Why I Am Not In a SIPP and It’s Unlikely You Should Have One Either

by Magical Penny on July 20, 2011

Last time in Magical Penny’s pension series we discussed the 3 Reasons to Open a Self Invested Personal Pension .

To recap the reasons to have a SIPP were:

  1. Tax efficient saving
  2. More choice
  3. More control

However, as a mid-20 something I don’t have a SIPP and I don’t think you should have one too. Whilst SIPPS have many advantages, for most people in their 20s and 30s its not the best way to save.

 

SIPPs don’t give you extra money like an Employer pension can

For many of us, the first time we think about pensions is when we are offered one at work. If your employer offers to contribute to a pension, you should definitely take it because it is ‘extra’ money on top of your salary -the only difference between a pension contribution and a raise is that you can’t access the pension money until you are 55+. But it’s still yours no matter what. It’s not tied to your company (unless you have what’s called a ‘vesting’ period, or it’s in the form of company stock but that’s a whole other article).

Bottom line: Pensions offered through employers typically aren’t  as SIPPs in terms of cost and performance because they often have limited investment choices and costly funds, so you may be tempted to get a SIPP. But your first priority should be an employer based pension for the sole reason of the company ‘match’ -free money that you would leave on the table if you decided against it.

 

You can’t transfer a current pension into a SIPP

Another reason SIPPS aren’t a good option for young people is that you can’t transfer a current pension into a SIPP. For many of us, we are already paying into a pension with our employer so whilst a SIPP would be better (for more control and choice), we can’t really take advantage of a SIPP because we can’t transfer the pension we already have if our employer is still paying into the current plan.

Bottom line: Make sure you are maximising enough in your employer pension before you even think about a SIPP.

One way to get around this would be to get your employer to agree to pay into a SIPP rather than an employer based plan but in my experience it is relatively rare that employers agree to this.

 

cautionYou can’t transfer an old pension into a SIPP if it is less than £10000

If you move jobs it’s likely you will end up with lots of different pension plans. This can be an administrative pain and also make it harder for you to get a full view of your investment allocation and total saving. Therefore, it makes a lot of sense to consolidate your pensions in to one provider. If you can do so, then transferring all your pensions into a SIPP would be perfect as you could have full control of all your investments and have your pension ‘pot’ all under one roof for you to manage effectively.  This is what I looked to do when I recently moved companies and wanted to bring my two employer pensions together.  However, there are restrictions on the amount you can transfer: to transfer pensions into a SIPP the value must be £10000 (or you must have the cash to top up the value of your pensions to £10000).

Whilst I’m relatively proud of what I’ve managed to accumulate in the short few years I have been working, I’ve not yet reached the heady heights of £10000 in my pension, so transferring my pensions into a SIPP is not possible at this time. Eventually I intend to do this, but until then I will have to wait. I imagine most of us in our 20s are in the same situation of pension pots under £10k. And if you do have more than £10k in your pension I could do with some Magical advice!!

Bottom line: opening a SIPP now would not make any sense because it would not help me or you reach the£10000 transfer goal to get all  the various pension pots in one place. Concentrate on saving another way first.

 

SIPPs force you to commit to £300+ a month, or you have to start with a £10k lump sum

SIPPs are great for their flexibility and potential for low-cost tax-efficient investing, but because they can be so inexpensive (and therefore not big profit centres for investment houses!) many providers have rules about minimum investment levels. Typically you have to commit to pay in £300+ a month into a SIPP when you first take it out, or you have to start with £10000 as a lump sum. Personally I don’t think this is realistic for those of us in your 20s at the start of our careers. Whilst saving money for retirement is important, there are many other things to save for and being forced to save at least £300 could lead to stress and strained financial priorities.

Bottom line: SIPPs can be so awesomely cheap for investors that investment companies want to make sure their admin costs are covered by insisting on high monthly contributions. It’s just not practical for most 20 somethings so don’t rush into a SIPP because you’ve heard it’s tax efficient.

