Why You Should NOT Pay Into Your Pension
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- Опубликовано: 30 мар 2023
- Everyone tells you that putting money into your pension is very important and you absolutely have to pay into your retirement plan or 401k.
But while it's important to plan properly for your retirement and make sure you do have a pension plan, it's important to understand some of the downsides to putting your money into a pension.
This video is the devil's advocate explaining some of the drawbacks to putting your money into a pension that you may not have thought about.
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A few points. This is specific to the UK, I don't know about elsewhere. 1. There is nothing to stop you opening a SIPP, then every year, do a partial transfer from your workplace pension to your SIPP, then you can invest it in whatever fund you want. 2. If you have a workplace pension, you usually also have death in service policy, often double your gross annual salary to your next of kin, on top of them getting your savings. 3. If you become terminally ill, you can access your pension early tax free, if your doctor issues a certificate saying you're unlikely to live for more than six months. At least that's my understanding, please tell me if I'm wrong.
Exactly what I do; transfer my workplace SIPP out of HL and into my personal II SIPP. it saves me so much on monthly fees as II is a flat fee of £20 a month including an ISA account!
I did a few partial transfers from my work scheme until Aviva told me if I did it again, they’d close my pension.
@@jgledhil I am also with Aviva, what is their reasoning for closing out your pension?
@@goksfamily7416 Aren't you only allowed one partial transfer per year from a DC work pension into a SIPP? I can't recall atm. Best ask them or your employer for the scheme's T&Cs, as it will state any restrictions there.
Interesting, didnt even know you could transfer a percentage out, cheers
Thanks for that Sasha, you've just echoed exactly how I feel about pensions. I'm from the UK, living in South Africa and there's fokol contribution from the companies so I opted out, and just stick my cash into index funds. They are my pension essentially. Cheers!
Every month, at least once, I think about the fact that by the time I should get my pension, the government might have changed it soooo much.. this is a horrible thought.
But that’s why you diversify. Come on now, you can’t trust the government, you should know this.
@leonhenry4861 Exactly. Plus there's nothing stopping the government from changing the rules surrounding an ISA either. Or any other tax allowance for that matter. Doesn't mean we should stay frozen like a deer in headlights.
@@MoneyGist exactly, people acting all stupid all of a sudden, just use the tools of the trade until the doors close, then find another route. It’s that simple.
Government can change anything, that's the whole goal of government, imagine that UK still taxing USA for delivery of the tea. Suddenly it changed. The future is uncertain, but it does not make any consideration for the future mute.
YOU ARE A LITERAL ANGEL, I've been researching about pensions, and here is this video! Thank you 👍
I came to many of these same realizations in 2020. Thanks for validating me. Everyone else tells me I'm dumb.
All of his points above can be disproven by someone that knows what they're doing. Speak to a qualified advisor
Cognitive bias is dangerous. Watch the content telling you the opposite of what you think. There might be something to it. Then make a more informed decision after weighing up both sides.
@@border304 That's exactly what we're doing by watching this video. But it is incorrect - tax relief on pensions for those earning above £100k is effectively 60% due to reclaiming the personal allowance, that cannot be turned down.
Fees & limited fund choice etc can be mitigated by simply partially transferring funds from a company scheme to a personal pension of your choice every few months.
If people choose to listen to someone with a RUclips channel over a qualified advisor, the results are on them.
Honestly don't listen to this video, as said a lot of it is just wrong. Seek professional financial advice
@@alexwatson2406 I was agreeing with you. Did you think otherwise?
Great video Sasha......You have a very wide spectrum of financial knowledge....Thank you 👍👍👍
Thanks Thomas!
In the UK if you are contributing income above the 40% income tax threshold that's a 25% bonus vs. the 15% marginal rate you will pay when you draw your pension. The tax regime would have to take a huge turn to the high side to make that an advantage worth passing on, espaciialy when you consider the extra returns on that large tax rebate in your pension over the years.
Hi Sasha. Been a long time subscriber. Really enjoy your pragmatic takes, and particularly enjoyed this one!
Great video. You have pointed out some very important issues with pension funds investing. Many people are not fully aware of that.
I never bothered with work pensions in the 6 years I worked for companies in my youth, they were clearly there for the benefit of the company and not for me, 40 years later it's clear I was right, those pensions are worthless due to poor investing and high fees.
Instead I saved up and got decent interest, paid off my mortgage early and bought BTL.
Changed recently back to investments due to gov coming after landlords.
I'll be maxing out my ISA and pension allowances for a few years to get that money invested but I'll choose my own investments.
Transfer your old workplace pensions into a SIPP and you have control over the investments yourself
@@Finlzz yep easy to do now, back then there was not too much choice.
If the companies you worked for offered a contribution match, then you absolutely fucked up.
Love this. Straight on the money. I used to sell pensions in the 90’s, I stopped funding (and selling) pensions when I got my head around all these points. Fees to the providers, taxes, restrictions and the biggest of all, you just do not know the rules when you come to retire. Very important to plan for retirement, but educate yourself, don’t blindly fund into pensions without doing your own research. If you are lazy and know if you don’t invest in a pension you won’t invest anywhere, then buy a pension it’s better than doing nothing.
