you choose, and the only unavoidable overhead/profit to the insurance company was 0.75% a year. (Company was Prudential.)

The main disadvantage I see with this scheme is that people educated / intelligent / motivated / wealthy enough to seek it out probably have a very long life-expectancy, so you're placing yourself in a relatively unprofitable risk pool. It might be better to just go down the very conventional route and try and get in with a bunch of chavvy smokers from council estates.

I don't have a problem with people disliking the compulsory aspect of annuities, it's when they disrespect them when they clearly don't understand them that I get annoyed.

When people say there's something wrong with annuities, in principle, I say no there isn't, in principle they are wonderful.

Whether there is something wrong in practical reality depends on peoples personal priorities, what kinds of products are available, and how much they cost.

[ASB]

The reason people don't like annuities is because people cannot think probabilistically. They don't understand that an annuity returns all your money, with interest, when you calculate the probability-weighted average of your returns across all possible futures.

Annuities return all the money with interest less the providers profits. These profits could be huge. Or perhaps they are low. Lack of easily available mortality information makes it fairly difficult to ascertain just what sort of value an annuity is.

However, I think the market competitive and providers profits are reasonable rather than excessive (as they used to be before open market options were more readily available.

The problem I see at the moment is that the yield on an annuity is often only marginally better than the yield on cash on deposit. Thus for those who could forgo some income they could be in the position of enjoying a modestly smaller income and preserving their capital.

I think it is wrong to force the annuity route (however if it wasn't forced - which is changing anyway) then ther may be pressure on people to go some sort of capital preserving route. This is going to hit the less well off.

[Hiram King Of Tyre]

Sounds like there are some benefits I'm not aware of. Elaboration would be much apprecirated.

What I mean is that you can will your pension on without any Inheritance Tax Liability. That means that it doesn't count towards your estate on death. Make sure you name the beneficiary though.

[IR35 Avoider]

I think being forced to buy an annuity is one of the pension's biggest drawback. You loose all your capital this way. I'd rather invest all the money in a High Yield Portfolio where you keep all the capital.

Cheers,
EF

Pension money is by definition money that you are going to spend to sustain yourself in your old age, i.e. you are going to get rid of the capital anyway.

The difference between buying an annuity or not is that with an annuity you will spend your last pound on the day you die, but with money you invest yourself either (a.) some of it will be wasted, i.e. left over, not used for its intended purpose, or (b.) you will run out before you die.

Let me put it in the simplest terms I can: for the pot of money that is going to provide you with an income in old age, you get an equal or higher income with an annuity than if you invest it yourself, plus you get the security of knowing you will never run out of money.

The reason people don't like annuities is because people cannot think probabilistically. They don't understand that an annuity returns all your money, with interest, when you calculate the probability-weighted average of your returns across all possible futures.

I would say people are thick, but hedge fund manager Nicholas Taleb in "Fooled by Randomness" made the point that people are not wired for probabilistic thinking, by telling of the time he was diagnosed with cancer. His inital emotional reaction was 100% correlated to the idea he was going to die. Then when he read up on his cancer and found the probability of survival was 70%, his emotion changed to 100% correlated with the idea he would live. The correct rational response of seeing himself as 70% alive was impossible for him, even though he has a highly developed intellectual understanding of probability.

[Lewis]

I do ISA's too but the big advantage to me for SIPPS is their "willability" and status outside of IHT

Sounds like there are some benefits I'm not aware of. Elaboration would be much apprecirated.

[electronicfur]

Annuities are a wonderful concept, and everyone who has a pot of money dedicated to providing them with the maximum possible income in the last 15 years of their life, without any risk of running out of money, should want one.

I think being forced to buy an annuity is one of the pension's biggest drawback. You loose all your capital this way. I'd rather invest all the money in a High Yield Portfolio where you keep all the capital.

Cheers,
EF

[Hiram King Of Tyre]

I do ISA's too but the big advantage to me for SIPPS is their "willability" and status outside of IHT

[glashIFA@Paramount]

There isn't really an issue, though for a while after A-day HMRC were talking tough, but they've now backed down.

