arrgh help me!

Oompa_Lumpa

EdInvestor wrote:

Oompa,


Are you contracted out or in now?What sort of pension provision do you have?

I am contracted in and I contribute 9% to a money purchase scheme with my employer matching that contribution.

dunstonh

Contracting out and contracting in both carry risks. One is investment risk and the other is legislative risk.

You could contract in and find that the Govt then totally abolishes S2P and you end up with nothing (they have reduced contracted in benefits in the past which have not affected contracted out benefits).

Or, you could contract out and find investment returns do not give you enough to have beaten the amount you would have got if you contracted in. Attitude to risk and a decent fund choice are quite important there.

Contracting out allows you to take 25% tax free lump sum between age 55-7. Contracting in has no lump sum and is taken at state retirement age (whatever that ends up being). There are some differences on death benefits as well which may favour contracting out.

As Ed says, there is not much time left but I am more inclined to contract people out for the remaining years because I would rather have the money in my hands than in the hands of the Govt. Plus, I would rather have the tax free cash to invest than an income that dies with me or only pays spouse 50%.

Which ever you do, there is an element of risk one way or another.

wotsthat

I think the legislative risk is always going to be much higher than the financial risk and we are seeing that now.

I don't think that people aged 40 or under or so will ever see the fruits of being contracted in and that the entitlement to S2P will be 'swapped' for higher state pension entitlement.

I'm 39 and contracted out 16 years ago - seeing the payments going into a private pension actually encouraged me to add my own to increase the pot further.

I've never really understood the argument for contracting in - once a government has made a rebate payment to me it's mine. Where would I rather the money be? In my 'pocket' now or under the control of a future chancellor who, at this very moment, could be about 15 years old and have better things on his mind.

EdInvestor

I've never really understood the argument for contracting in - once a government has made a rebate payment to me it's mine. Where would I rather the money be?

Most of the people who contracted out in the late 1980s and retiring now and in the next few years will receive pensions significantly smaller than what they would have got if they'd stayed contracted in.

As time goes by this will become even more apparent as S2P is index linked and most people will buy level annuities with their protected rights pensions because the amounts are so small.

Eventually I predict this will develop into a scandal.Since most of these people had no idea there was a risk like this involved , expect a repeat performance of the endowment misselling scandal.

The decision to abolish contracting out in 2012, allow tax free cash and early access should at least spare the life industry and the Government some flak from this disaster, which would become even more apparent when the 1978-88 pre contracting out years of Serps entitlement drop out of the record.

margaretclare

Zwicky wrote:

Ed, do step down occasionally from your lofty perch and take a look at what happens in the real world.

I am afraid that I agree with Ed. Over many decades, I've seen - on the ground among real people and not from any lofty perch - the disasters that can come about through people being encouraged to adopt the 'childlike attitude' that Ed refers to. I hear it now from women younger than me who're just coming up to retirement and facing years of living on means-tested benefits: 'I didn't know - no one told me - we were told we'd be taken care of - I always thought it wasn't a woman's job to worry about pensions, that it was the husband's job....' In other words, it's always someone else's responsibility, the gubbmint, the husband, parents, anyone else. You hear it now 'What am I entitled to, will the council rehouse my son if I kick him out?' Always someone else.

Learning to manage your own finances is not rocket science. For a young woman like the OP may I recommend not only Martin's book, but another one entitled 'A Girl's Best Friend is Her Money' by Jasmine Birtles and Jane Mack. This is invaluable reading for any woman from 9 to 90. I've given a copy to both my granddaughters.

Student loans are the one exception to 'pay off all debts before starting to save' because they are at such low interest, or no interest at all. Always pay off anything that's costing you money i.e. interest! Then start to make the interest flow the other way, towards you rather than away from. Then make sure that you don't pay tax on the interest you gain on your savings - that's what ISAs are for. Simple, really.