One flaw in this math is that your 1X actually is more like 0.7X ish after the income tax you pay. One learning point here is to see where your pension is being invested and track that index
lol I paused the vid to look for this comment :)
U r missing the point! U would be better of with a cash bank account with 1% return! Gordon brown (uk chanceller) almost broke the pension system with one tax bill!
Good point, the amount someone invest in market is net of taxes with this he has have to pay applicable brokerage and also pay for investment advice . Kindly correct me, if something missing. Thanks and Regard.
@@hworldsystem300you don't have to put regards at the end of a RUclips comments bro.
Yours sincerely
@@oliverhopkins8074Agreed!
Kindly Yours
I think the underlying point here is be diversified, small eggs allocated correctly in various baskets according to the situation (some large , some small), and don't fully rely on only 1 instrument
The utilization of after-tax money and tax-free growth makes opening a Roth IRA very advantageous. Through a careful guidance of my FA, I did not pay taxes on my withdrawals of $2.86 million when I retired.
Indeed, I did make use of a financial counselor. As I get closer to retirement, their advice has been really helpful. I thought compound interest on index funds wouldn't be sufficient because I started late. It's amusing how I've done better than colleagues who have more years of investment experience. I've profited more than $886k tax free.
@@maryHenokNft Please who is the consultant that assists you with your investment and if you don't mind, how do I get in touch with them?
I've shuffled through a few advisors in the past, but settled with *Camille Alicia Garcia* her service is exemplary and she's a genius in portfolio diversification. I'd suggest you research her further on your browser, sure you'll find her basic info.
Appreciate this recommendation, hopefully I can get some insight to where the economy is headed and strategies to beat inflation with when I hear back from Camille .
@@maryHenokNft very interesting, I spoke to Camille Alicia Garcia for financial advice and she told me to go f*ck myself, she even wished my dog got cancer. Seemed mentally unstable if you ask me.
EXCELLENT ADVICES....absolutly true as well
nice video as always, thanks
Happy 100k Subscribers Sasha! been watching your vids for quite a while and I have to say you are the most informative day to day RUclipsr that discusses world events tied to the stock market. Congrats!
Great video as always Sasha. We’ll done on hitting 100k The challenge with future governments going after your pension is valid for property and other investments. They have gone after BTL recently and with current CGT changes it shows they are always looking to increase their tax revenue. Diversification and agility should be key to all investors.
Been thinking it was like this for a while so I put my money into stock, property and land rather than a pension but never ran the numbers before. Thanks for the effort and saving me figuring it out. Great vid as always 👍
I'd suggest you run the numbers yourself for your own specific situation. The examples in the video only work in the exact circumstances given.
stock property and land, are you 12?
@@tomfidler2170 what's wrong with property, farm land and stock? I'm no expert and for sure could have made better financial decisions but it's allowed me to retire before 40 which I couldn't have done if I'd used a pension. Everybody's situation is different but it worked out ok for me.
@@tomfidler2170wtf is wrong with a 12 year old?
@@tomfidler2170 Relax. He's one of those finance bros that watch fiance bro YT channels.
He knows what he's talking about.
He's gonna show how wrong you are when he finally gets his first job and moves out of his mother's boyfriend's basement
Great video. Thank you.
Another good one Sasha. Well put together 👍
👍
Sasha is the real deal Holyfield.
congrats on 100k subscribers!!!
Thanks for the insight Sasha.
You’d have to be a mug to buy an annuity with your pension pot. I pay 6% into my pension and my company pays in 15%, so it’s a good deal as I’m 50 and live in the U.K. Any AVC’s I add and my company contribute 10% of my AVC contribution. Contributions have not been taxed by HMRC.
However, there’s a self-determined limit to what I will pay in as I also invest in the stock market, too, and soon, real estate. I fully intend to go down the drawdown route when I retire.
Your video at least gets me thinking as it presents a wider picture so I will re-watch it.
Excellent video, many valid arguments made. One of the most important is that government can and almost certainly will raid pensions more. They're already robbing us with the halvings of the cap gain allowance and more. One more point I'd add is they can raise state pension collection age when they want, and this impacts private pension collection age. Thanks for posting.
Fantastic advice! thanks Sasha
Once I started looking into the inefficiency of my work Scottish Widow's pension, I found the best solution was to simply transfer my pension contribution out each month into a Vanguard pension account, to be invested in the S&P 500. Just leave a few pound each month in the Scottish Widows account so it stays active and so you still get the benefit of the employer's matching contribution. But I still wince at all those years my Scottish Widows was basically stagnant due to my just being passive and not looking into it.
I started doing the same thing since last year, but investing into the FTSE Global All Cap and the S&P500.
Hi, I have a Scottish widows pension and getting £500 a month going in.
Think I need to look into moving it to my SIPP and managing it myself.
Interesting.
Take care all M
@@Magpie314 Yeah, I do both, with more weighted into VWRL. My original post was more about the idea of actually doing the investing yourself, rather than whatever crappy inefficient one you are giving by your employers pension scheme.