 

If you are not a higher-rate tax rate a Stocks and Shares ISA would be better

The benefit of a SIPP is your money gets to grow tax free  -but you get a similar benefit in a Stocks and Shares ISA. The difference is that a pension saves you money at the start and the ISA saves you money at the end (you are not taxed when you take money out whereas with a pension you are)

If you are a higher rate tax payer (earning around £40k or more) then a SIPP is amazing as it allows you to skip paying 40% tax on your earnings above the higher rate threshold, essentially meaning you get £100 in your pension for only £60. This compares to the benefit of a standard rate tax payer who only gets to ‘save’ 20% -£100 in a pension for a real cost of £80.

Most of us in our 20s are standard rate tax payers so the benefits of a SIPP are not as good for us -but we can do something clever about it. We can save money in a Stocks and Shares ISA (which by the way can be just as flexible as a SIPP) and let it grow tax-free. Then, once we are earning at the higher tax rate, we can redirect the money into a SIPP or other pension  -essentially getting the 40% tax relief on the whole sum of our savings!!! That’s huge! For every £600 we save, we can eventually turn it into £1000 of pension money  (assuming we are earning at a higher-tax rate).

It’s a little complicated to explain but once you understand the concept, it lessens the appeal of a SIPP if you are a standard rate tax payer….as long as you commit to investing in a Stocks and Shares ISA instead.

BOTTOM LINE: A Stocks and Shares ISA is just as good as SIPP, only you save post tax rather than pre-tax. In fact, it can be more flexible than a pension as you can access it any time you need, and you can search out the inexpensive investment funds in the exact same way as for a SIPP.

 

And if you get your head around the tax game, it can make a lot of sense to first save in an ISA when you tax band is low and then move it to a SIPP when your tax band is high.

 

In summary, I’m looking forward to opening a SIPP when the time is right, but it’s not the right time for me at this stage, and if you are in your 20s it’s unlikely the right time for you. But don’t let that stop you from saving and investing in other ways:

  • Getting rid of all debt apart from ‘student loan company’ debt
  • Joining an employer pension scheme for the ‘match’/free money
  • Investing as much as you can in a Stocks and Shares ISA -up to £10k+ a year currently
  • Opening a SIPP when you’re ready  (reaching higher rate of tax or have £10k pension pot already)

 

I hope you found this helpful -if you have any questions I’d love to clarify things through email: adam AT magicalpenny.com

 

Other links:

Do You Find Pensions Confusing?

Confessions of a Procrastinator -And Why You Should Be Saving For Retirement Today

Do you trust pensions?

Why A Pension Is Like A Water-Proof Envelope

The UK State Pension

Final Salary Pensions

 

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The Truth about a No Cost Refinance

by Magical Penny on July 19, 2011

In the mortgage world nothing comes for free. So, when someone asks you if you’re interested in a “no cost refinance”, what do you think they mean?

They are talking about a “no cost refinance” in which you do not have to pay closing costs upfront. Thus the term “no cost”. This, however, does not mean you will not have to pay for those closing fees. It only means that you will pay for them in the long term. In most cases a no cost refinance will end up costing you more for your home over the life of your mortgage.

The primary advantage of a no cost refinance is that you do not have to pay the closing fees when sign for your new loan. By understanding how a no cost refinance works, you will be able to make the right choice about whether a no cost refinance is something that you want to look at further or avoid all together.

No Cost Refinance Types

A conventional no cost refinance takes the closing fees usually associated with the upfront payment and rolls them into the loan. This can occur in one of two ways:

  1. The closing costs are added to the interest to make it a no cost refinance
  2. The closing costs are added to the principle to create a no cost refinance.

 

(Note: A lender may choose to pay for these fees as well, but this is typically only done in very select situations where there are other factors involved.)

Either way, the result is the same. You will continue to pay for those closing costs throughout the life of your loan. This means that you could end up with a higher monthly payment after you’ve taken a no cost refinance, even if your interest rate goes down.

So, Who Wins in a No Cost Refinance?

