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I currently pay 15% of salary into company pension/ 25.8.2013• A. Velasco• Posted At 11:40 AM

…which is £357gross £286 net with income tax allowance. The company contribute 5% which is £119 per month. My pot is worth £45,000 at present and I have just under 9 years to retirement although thanks to our wonderful governments my state pension age is now 66. I save regularly into a cash ISA and have a small stocks and shares ISA  as well. Is it worth decreasing my pension contributions and saving the saved amount into the ISAs.

Thanks, Jim

IFA Andrew says:

Dear Jim,

Thank you for your question.

By both you and your employer paying in to your company pension, you are building-up your pension fund for when you retire. As you quite righty have stated the contributions attract tax relief, thus increasing the amount that is added to the fund. On retirement you then have a number of options.

In general terms when realising a pension fund there are 3 main options.  1.  ‘Tax free lump sum’ – taking up to 25% of the fund as a tax free lump sum immediately upon retirement  2. ‘Annuity’ – establishing how much income your pension fund can provide for you  3. ‘Options’  – deciding on your own individual options (of which there are many varying from provider to provider) for example: ‘Escalation’ (whether you want your on-going pension income payments to increase in line with inflation), ‘Guaranteed period’ – if you die within a pre-arranged guaranteed period (typically 5 – 10 years) set at the time of establishing your annuity, your dependents would continue to receive your pension income payments (without this guarantee the pension provider would retain your remaining pension fund upon death).

The income you draw from your pension is taxable as you have had the benefit of tax relief on contributions to the fund during your employment.

Generally, the key reason for holding a pension is to achieve long term growth on the fund. Higher risk funds are generally more volatile but this can be less of a problem where investments are made over a significant period of time. Most pension schemes allow for a ‘life-styling’ approach – meaning it would be possible to invest in higher risk funds at the beginning and as the chosen retirement age approaches switching into less volatile funds.

Each pension scheme has its own rules and benefits for the members of the scheme. Pensions can be quite complex so it’s important for you to understand your own pension scheme.  You should always check with your Pension Scheme Trustees or managers for your scheme’s rules. I would recommend that you check with the Pension Scheme Trustees who will be able to provide you with an illustration as to what your pension benefits are anticipated to be based on your current level of contribution.

By decreasing or stopping your pension contributions and diverting them to a ISA, you will potentially reduce the value of your company pension fund over the remaining 9 years of employment. If you reduce your contributions, does your employer do the same?

By paying in to an ISA you have the opportunity to draw an income from this at later date in a tax efficient manner and you have access to whole fund if you so wish, rather than a maximum of 25% of the pension fund.  Any income or growth from an ISA is exempt from Income Tax or Capital Gains. It should be noted that whilst you may be contributing to the ISA, your employer is under no obligation to do so and you will not be getting tax relief on the contributions you make. So whilst you could be making a similar contribution level to the ISA, the total amount contributed without tax relief and employer’s contribution could be significantly less.

In the tax year 2013-14, which ends on 5 April 2013, you can put in up to £11,520 into ISAs. Subject to this overall limit, you can put up to £5,760 in a cash ISA and the remainder of the £11,520 into a stocks and shares ISA with either the same or another provider. So, for example, you could put £5,760 into a cash ISA and £5,760 into a stocks and shares ISA, £3,000 into a cash ISA and £8,520 into a stocks and shares ISA or nothing to a cash ISA and £11,520 to a stocks and shares ISA.

There are no hard and fast rules as to which investments are better or worse as their performance can vary over time and their suitability to each investor varies according the investor’s circumstances.  When selecting an investment type there are many factors to consider including what access you may need to the funds, what is your attitude to risk, what tax rate you pay etc.  The only sure way to find out which is right for you is to speak to a qualified professional.

There are two ways to invest in the stock market – directly or indirectly. Direct investment means buying individual shares which give you a stake in a PLC. Indirect investment involves a fund manager pooling together money from a number of investors and then using this large sum to invest in a whole range of shares. This sort of collective investment spreads the investors’ risk and means that if one share drops in price, the overall value of the fund will be largely unaffected. Additionally, because collective investment funds are run by professional fund managers, they allow individuals with only a relatively small amount of cash to get access to the kind of investment expertise which they would not normally be able to afford. Only invest in shares or stock market funds if you can tie your money in for the long term. Investment advisers believe you should be prepared to invest for at least five years to smooth out short-term ups and downs on the markets. Whether an investor is prepared to invest in direct shares or a collective investment can be dependent on the individual investor’s attitude to risk. An investor must decide how to invest in various asset classes – i.e. through direct investment themselves, by using a discretionary service from a private client stockbroker or using collective investments. For many individuals, direct equity, bond or property investment may be inappropriate in some or all areas, due to the costs of such investment or a lack of time to make the important investment decisions. Investors may still require exposure to these asset classes and potentially will be able to achieve this by investing in collectives. Investors with smaller portfolio’s may find it difficult to achieve the required diversification in a cost efficient manner with direct investment in shares. Collective investments may provide a diversified portfolio for smaller sums. In addition, the use of collectives enables investors to gain diversification of investment managers and styles which may not be possible or practical with direct investment. For individuals with limited amounts of capital to invest, it may be difficult to acquire a sufficient number of underlying equities to ensure adequate diversification. For an individual to acquire a sufficient number of shares to be adequately diversified would require a significant number of purchases at a potentially significant cost. Therefore, a collective investment vehicle, investing in equities, will own many shares in different sectors and will therefore provide a sensible level of diversification. Individual investors may not have the necessary and important combination of time, expertise and preference to manage their own portfolio, and so will usually employ somebody to manage it on their behalf – either a stockbroker or the managers and teams of the collective investments chosen. To follow equity markets effectively can be very time consuming and only professional investors can do this. If a client wished to be more involved with the decision making process within their portfolio, then a direct investment through a stockbroker may be preferable to them . Alternatively, if they wish to remain less directly involved, the a collective investment may be the answer.  In either case, you should note that the value of investments and the income from them may go down as well as up and is not guaranteed. You may not get back the full amount invested. Past performance is not necessarily a guide to future performance. Investments in overseas assets carry an exchange rate risk and may cause the value of the investment to fluctuate.

I hope this answers your question, please feel free to contact me on my contact details below if you wish to discuss this with me in greater detail.

Kind regards,

Andrew

Andrew Gurton
Financial Adviser
Shepherds Mutual Solutions
Direct Line 0161 495 6411
Team Line 0800 0921 245

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