@@Magpie314 I can never understand why ppl say S&P500 is not diversified. Literally every company within s&p 500 is a global corporation with offices and business everywhere in the world, not just in the USA. Also, majority of FTSE All World growth actually comes from companies which are part of s&p 500 - the rest of it is miserably mediocre when it comes to growth.
@@Magpie314 I personally hold next to £0 investments in UK listed stock. FTSE100 for example has grown only 800pts in 15yrs! In contrast the S&P500 has grown by 3000pts over the same time horizon. Complete waste of time investing in the LSE imo. This is why Jeremy Hunt is now trying to 'force' default pension funds to invest in UK non-listed equities - how do we think this will end!
To be fair your example of the return has overlooked the tax advantages. So it might be 2x +40% or with salary sacrifice, there is saving on national insurance too in the U.K. so it might be better. The funds can be transferred to a better performing fund. You also fail to mention the ability to borrow vs a pension fund in an emergency. And in the U.K. inheritance tax benefits.
In his opening lines he says after you’ve paid your tax pay into your pension. But with salary sacrifice I pay into my pension before tax and NI. With 2 kids I effectively save 61% tax on that so an immediate 61% gain! I then actively chose my pension funds and have seen decent growth too!
Brilliant! Love your style fella, brilliant!!
Well damn, your financial game yet keeps on giving. Thank you Sasha.
Very good points. I can add one. A downside of government or employer pension programmes that I have come across is when trying to plan my early retirement. Many of those programmes only kick in with 65, what if you want to retire at 50? Something to think about. I'm still working and contributing the minimum BUT I'm saving and investing to be able to live between when I stop working and when my pension kicks in.
Great video again. I've always been sceptical of it, and i've had a sneaking suspicion for probably 10yrs now that the government pension will become means tested to some effect. Though retirement is a pipe dream really, i'm gonna work as much as i can and enjoy life. No point suffering throughout life for monies.
Bro escaped the matrix. Thank you for a valuable insight, Sasha, and congrats on 100k!
Err, so SIPPs don't exist? Open pension platforms? It is absolutely SHOCKING advice to tell people not to pay into a pension but instead invest outside one. You can do pretty much everything you want inside a ension wrapper that you do outside. Ut with a whopping tax advantage. No brainer.
There is a reason the govt limits pension size etc. It really is a give away relative to not doing it.
Excellent information Sasha....!!!
I pay in 8.5% monthly, and my workplace matches that, along with tax relief. That's over 100% Return at the point of putting your money in. I wouldn't care if the pension investment plan is cautious after that. Management charge is 0.45%. I must say I haven't seen a 2% Management charge in any of the places I've worked.
Good advice on a topic that few people actually comment on. It should also be mostly relevant outside of the US because the pension systems seem to work mostly in the same way (at least in Switzerland, France and Germany they do).
That is a very good point!
👍
The problem with work place pensions in the UK is the default investment plan differs hugely from provider to provider, as does how easy it is to change that. Worse employers have no duty to provide education/training in managing a pension to employess, how much do you need to save etc. Far too many people are basing their expectations of what their workplace pension will provide on their parent's situations. But the employers contributions rates have absolutely crashed with the demise of DB schemes and the minimum required employee contribution is nowhere near enough to build a decent pension, you have to contribute far more.
Fantastic video! with 20+ years to go before I retire, i`m very much weighing up creating a SIPP
Thanks for video , good to investigate pension issues. However, if when younger I had only put savings outside of pension, i would have spent monies on a bigger house etc . Luckily I could NOT raid my pension fund. Most people including me spend to the max , at least a pension is available when salary is stopped .
It's good we have people like you on here telling it like it is ! what a mess were in (uk )Love to hear your thoughts on digital currency , thanks , keep the posts coming
Great vid Sasha. I have a good workplace pension but if I could go back in time would have maximised stocks and shares ISA allowance and SIPS. Maximising tax free growth and income in retirement. Only risk is Govt introducing a 'wealth tax' on assets that doesn't apply to pension pots.
The only issue with ISA's is you don't get the tax relief on the way in, only the growth is not taxed. For me this is 45% tax and 11% NI - a huge win up to £60k every year assuming salary sacrifice. Only risk is you don;t know if the government will raid pensions but of course they can do the same with ISA's too.
Hey Sasha, this video made me smile today! I am one of them who never invested in pensions and I agree with you. As long as one has some type of investment to back their old age then all good!
thanks for sharing hidden charge with pension benefit, it is extremely rare information. I have seen many video over pension topic most of them equipped with the provider information but miss to mention the fee they charge. "nothing is free lunch"
In the UK, if you are a high earner, you start losing your tax-free personal allowance after £100K, plus you are getting taxed at the additional rate of 45% over £125K. One way to prevent that is to salary-sacrifice into a pension, which can bring your taxable income below those thresholds. You will also be saving not just on tax, but on the National Insurance as well.
Well in the UK I believe you don't pay income tax when outside of the country so it would make the most sense to work in another country with no income tax, maybe 6 months out of the year remotely.
@@ajr993 except that once you come back from that sweet, sweet tax free country, the lovely people at HMRC will come looking for money sooner or later. There is a 105+ pages manual to determine when you will have to pay taxes in the UK. Long story short, spending more than 6 months abroad doesn't exempt people from paying taxes.
