Pensions Versus Savings

EdInvestor

Actually one reason why the Government decided to introduce stakeholder pensions was moral risk - or moral hazard as it's officially known in financial services.

The restrictive nature of pensions - the fact that once the money's IN people can't get it OUT of the system for many years - and the lack of detailed regulation in the early years had enabled companies to take advantage and impose huge penalties on transfers.

These effectively locked the customer in and enabled the company to then milk the pension fund via high charges or and/ or through big exit penalties. You can still see this today with the nefarious MVAs and other exit charges on With profits funds, and the massive exit penalties imposed by the likes of Allied Crowbar when people try to transfer old pensions.

Hence a key feature of a stakeholder pension is penalty - free transfers. Ignore it at your peril, despite what they say about personal pensions being the same or even better.They may not be.

Moral hazard was also a key factor recently in the structure of the Pension Protection Fund, set up to safeguard company pensions, as the Government tried to avoid enabling companies to rip off the taxpayer by dumping their unfunded pension liabilities in the fund.

Moral hazard is normally something perpetrated by big sophisticated organisations on weak defenceless individuals, not normally the other way round.

dunstonh

Quote:
Property only really becomes an investment when you dont include the one you are living in.


I disagree.There are several ways your home can be made to work as an investment as well as the place you live: you can downsize to release capital or do equity release/home reversion, you can earn extra income by taking in lodgers (taxfree).You can rent it out and decamp to a hot climate for a couple of years, using the rental income to pay your rent abroad.......

.... if you compare this flexibility with a pension, the house wins hands down and that's apart from the fact that you can't live in a tax wrapper .

Its not exactly desirable though to have to downsize, equity release or take in lodgers. Renting it out to live abroad may not be ideal as what do you buy abroad when all your money is in your property?

You cant live in a tax wrapper but it can provide you money to pay for what you do live in.

oceanblue_3

EdInvestor wrote:

Actually one reason why the Government decided to introduce stakeholder pensions was moral risk - or moral hazard as it's officially known in financial services.

No, I didn't mean Moral Hazard in the technical sense; I meant the moral risk presented by the inherent liquidity of ISA's: that individuals are, potentially, more tempted to over-subscribe on the way in, and more tempted to use their savings before the "designated" time.


You still haven't commented on the point raised by Margaret Clare, isasmuf, dunstonh, and by me concerning the degree to which an ISA's inherent liquidity might compromise the objective of long-term savings in order to generate income in life after work.

EdInvestor

It's a free country oceanblue.

People are entitled to spend or save their money as they see fit, aside from the requirement to pay National Insurance contributions to provide Basic state pension + S2P or BSP + contracted out private pension to replace S2P, as an income for retirement.

It is otherwise not compulsory to save at all - indeed it is not possible for many people because they earn such low wages. For those that can save, what they do with their savings is their business, not yours.

oceanblue_3

EdInvestor wrote:

It's a free country oceanblue.

People are entitled to spend or save their money as they see fit, aside from the requirement to pay National Insurance contributions to provide Basic state pension + S2P or BSP + contracted out private pension to replace S2P, as an income for retirement. It is otherwise not compulsory to save at all - indeed it is not possible for many people because they earn such low wages.

I agree with you completely; nevertheless, most people need and many people want guidance in the area of providing income for life after work. This thread is dedicated to that issue, and you have proposed the plan to use ISA's rather than Personal Pensions. Many of us are looking for you to explain how this plan works in reality, and how falling interest rates, for example, might affect a reliance upon Cash ISA's.

Edinvestor wrote:

For those that can save, what they do with their savings is their business, not yours.

On the contrary, my clients DO look upon it as my business: this is why I'm so interested to hear your thoughts on the subject of Pensions versus Savings...I don't want my ignorance of your opinions to compromise their enjoyment of life after work.