The answer to this question depends more on what you are looking to get out of the no cost refinance. The fact is that interest rates are still quite low and housing prices have continued to remain stable. This could mean that you now qualify for a refinance that you didn’t earlier in the year. Unfortunately you may not be able to afford the costs associated with this refinance. This is when you will want to look at a no cost refinance as a way to get the refinance you want, without breaking the bank. The trick is doing some maths to find out if the refinance will actually save you money.

The No Cost Refinance Maths

It is impossible to tell you whether a no cost refinance will save you money every time. The assessment of a no cost refinance must be done individually. This makes it a lot harder for the average consumer to tell whether they are getting into a no cost refinance deal or a no cost refinance scam.

Basically, you want to have a look at the difference in the interest rate, loan length, and overall amount of the no cost refinance. If either of these are significantly higher than they were before the no cost refinance you may be in trouble. In all cases where you are unclear of the possible savings a refinance could provide, consult a professional.

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Do you need health insurance?

by Magical Penny on July 17, 2011

Like all insurance, health insurance is a financial product that protects you from costly medical bills if your health takes a turn for the worse or you suffer an accident. In the United States and other countries where medical care is not handled by the state, health insurance is incredibly important. Without it you are only an accident away from potential financial ruin as medical assistance is costly. In the UK, health insurance, otherwise known as “private medical insurance” is less important as the National Health Service is free to all – the costs are paid by everyone in the form of ‘National Insurance’ deductions from wages. However, despite universal healthcare in the UK, there is still a market for private medical insurance:

  • For those who want to be treated quicker than the NHS waiting list will allow for non-urgent procedures
  • To have greater choice on when and who does the operation
  • For those who want more luxury and comfort in a private hospital

If you’re reading this, its likely you have decided to get your financial house in order and considering what insurance you need to make sure your financial plans are derailed.

If you are in the US it is imperative that you prioritise life insurance despite the cost, because getting sick can quickly eat into even the most substantial of savings, or worse lead you down a path of huge amounts of debt. One way to keep costs down is to have a high excess –the amount you need to pay should you need medical care. By agreeing to a large excess (or example $5000) this significantly lowers the cost of the policy, yet still gives you cover to rely on should your medical bills grow in the event of a medical emergency.

If you’re in the UK, private medical care does have its benefits but for most healthy 20 and 30 some-things, it’s unnecessary and your focus might be better placed on other things, like saving for a house or investing for your future. That said, it does more sense to self-insure by regularly putting money away into a savings account. Having savings always gives you options, so if you ever wish to pay for a speedy consultation or simple procedure, you can get things moving rather than relying on the NHS and its something long waiting lists.

It never hurts to prepare for a rainy day and if the time ever comes when you need extra pennies, they really will feel magical! Make sure you are always saving something!

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How to save money on your insurance

by Magical Penny on July 14, 2011

Normal scheduling will resume shortly, including information on if SIPPS are right for you and other investing topics, but in the meantime, I hope you find this guest post helpful! Take away point: negotiations work -use them to your advantage.

Whether you’re shopping for home insurance or boiler cover, you’ll want to make sure you get the best deal possible. But it isn’t going to be handed to you on a plate. Haggling will be your best tool when it comes to getting an agreeable quote, whether you’re renewing with your current provider or looking elsewhere. If you’re looking to get a decent discount, you’ll need to learn the gift of the gab quickly – here’s what you need to do.

Start at 60%

When you’re looking to get a good deal, 60% of the asking price is a good place to start haggling. In most cases, you won’t get this much of a discount, but it gives you room to manoeuvre – and means that a 10% or even 20% should be achievable.

Play one insurer off against another

If you’ve managed to get an agreeable quote from an insurer, don’t jump at it – use it as a springboard to a better one elsewhere. Get a reference number and contact competitors – insurers are desperate for business in the current climate, so it’s in their interest to beat the quote and take your business.