@@ajr993don’t forget some country have tax agreements with UK and you might end paying double tax. You have to declare that you are none UK tax residency and select tax status of country of residence where you are living
In my experience, I live and work outside uk, you pay tax only on income earned in the uk. Any income earned outside uk is taxable outside uk and there’s no “double taxation.”
@@kellywalker4494correct, but the suggestion here was basically along the lines of go work in dubai (a country with no income tax), keep travelling and you'll not pay UK tax, which is not true as HRMC will want "some" of it once you come back.
Great Video Sasha, Couple of points to mention :
- Near the beginning you say that the employee puts in 5% and the company 3%, it is actually 4% that the employer contributes and the government indirectly contributes a further 1% on top (due to the employee not paying income tax on their contribution).
- as you hightlight, most company pensions schemes are limited in what you can invest in and by default follow the old school life strategy approach, but you can transfer out to another more flexible provider (appreciate that the average employee may be wary of doing this, but your typical viewer is more likely to do this, than the average Joe). This is what i do, typically once a year i move my funds from active pension into my Interactive investment sipp.
- Regarding high fees on dc company pensions, the government has limited these to 0.75% per year , thats the max of the mgt charge and any fund fees.
- Also pensions are not included in your estate, so if you have sizable amount in your pension, this can result in a significant saving if you want to pass some/all of the pension on your spouse.
- Tax raids on pensions are a risk but realistically it would be political suicide so the government at the time are more than likely to go for easy targets like isa limits and capital gain allowances(like they have done this year). No one knows the future, and with the reduction of the lifetime allowance (granted this could change), it makes putting more money into your pension, less of an concern from a tax perspective. Most of the tax implications when the life time allowance existed could be mitigated to a greater or lesser degree (ie partial drawdown for example). Also labour are unlikely to reverse the life time allowance, as it was stupid tax, i suspect they will tweak other tax incentives, worst case if they do reverse it, it will be staggered.
1. I was talking in gross salary numbers because these are way easier for people to understand. I appreciate the reality is a little bit more complicated but this is a short RUclips video.
2. The fees are capped but then go and add the transaction fees, fx fees and any other fees on top. And I did say that often these sit in the 0.7-1% in the video - the audience here is international.
3. We’ll have to agree to disagree on future risks. Labour wants to reintroduce the Lifetime Allowance and significantly reduce it… That’s just one example.
@@SashaYanshin Hi bud, totally take your points on board, and yes, I am talking from a uk perspective so not generalising like you did in your video for the international audience.
Point 2 charges are a max of 0.75% of the pension pot, that is for the platform and fund costs all in. No companies running a company contribution pension is allowed to charge more than this.
point 3, who knows, Uk politics changes based on the wind direction these days.
@@SashaYanshin A slight point on the Life time Allowance, when it came in there were protections offered if you were at the allowance limit and so you had a protection on your funds at that point, though you couldn't add further to the pension.
Totally agree about the ultra conservative generic pension funds that many people end up living with. I’m with Scottish Widows and was able to find a fund called Fundamental Index that tracks the top 1000 global companies and has given a reasonable return over long term. I had to hunt through a load of rubbish funds to find it though. My employer puts in 9%, so it’s a no brainer.
9%!!! That’s phenomenal
@@Eric-gk7sl Yea…they stopped being so generous a few years ago for new starters, but it’s in the terms of the contract for old timers like me 😉👍
Im with Scottish widows I'm in the pens portfolio 2.
I get 10% from my employer I pay around 8%
My employer double matches me.. getting 12% from employer...
@@manjsingh5073 Brilliant! Make the most of it. Some people don’t but it’s like declining free money!😉
Thank you.
I looked at the default fund from my pension provider a few months ago. I was annoyed to see it had 15% bonds and a high management fee - I am in my thirties...
I instantly switched into a "passive global equities" fund with much lower fee and whose past performance looked somewhat similar to the msci world index I use in my stocks and shares ISA.
I saw the same thing with mine. I was like this is bullocks and I expected more from Scottish Widows. So I changed to a better fund with lower fees. But I also have my own sipp and properties, never have all the eggs in 1 basket
@@leonhenry4861 After becoming more investment savvy recently, i checked my Dads SW pension. projected growth over 10 years? -10%. oh why's that? Massive fees on actively managed bond funds. It really is criminal. since then, ive moved it to vanguard and invested it into passive trackers... what a joke
@@NedFlanders39 the fees are a rip off. And because it’s a work place pension most people won’t think to change the fund it’s in. Anybody under 50 should be in emerging markets. Then anybody over should change the fund to something less volatile. Hope your dads fund grows like it’s supposed to.
@@leonhenry4861 yeah exactly. some people are too worried to do it themselves and would rather just trust the 'experts'
@@NedFlanders39 can’t blame them though. You’d think these people with fancy degrees could do better, but the fact is they do it for a pay check / bonus. That’s why I handle my own. It’s mine to lose.
