So, thanks to the government, I am now the proud owner of a pension which is growing at a rate of £55 a month (total), and is costing me only £14. I can increase my contribution to this, which will not increase my employer’s contribution, but will increase HMRC’s. Based on this, it sounds like I should increase my contribution to take advantage of HMRC. However:
1. I don’t really get the deal with the tax. OK, so HMRC contribute to it, but then I have to pay income tax when I come to withdraw it. I don’t fully understand here if they are really giving me free money or whether they are just letting me wait until I’m 70 to pay tax on my current earnings, in which case I don’t understand if this is a good deal or not. I think it is a good deal if I’m a higher rate tax payer now and get higher rate tax relief, but expect to pay the lower rate when I retire. This is just a long way of saying “higher earners get free money from the taxman, low earners don’t”. I find this confusing because it is clearly stupid.
2. The fund seems sub optimal. There are some options but they place disproportionate weight on the UK’s stock market. I didn’t get any choice over pension provider.
3. The fund’s fees are 0.5% per annum. If I’m expecting an average of about 3% return per year, that fee is not insignificant.
Over the past few years I’ve been funnelling a large percentage of my income into a stocks and shares index tracking ISA (with lower fees than 0.5%), which I’ve always viewed as a retirement saving. It is hard for me to understand if a pension offers anything more than that does. I don’t think it does. With the higher fees, it seems like I would just be donating some money to the pension fund manager.
As far as I can tell, the main advantage of a ‘real’ pension vs an ISA is the employer contribution, and if I’m maxing that out (which I am), it doesn’t matter where the rest of my money goes. The main drawback of the pension is that the money is inaccessible to me for a long time.
1. Pensions are not more important than ISAs => keep things as they are
2. Pensions are important => Pay more in
3. Pensions are important, but this one could be better => Get a private pension that gives me more preferable fund options and lower fees and pay into that instead (employer contribution still goes into first pension).
So far, I am leaning towards option 3 for a bit of diversification, but I will wait for George Osborne’s pension reforms to unfold in a few weeks.
UPDATE: Since I first drafted this, it looks like Osborne is going to do away with tax-relief and move to an ISA model. People are whinging about this, but it makes more sense to me because it means 1. the system is more transparent, and 2. standard rate tax payers taxes aren’t used to subsidise higher earners’ retirement contributions before their own and subsequently end up drawing benefits out in their old age because they didn’t save enough…
UPDATE #2: Oh it turns out he’s scrapped that. I suppose I was being optimistic expecting the conservatives to do something fiscally sensible.