Have a back-up argument

Go into your haggling prepared with a plan B or even plan C – insurers deal with hagglers every day, so they’ll have stock answers for common queries and tactics. Think of ways you can sell yourself as a customer – your years of no-claims or, in the case of car insurance, advance motoring certificate.

Refer your friends and family

Telling an insurer that you’ll refer your friends and family in return for a discount may well seal the deal. Another option is to promise repeat business – if you’re a property investor and are looking insure more than one home, suggest that the more policies you take out, the cheaper they become.

Be realistic

Don’t get too carried away – if a boiler insurance policy comes at £10 per month, it’s unlikely you’ll get it down to £2. However, play your cards right and it could certainly be nearer £8. At the other end of the scale, if you’ve been quoted a four-figure sum for your first car insurance policy, there could be room to get down to three-figures if you argue your case. Making sure the negotiations go your way is a delicate process – be polite but firm, determined by flexible and prepared to put the hours in and you should come out with a few extra quid in your pocket each month.

 

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Using credit cards to do more with your money

by Magical Penny on July 13, 2011

Editors note: Today’s article is a guest post from Mike.  Whilst credit cards can be controversial when it comes to personal finance, they certainly do have their uses. Just make sure you’ve paid off any credit card debt before you start investing.


Using credit cardsFor most people, credit cards can be a handy way to pay for certain things over a longer period of time. This might mean taking care of larger bills, splashing out on a luxury item every now and again,or treating the family to a day out. But what many people don’t take advantage of is the fact credit cards can be a means to help you better manage your money.

When you use your plastic wisely, it can do so much more. Of course, this is entirely reliant on how sensible you are with your cash in the first place and how dedicated you are to making sure anythingyou borrow is paid back on time. For those who have multiple credit cards, for example, it can often be sensible to use individual ones for specific things. So, if you want to clear existing debts, you might use one card for this and keep your other card for day to day expenses or emergencies only.

One thing everybody should do is compare credit cards to see which has the best rate of interest.If the rate on offer is better than what you are currently paying out to your current provider, thenperhaps it is the time to switch. One thing that can also be helpful if you are planning to do this arebalance transfer credit cards, as very often these will give you 0% interest on the amount you bring across from your own card. However, this may only be for a specific period of time so, as always, it’s best to check the details before you make the switch.

Another great option which can tempt people away from their existing provider is plastic that gives yourewards as you spend. Air miles credit cards continue to prove popular with people who are hoping to someday take a dream holiday to a destination they could otherwise not afford. As you spend, your air miles will accrue and if you have the account for a few years you could soon see them clock up enough to get you a flight to some exotic location or other.

The main thing to remember is that a credit card will work more effectively for you if you use it carefully, as opposed to maxing it out as soon as you get it. We all need a little help with bills fromtime to time or paying for expensive purchases, but with the right credit card – or one that gives you something extra each time you use it – your wallet can do so much more.

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Mindset -Cultivate A Good Mindset and Rock Your Life

by Magical Penny on June 20, 2011

When I first starting getting interested about investing and the stock market, I was pretty intimidated. Maybe you are too.

Similarly, when I graduated and was thinking about what career I should go into,  I was overwhelmed by the options. Even worse, there were some really good jobs I didn’t even bother applying for, because I didn’t think I could get them.

The difference between someone who applies and eventually gets the job, or the person who starts saving for the long term instead of just spending for today, is mindset. It’s not brains. It’s not blind confidence. It’s mindset.

 

This video also contains information about a limited-time offer that has now ended. Bad luck.

Sign up to Magical Penny to not miss out on future cool things!


How To Get The Right Mindset To Completely Rock Your Life

When it comes to being successful at saving money, growing your income, finding a career, and just about anything in life, it’s not really about what you know or even who you know, but success comes when you reach a point where have the right mindset to just GO FOR THINGS.

I’m not talking about being wreak-less, nor am I writing about simply *wishing* for a better life.

But rather I’m stressing the importance of working on yourself -reading things and doing things that gives your mind a chance to believe in your potential.

It might sound a bit too motivational, but you know what? You should be motivated to completely rock your life.