From A-day pension contributions have had to pass the same test as any other company expense, to be tax-deductible when calculating Corporation tax. The current advice is that if the company contributions are for a worker in a one-person company who's generated all that company's income via contracting, they cannot be excessive for the purposes of allowing them as an expense against Corporation tax. On the other hand, if he pays contributions to his wifes pension, meaning her overall remuneration (salary+pension) is more than the market rate for whatever work she does for the company, the excess would be disallowed as an expense.

There is an annual limit on how much can be put into a pension without incurring a penalty, but I'm assuming that's not the issue you are worried about, i.e. you were not thinking of putting more than a couple of hundred thousand per year into the pension.

This might give a bit of clarity with regard employer contribs.

http://www.moneymarketing.co.uk/cgi-...id=136528&d=11

[IR35 Avoider]

I do not bother with pensions anymore, whilst I do save for my retirement I choose not to do it via the pension route.

The enforced purchase if an annuity etc and the tax savings are not that great, if I have to pay a larger salary, I expect the 40% relief to go soon and I prefer to have control over my savings.

With an annuity you loose out from future capital and income growth, it is ano bainer to me.

Annuities are a wonderful concept, and everyone who has a pot of money dedicated to providing them with the maximum possible income in the last 15 years of their life, without any risk of running out of money, should want one.

The kind of people who don't need one are those that have so much money that leaving something to their kids is actually more important to them than anything extra income could buy them. People in this situation who are forced to buy an annuity can use the extra income to buy life insurance. Since life insurance is just the inverse of an annuity they effectively nullify the annuity. Obviously there is a downside in that they will have two insurance products that cancel each other out, so they will be contributing to the insurance companies profits twice. It's also worth remember you can have an option within an annuity to protect the capital so it goes to the kids.

If you divide your money into two pots, what you want to leave behind and what you are going to live off, you can only maximise the income from the second by buying an annuity.

[IR35 Avoider]

I can't see why is should be a problem. After all, paying money into a pension isn't avoiding tax, it's deferring tax

For a basic rate taxpayer making personal contributions, it reduces the tax from 20% to 15%, due to the tax-free lump sum.

For a higher-rate taxpayer who makes personal contributions and who becomes basic rate in retirement, it reduces tax from 40% to 15%

For a higher-rate taxpayer who is an IR35-caught contractor and who makes employer contributions and who becomes a basic-rate taxpayer in retirement, it reduces tax from something like 48% to 15%, as he also avoids employers NI.

[Lewis]

I do not bother with pensions anymore, whilst I do save for my retirement I choose not to do it via the pension route.

The enforced purchase if an annuity etc and the tax savings are not that great, if I have to pay a larger salary, I expect the 40% relief to go soon and I prefer to have control over my savings.

With an annuity you loose out from future capital and income growth, it is ano bainer to me.

There was an interesting article comparing ISAs with Pensions in this Saturday's Guardian. In concluded that multiple studies have shown a pension is better than an ISAs in almost all circumstances. The only exception being low earners. For 40% tax payers the tax advantage makes it a much better proposition. Plus the fact that life expectancy has gone up so much (it was smething crazy like into the 90s for current newborns) means that you run the very real risk of running out of money when you are very old! (which is probably the last thing you need). Annuities are good for people who expect to live a long time and not so good for those that don't (as obviously they pay for the others!). My family has had three 100+ members, having an annuity was fantasic for them. Any other form of money pot would have run out a long time ago. I certainly wouldn't write off pensions but I agree with other comments about having a mix of preparations such as ISAs, Pensions and properties that can be rented to provide an income. But then there is the very real risk that you might lose the property in order to pay for care! I recently opened a pension for my 1 year old. I wish someone had done that for me! Just paying the max (£3600) for 1 year results in a hefty pot at retirement.

[Waldorf]

I do not bother with pensions anymore, whilst I do save for my retirement I choose not to do it via the pension route.

The enforced purchase if an annuity etc and the tax savings are not that great, if I have to pay a larger salary, I expect the 40% relief to go soon and I prefer to have control over my savings.

With an annuity you loose out from future capital and income growth, it is ano bainer to me.

[Hiram King Of Tyre]

I have 2 SIPPS. I use Hargreaves Lansdown for funds and Alliance Trust for shares

[ittony]

Who cares about pension when there it is BTL ?

Ha haaaaaa ha ha ha ha ha ha ha ha ha ha ha ha. Ahhhh. Good one!