Thanks Sasha a very helpful video to bring a fresh perspective, I am critical of just opting into a pension just because most people do and it depends on personal circumstances, for example I am in my early thirties and would like to be mortgage free in a few years and any savings I put into a pension now will slow me down to achieving this goal. However it is not an easy decision as the tax savings from a pension are really significant at retirement and are not just a simple case of deferring income tax till later in life. In the UK you get 25% tax free at drawdown and this does not impact the personal allowance which assuming my calculations are correct makes a big difference, 2) the SIPP is an additional tax wrapper so say you use up your ISA allowance each year any additional savings for your retirement would if left outside your pension be subject to capital gains and income tax, 3) any savings outside of a pension are likely to have IHT liability, 4) employee contributions are effectively free money unless perhaps you are self employed / family business. I think one thing we would all agree that no one should reach a decision on whether to opt in or out of a pension without very careful consideration of the facts and their personal and family circumstances.
Great video
👍
It depends where you are from, for Singapore, when we put money in our secondary pension account known as srs account, we can invest the money inside into anything on the sgx market
Great video! I still pay more into my pension than I do in my brokerage account due to a law in Ireland where investing in ETFs comes with a deemed disposable rule where income tax has to be paid every 8 years on all unrealised profits. Which means the benefits of a 9% vs 6% return doesn't matter as much. But for most other countries these are all very valuable points.
Your country is stupid as hell. A wealth tax on unrealized profits makes no sense whatsoever. And it's stupid squared to make anyone under a hundred millionaire pay a wealth tax on investments and retirement.
Wow, paying taxes on unrealized profits is insanity, I hope they don't pull that trick off in the US!
Irish revenue authority is becoming a scammer lol😮. Taxing unrealised gain is daylight robbery.
Tax on unrealised profits is a theft. I didn’t know wealthy country such as Ireland can be so unfair. Well, Slovenia’s pension system, is probably one of the worst in Europe. It is state owned and non transparent, without any flexibility for worker to decide how much and where his pension money goes. On top there is a max pay out caps that are very low…. To mention a few points. UK has an pension system in comparison allowing me to manage my pension pot in a SIPP by myself. I am only worried about future tax obligations especially the Lifetime Allowance being fixed for a few years now. Tax hike on the wealthy. Ps. Blaž must be Slovenian name 😊
Move country
Successful investing is hard work because it means disciplining your mind to do the opposite of human nature. Buying during a panic, selling during euphoria, and holding on when you are bored and just craving a little action. Investing is 5% intellect and 95% temperament.
How can avoiding the 45% tax penalty that I would otherwise pay would not be a good idea, especially if I have full control over where my pension is invested? What type of advice are you giving your viewers?
It's possible to switch out of a pension fund that does not suit your needs and into one where there is a choice of investments. Take Aviva, for example, you can choose the level of risk that suits you and the fees are extremely low. It would be absolute madness to not take advantage of the £60k tax-free pension savings threshold that is allowed in the UK. If you decide to take your bonus in cash, the taxman takes over 45% away. Whatever uncertainties there are with the future of your pension and its tax treatment cannot be worse than the uncertainties that there are with the share market - especialy if you can invest the money in a similar way, with various risk profiles to choose from. So why turn your back on free 45% tax-free money?
For someone who's financially illiterate your videos are so informative thankyou!!!
I watch this video each time someone talk me inti adding more to my pension. This video changed my life perspective. I now try to maximize my stocks isa instead. Thank you again and again
Yup. Good man. I've been explaining this to others for a while, but most listen but don't hear.
Pension savings ending up forced into an annuity just makes the financial types more money. If the markets average 9% and pension funds and annuity finds return 5%, the financial types are taking the 4%. Take control, learn how the system works and save yourself from funding other people.
I agree about the fund choices in workplace pensions. I'm lucky that my workplace pension is with Hargreaves Lansdown and have a great choice of funds in there. However, I ensured I moved out of the default fund as it was - as you rightly say - very risk averse. Employees need to be aware of this, do their research and take action. We are lucky that HL actually run regular webinars for us employees and tell us about this.
My old pension is with HL too - I think they're great! Just wish I could convince my current employer to use them too, instead of Aegon Retiready which is a load of 💩 because it gives me no clue how my investments are really doing.
@@robertpearce7795Hi, I’m sure their profits art coming from your pot!
Think it’s worth managing it yourself. You will take more care of it and make sure it is there for you when you need it.
Take care M.
I'm with HL and in the generic fund, going to spend some time looking into other options they have.
You could open a SIPP and after every few years you migrate your company pension into your sipp and invest it into SandP. That way you can get around the fees/bad returns. It's what I've done in the past.
Great points!! It also depends on the pension fund your company chooses, my actual pension provider is crap…I can choose between five funds, this pisses me off a lot, while my wife has access to more than 300 pounds and I can see the difference! 13% year on year for her (I made the selection of funds) instead of 4% for mine. My company tops 10% and I add 7% but I need to find a way how to move the funds to my private pension provider moneyfarm, something I’ve done each time I moved to another job.
Don't leave your pension in the workplace pension , move it into a SIPP at regular intervals, then you have easy control of how it's invested and risk/return for the investments. Your pension is not included in your estate for tax purposes so no inheritance tax on SIPP funds, it can be passed to your spouse if you pre-decease them ( so no 50% cut like with a typical "widows" pension) and even on to your kids if the pot is not used up in their parents lifetimes.