 

Change your mindset, change your life.

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Some financial preparation for after you’ve gone

by Magical Penny on June 15, 2011

Today’s post is a guest-post from Emma.  Magical Penny is predominately aimed at those in their 20s and 30s, encouraging you to start saving for the long term.  As you get older, it only becomes more important  to make sure you are prepared for the next stage of life. Today’s article takes this topic further into the future. Take it away, Emma.


A new survey has highlighted how changes in the economy have made things more difficult for some people to make some provisions for after they’ve gone.
Conducted by Engage Mutual, a provider of a range of products including over 50 life cover, the research polled 3,000 people across the UK. These people were asked about their plans to leave a will behind when they die.

It was revealed that 33 per cent of those who have already made a will are concerned that by the time they die they will have spent everything they had to pass on. One fifth of people also said they’d been changing their mind about what the contents of their will should be after rethinking who should receive the inheritance.

Commenting on the study, Engage Mutual spokesman Karl Elliott said:

“Wills are an important part of life planning and are there to ensure that your wishes are carried out when you die. It can be a complex process, and sometimes life’s twists and turns can make it more so, but a will can be changed to account for changes of mind.”

Another option you may like to consider to help your loved ones after you die is an over 50s life insurance plan. Policies differ between providers, but most will ask that you fall within a certain age bracket at the outset, 50 to 80 years old, for example – and are a resident of the UK. Once the cover is set it up, the benefits are be payable upon your death, provided you’ve kept to the terms and conditions, and are able to maintain the monthly premiums.

However, it’s important to remember that an over 50s life insurance plan carries no cash-in value and is not a savings plan. The policy will only pay out when you die and any benefits, while free from income and capital gains tax, could be subject to inheritance tax – unless the policy has been written in trust. You can apply online, over the phone or by post, and providers will offer you the opportunity to get a quote that lets you see how much cover you could receive based on a specific monthly premium. It should also be noted that you could pay in more in premiums than the plan pays out in death, but this will depend on how long the premiums have been being paid.

 

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How To Invest -An Interview with Betty Jean Bell

by Magical Penny on May 17, 2011

Last week I had the pleasure of speaking with business coach Betty Jean Bell of Love Your Worklife

We met in Austin, Texas, at a party Betty Jean was throwing for Jenny Blake of Life After College. I couldn’t pass up the chance to meet such inspiring people and the event turned out to be one of the highlights of my trip.

Upon my return Betty Jean was kind enough to let me share the Magical Penny message with listeners to her podcast over at Love Your Worklife. In the podcast I shared how I do the bulk of my investing, specifically :

  • Why index funds (sometimes called ‘Tracker’ funds) are so great
  • How you don’t need a lot of money to start investing
  • The benefits of a strong mind-set and the fun of partying with high achieving people

Visit Love Your Worklife for the full podcast or read along below:

Click to read the interview transcript

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Are You Intimidated by Greatness?

by Magical Penny on May 4, 2011

It’s human nature to compare yourself to others. But does this help or hinder your efforts to prosper in the future?

Since returning from Austin, Texas in March, Magical Penny has been quieter than in previous months. I could attribute the inactivity to a particularly demanding period at my day job, or the extra time and effort I’ve been putting in as a founder member of a new Leeds based choir preparing for our first concert.

But that would only be half right.

Click to learn why…

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Avoid Hitting the Rocks of Financial Ruin

by Magical Penny on April 27, 2011

You’ve got to know yourself if you are to make progress in life. You’ve got to know what helps you, and what stops you from achieving the goals you set for yourself.

I believe the difference between high achievers and those who have little to show for their years on the planet is remarkably little. We all can be lazy, and be influenced by temptation. But those who end up meeting their goals simply have a better understanding of themselves and ‘trick’ themselves into getting things done.

Controlling Yourself –Lessons from Ancient Greece

One of the most famous ‘tricks’ that someone played on themselves is in Homer’s Odyssey, an ancient Greek story of Odysseus and his journey across the known world.

Read the rest of the story

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