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Pension Funds Association Introduces Quality Mark, Stick With Cash ISA's

Personal_Finance / Pensions & Retirement Sep 21, 2009 - 10:43 PM GMT

By: Nadeem_Walayat

Personal_Finance

Best Financial Markets Analysis ArticleIn an attempt to enliven battered and bruised employee / investor interest in pension products after many have seen their pension pots dessimated by both the stocks bear market and companies going bust. The National Association of Pension Funds (NAPF) has introduced a new Quality Mark to highlight the supposedly better constructed and presumably 'safer' pension products offered by employers on behalf of its 1200 UK fund providers.


My own opinion on personal pensions has not changed since the advent of Cash ISA's in that if one wants an extremely low risk pension then the only option is to utilise your annual Cash ISA allowance and fix for as long as possible when interest rates are high (as I repeated stated during last years opportunity right up until early October 2008, when Cash ISA fixes were still available at between 6% and 7% for several years).

Don't be seduced by the tax back gimmick! As we have witnessed pension funds lose more than 50% of their values over the past 2 years, and then there is the expectation of a large chunk of the fund having been consumed by annual commissions over its lifetime.

Additionally, when you take you pension the income received will be taxable and will be under conditions that the bulk of the fund must be used to purchase an annuity. Whereas with a Cash ISA the retiree retains complete 100% control of the funds to do so as they wish and ALL OF THE INCOME AND INTEREST GENERATED is TAX FREE ! Additionally if the pension saver wants some element of risk they can include a small percentage of the funds in a share ISA.

Pension / Cash ISA comparison

As an example of the difference of performance of £3,000 saved annually over the past 10 years between a Cash ISA and a Personal Pension plan taking account of the following -

  • Start Date April 1999
  • Cash ISA average fixed rate 5%
  • Pension Fund annual Fee of 2%
  • Pension Tax back of 22%
  • Pension Fund annual dividend income of 3%
  • Pension Fund performance inline with the FTSE 100 Index.

Cash ISA

Over the past 10 years you would have saved £30,000 into the cash ISA which would now be worth £39,620

Pension Fund

Over the past 10 years you would have invested £30,000 which would have been topped up by the Inland Revenue to £36,600. However despite the top up your pension fund would now only be worth £30,641, i.e. showing a gain of just £641 over 10 years where the only winners are the pension fund managers.

Comparison - Cash ISA, Near zero risk gain £9,620 +32%- Income Draw down Tax Free. Pension Fund gain £641 +2% AFTER Inland Revenue top up of £6,600 has been included- Income Draw down Taxable.

Employer Contributions

Off course one could also continue a personal pension plan at the same time into which only your employer would pay the usual range of between 3% to 7% of salary of employer contributions.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 400 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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Comments

E Pearce
28 Sep 09, 05:03
Pension quality mark

The comments re the Pension Quality Mark are leading. To get the PQM the employer has to contribute at least 8% of salary and fees must be no higher than 1%. That is the comparison to make against an ISA - not a personal pension plan with no employer contributions.


Princes24
14 Feb 10, 06:33
what about the future?

This has been a very comprehensive report thus it encouraged me to take a closer account on my investment especially with my retirement pension plan, I heard a good reward in sipp, I hope to see more next time.


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