Gr8 vid Sasha - in ur calculation at @8:45 u did not include the tax saving tho? correct me pls? on the 58.91 u ve to add the tax saving too? If I am on 40% tax benefit atm and I will withdraw my pension at 25% tax rate for eg - so we need to add 15% to 58.91 as well - right?
You can do regular partial transfer out of most work place pensions into a SIPP with a provider like vanguard to choose the type of fund you want. In my case I've picked FTSE world all cap index... the default fund at work looked poor. Much happier with my choice and fees are low.
Great points. My private pension is performing MUCH better than my company pension, which is performing about as well as dog poop. I'm itching to move my money over but having all my eggs in one basket is a bit scary, so I'm still sitting on the fence even years later. Might be best to just invest it myself, but I'm super happy I picked one some property at the bottom of the GFC as that will be a nice source of income in retirement, regardless of what happens to the pension funds.
In USA try to work for better employers. You can contribute 20k to Roth 401k + get employer contributions( will be tax deferred) + contribute to after tax 401k and use same day in plan conversion to Roth. You can put away around 60k annually. Also good employers have an option to create brokerage accounts within 401k plan and buy anything the broker offers excluding the stock of your employer.
Cheers man
Excellent Advice.
One extra thing. On death you can only pass a pension onto a dependent beneficiary such as a spouse or young child. Otherwise the pension payments end. Your own investments however become part of your estate upon death and can be allocated to whoever you want.
Then maybe you should consider not being a childless coomer, Stevo, eh?
So your reasons not to pay into a pension are:
1. Because you are trying to predict tax policy in 75 years
2. Because default funds exist
3. Because you are assuming you would achieve higher growth outside of a pension (why would that be the case if you’re invested in the same thing?)
4. Because you are assuming that pension fees are higher than ISA fees (Legal and General’s pension costs 0.09%)
5. Pension access is inflexible until you retire (Isn’t that the point? Also doesn’t that go against your previous arguments about growth if you’re unable to disinvest?)
6. You say there are no circumstances where you can take money out before you retire but this is untrue (especially in illness cases)
7. Your concerns about needing money for health are bizarre considering we have public healthcare in the UK. Also see my previous point.
8. Your argument for being against an emergency fund would also go against your growth arguments if you needed to disinvest at an disadvantageous moment (look at sequence of returns risk)
9. Again, you are trying to predict tax policy in 75 years (but you neglect to mention estate planning which is one of the biggest pros of a pension)
Nobody can predict the future, but I think this video will needlessly scare a lot of non-financial people into stopping their pension contributions when that maybe a bad choice for them. I would hate for people to not adequately save for their future because you’ve scared them.
Finally a comment that makes sense to me. This video feels like scaremongering and he's going against the grain of advice for the sake of views. While the points made are technically true they've been irresponsibly presented. Ideally they should be presented in a way that allows people to make an informed decision and not in a way that makes them anxious about pensions and financial advicers.
Hi, now at the back end in my 50 and following health issues making sure that the pot is part of my estate when I do die is very very important.
To show where I’m coming from, I looked my life expectancy with Diabetes, it was 67. State retirement is 67. Doh!
Now I just missed a fatal heart attack at 48, went to hospital with chest pain from just walking or climbing the stairs. This would have killed me if the artery had blocked, only have one.
So do I think I will see 67???
It’s not hard to see the answer.
Take care all M.
4. I'm not sure where the LGEN pension cost came from. Their spread and management charge
is more than five times the quoted figure of 9 bps.
It's good to take full advantage of your workplace pension and minimise the associated costs, though. It's food for thought, but I don't think Sasha is recommending we all stop making contribs, opt out and put the money into an ISA instead. People have very different circumstances.
The argument in the vid is more applicable to younger folks with time to spare and plenty of choices.
For example, if you were building a pot for yourself, didn't want/need to leave a legacy and wanted to minimise the size of the pot versus income generated, it's easier to do in an ISA wrapper. Sure, tax rules can change down the line, but so can many other things besides. Don't worry too much, plan using the best information available at the time and adjust down the line accordingly. :)
Counterpoint: there are 100 trillion videos and comments and articles on the internet all saying the benefits of paying into your pension with little nuance, while it's so hard to find opposing views that it seems somewhat cult-like despite there being real concerns that everyday people often bring up. I'm grateful that some people have thought through some edge cases and make content about it. I'm also grateful to people responding and debating/criticizing these arguments. But I don't think we "need to be protected" from these discussions if this is the fear. We're all adults here and can figure stuff out, let the free debate and discussion continue.
I mainly pay into my workplace pension (DB) as a backup. If I totally fuck up my investing by selling all my S&P 500 and YOLOing into a jpeg of a monkie then at least I've got my workplace pension as a backup. Other than that my main retirement plan is to keep maxxing out my ISA and let is build over time.
@8:03 The calculation is not indicative of the actual future value because it doesn't take into account the cashflows each year we pitch in and also the growth rate of these new cashflows.
Example:
Initial pension cashflow = 2400 ( 24.000 after tax annual wage * 5% * 2 )
Growth rate = 3% ( A rate of increase close to the inflation )
N = 50 ( number of years )
Return of the pension portfolio = 7 %
-->FV = 1,504,387
Initial Investment cashflow = 1200 ( 24.000 after tax annual wage * 5% )
Growth rate = 3% ( A rate of increase close to the inflation )
N = 50 ( number of years )
Return of the stock portfolio = 9 %
-->FV = 932,946
You make fair points across the board but in a lot of situations it's not as a big as you say (varies by country though).
For the US:
To your point of tax rate in the future: roth
To your point on funds: some 401k allows you to manage like a brokerage account, no fees. But all that I've seen thus far across multiple employers do have both conservative and aggressive fund options. I do agree the funds have more fees than an etf though.
On liquidity: in the US you can borrow against yourself or use 401k for a primary home acquisition downpayment.
On tax change risk: I agree at many countries that's a big risk. In the US not so much.
We have NOW, absolutely terrible performance for me. I had a nightmare switching my provider too as I remain with my company and NOW don't allow partial-transfers! I dropped around ~9% in the few weeks that it took them to crystallise and transfer. Shocking.
How you think is how it works. For a lot of people not being able to access there pension is a real plus as they would have, at some point used the money to get over a bump & they would not have put it back !
That is also a very good point 👍
Cracking vid as always
Thank you!
To me you are sort of genius…you understand pretty much how this sophisticated world work out, I mean about useless thing like money!.. keep educating us!
Good advice. I don't agree that you shouldn't pay into it, at least not here in the US. But, don't leave them handle your money for you. I have a self-directed portfolio for my 401k which means I make my own investment decisions. I invest in any stocks I like. I took it over about 3 years ago because I got mad at how shit their funds were. Since I took it over, my 1 year return is 47 percent, 2 years is 95 percent and year to date is 17.46 percent. I made some bad mistakes at the start but I learned from those mistakes and now, there is no way that I would ever let anyone else handle my money because 1) who's going to care as much as I do about it 2) investing is super interesting and a skill you can keep developing. 3) They are pretty damn obnoxious when you try to do it yourself and try to make you think that you're an idiot for trying to do this, that you should just leave it in the hands of the professionals or something. That said, the market is dangerous right now and I might still get burned but at least if I do, it will be because of decisions I made and I will learn from them. In the long run, I think that puts you in a much better position.
Completely agree with you Daniel. I've done the same with my investments in the UK. I didn't have the confidence to do all my own investing for a number of years but if I had followed my gut from the beginning I would have smashed the performance of the professionals who I was employing. The final straw was when they wanted to increase their annual fees from 0.50 per cent to 0.74 per cent which they tried to convince me was 'just' a 0.24 per cent increase. I pointed out to them that this was in fact a 48 per cent increase in their fees and then I terminated their contract.
@Sasha Yanshin Could you compare UK SIPPs? I'm with AJ Bell and Vanguard. My understanding is Vanguard is slightly cheaper on fees but has less etf options than AJ Bell e.g. s&p 500 information technology.
My largest private pension lump sum is a measily £11,000. Yielding a paltry £47 per month! In other words, a packet of Marlborough lights each week!
Hi Sasha, I am new to pensions and appreciate this video is a year old. My pension allows me to transfer out and invest in Vanguard, as an example. I can also select different funds within the current pension provider. Also, I get additional "free money" as I am a high rate tax payer. That's a lot of free money to turn down? Appreciate regs can change but that's with anything right?
I agree that this shouldn't be your only approach but it's still very damn attractive.
My limited experience of pensions/ pensioners,, my grandad, RAF for a couple years in the 50’s then worked as one of the masses (clever dude though). My misses grandad, entrepreneur, skilled metal worker and fabricator married to a lady clever enough to do PAYE.They built a business and invested in stocks bonds and shares. A friend of the family , middle aged , cemented her fortune by securing pensions from the above mentioned.. I always wondered why,, of course, no one reads the small print , and relying on a debt based system, the numbers always go up,, good vid Sasha,, the word pension is thrown around quite often with very little understanding,, sounds like a yield farming crypto scheme backed by government promises
Wise words
They seem to get you every way; the closer you get to retirement the more risk averse your provider becomes with your investment and the more you end up in "safe" bonds... they've been doing well recently, haven't they. I got stuck with a crappy pension forty years ago, the way it was sold to us it sounded great, however the company I worked for rifled the scheme; payment holidays, loans to the company and merging in a poorly performing management only scheme... all perfectly "legal" at the time, apparently. The average person has no idea how pensions work and no idea how they are being shafted, I started to understand what was happening and worked my arse off to fund decades of ISA's... I feel I'm in a better place but barely given the under performance and high fees of my pension schemes... and then there's inflation, great!
It may well be worth the while using a Stocks and Shares ISA account to grow and develop your retirement pot because of it's tax free advantages and the ability to invest in a plethora of low cost index funds of your choice.
If I'm not mistaken there was a belief prior to the implementation of LTA that if you contributed to a personal pension or SIPP then you would receive 25% tax-free of ALL contributions and growth when it came time to access the pension in the future e.g. today. Even with the 'benevolent' chancellor scrapping the LTA, the 25% tax-free still has a LTA imposed. Pension savers/investors that trusted gov during noughties, nineties and earlier have still been screwed over if they have made good investment (not product) decisions and seen the top-line of their 'pot' grow beyond £1.07M.
Sasha,
Geometric vs Arithmetic
That is all,
Love you
The single biggest reason I don't pay into a pension is because I have zero confidence it will still be there in 30 years when I got to claim it. We should have learned this after 2008.
Yep. Many people hot stuff screw when the company i worked for went out/bought up
This is pure gold
It's all about education Sasha. This stuff isn't taught at school. 🤔 I'm 49 and I've only really got my head into finance in any meaningful way in the last couple of years. I've consolidated my old workplace pensions into a SIPP and luckily I was able to change my current workplace pension to some Global "All equity" passive index fund thing with cheapest 0.09% fee from the default "safe" one. Other funds were available but with stupid fees.
I agree with you that pension funds can be and are quite limited in certain circumstances but I think pension providers are starting to realising they need to offer a little more flexibility these days. Like most people my age who've not saved anywhere near enough to retire on, I can't really envisage not working ever. The one other benefit of a pension is that "currently" it's exempt from inheritance tax and if I die before I'm 75 my kids can withdraw it tax free.
What I've learnt from you amongst many other "decent" financial youtubers I have tried to pass on to my kids in the simplest of terms, just to get them investing within an ISA.
Same here. I'm 52 and have only really been self educating in this area recently. Pensions are not in default funds but global index trackers. I have been drumming into my teenage kids the importance of investing. They can see how their JISAs and JSIPPs are doing and this is an incentive to invest. I wish I'd been more clued up about investing as a teenager but I'm very happy that my kids will be very knowledgeable even before they've started their careers.
A few fair points there. Interesting.
@8:40 I totally get the maths but surely the second example of someone investing in the S&P 500 rather than their pension should have income tax taken into account. Therefore, if someone is taxed at 40%, they would be left with $0.6 for every $1.0 they could have put in their pension. Therefore they would invest a much lower amount. Therefore their return at 9% per year in the S&P 500 would be 0.6(1.09)^50 = $44.61x which is lower than if the person invested in their pension. Granted the return on investment via a pension would then be taxed when drawn. For their to be no net gain by investing in a pension the effective income tax when drawing their pension would have to be 24%. Therefore if the effective income tax rate at the time the money is drawn is less than 24% they would have been better investing through a pension, if higher they would have been better investing themselves through the S&P 500. Obviously the numbers are different if someone pays more or less income tax right now.
I think 50 years is an ambitious figure. Auto enrolment starts at age 22, and I won't have the financial need to work until age 72, so I won't. I just did the calculation assuming 40 years of investing, and the numbers are 29.9x and 31.4x. not a huge difference. Also, platform fees have not been taken into account, which would probably tip the scales in favour of the pension for an investing horizon of 40 years.
Hi Sasha, a few comments in favour of pensions. Its true you save tax up front but pay later, but you also should make money from the tax element that the goverment has lent yo, also 25% is tax free. In addition you have national insurance savings which a kind employer may pay into your pension. Some pension companies offer life strategies for sure but some will let you opt out and choose your own if you can be bothered, in this case you get all the benefits of matching cash, tax break and narional insurance saving plus the chance to play with the stock market if you wish. Additionally pension can be good in terms of inheritance, not something you would think of when your young but middle aged, and your pension could be better for your next of kin rather than cash or assets. You are right no one knows whar will happen in the future its a gamble but all you can do is improve your odds. Its a balance for sure and you should live your best life today, but if your lucky retirement does come sneaking up one day.
Your comparison between investing inside/outside pension uses excessive parameters. The formula for the breakeven return differential between the two is (2^(1/t)-1)(1+r), so with more reasonable parameters: at 7% S&P return for 30 years, you would need a return of less than 4.5% in your pension for you to be worse off.
Also, in retirement you typically have more flexibility on where you can live, so if the UK goes berserk on taxes, you can leave for a more friendly destination.
"leave for a more friendly destination". I see, and this future UK government would not foresee such an exodus and put severely punitive arrangements in place to prevent you doing so with all your invested pension money? This is blinkered. As as an adult you are deemed to be gamble-aware. Every pound paid into your SIPP (even if self-managed, let alone these scam schemes) is a hostage to fortune. Hiding your head in the sand is not the right response.
If your pension sucks and they make you chose their stupid funds, I completely agree. Fortunately, mine doesn't. However, once I hit 59, I am going to start converting my 401k it into a Roth IRA. Hopefully, by then, I can retire so my income will be zero. That way, I will avoid some of the taxes on the withdrawals.
Ironically I've been thinking about my company pension a lot recently as its performance is reprehensible! However the company contributions are a bonus.
People have looked at me weird for years when I say I don’t do pensions.. I’d rather invest in the winners - Thanks Sasha!
But pensions don’t have anything to do with investment choices, they’re just a tax wrapper. What could you not do in a pension that you could do elsewhere?
So you're paying tax and NI when you don't need to as it could be going into your pension and also giving up your employer's contribution? Literally turning down free money?
I do both DC pension and Vanguard life strategy 80.