Best wishes

Margaret Clare

dunstonh

Most of the people who contracted out in the late 1980s and retiring now and in the next few years will receive pensions significantly smaller than what they would have got if they'd stayed contracted in.

Please can you provide your stats for that. The last stats I read showed that it was about £1 a week lower on average.

Eventually I predict this will develop into a scandal.Since most of these people had no idea there was a risk like this involved , expect a repeat performance of the endowment misselling scandal.

There is no expectation of a scandal as contracting out is an annual decision and the failure of people to review on an annual basis is not the fault of an adviser. Also, advice cannot take into account future changes on legislation. In 1988, contracting out was almost a dead cert if you earned enough and were under a certain age. With Labour reducing the rebates, the fault lies with them and not the advisers.

Plus there are distinct advantages of contracting out and they can be more important to people than having to wait until state retirment age. Last week I commenced a protected rights fund of £40k for someone aged 61. Hes got 10k in the bank now an income from the rest 4 years earlier than he would have done had he contracted in.

With both options containing a risk, you cant choose one over the other, get to the end and then decide you should have chosen the other because that one was better.

I am afraid that I agree with Ed. Over many decades, I've seen - on the ground among real people and not from any lofty perch - the disasters that can come about through people being encouraged to adopt the 'childlike attitude' that Ed refers to. I hear it now from women younger than me who're just coming up to retirement and facing years of living on means-tested benefits: 'I didn't know - no one told me - we were told we'd be taken care of - I always thought it wasn't a woman's job to worry about pensions, that it was the husband's job....' In other words, it's always someone else's responsibility, the gubbmint, the husband, parents, anyone else. You hear it now 'What am I entitled to, will the council rehouse my son if I kick him out?' Always someone else.

Whilst I agree with you in principle, it still doesnt change the fact that a great number of people do need the tie in that a pension has because they cannot trust themselves not to spend the money.

margaretclare

dunstonh wrote:

Whilst I agree with you in principle, it still doesn't change the fact that a great number of people do need the tie in that a pension has because they cannot trust themselves not to spend the money.

But this is the kind of self-mistrust - what Ed called 'childlike behaviour' - that should NOT be encouraged! I thought that was what forums like this were all about - sharing of information with the intention that everyone should become more well-informed and able to trust themselves. It's a cliche, although a useful slogan, to say that 'no one looks after your money like you do'.

Having said all that, I do recognise the value of pensions planning at an early age - it's something that you should be able to set up and not worry about, it will be there when you need it. This is what the OP, Laura, was asking about.

Wasn't the idea of stakeholder pensions intended to be just for the like of Laura? You pay in 78p and the gubbmint makes this up to £1 which is then invested. A simple idea. However, I would recommend Laura to look at the whole of her finances and not just 'pensions' in isolation. There are many possibilities out there, not only Virgin which is said to be 'dire'. There are others which aren't so 'dire', and everyone will have their favourite. A household name like Norwich Union or Friends Provident would be worth looking at.

Margaret Clare

EdInvestor

dunstonh wrote:

Please can you provide your stats for that. The last stats I read showed that it was about £1 a week lower on average.

It's not hard to work out.The average overall pension annuity is 35k ( and I'm probably flattering PR funds by using this figure, one suspects they may be smaller). For a 60 year old man a fund of this size increasing at RPI as the second state pension does, will pay an income of 26 pounds a week accoding to the FSA's tables.

https://www.fsa.gov.uk/tables

If the man had a full record for Serps/S2P he would get approximately 80 pounds a week now. Approximately one third of the gap needs to be deducted because everyone was contracted in between 1978-88, so that means the the contracted out man will get 52 pounds.Quite a big gap.

There is no expectation of a scandal as contracting out is an annual decision and the failure of people to review on an annual basis is not the fault of an adviser.

I see, is that the get out of jail free card?So the advisors will all be able to show
a)that they warned the punter about the risk in year 1 and
b)that they also warned the punter that they needed to revevaluate the risk and retake the decision on contracting out each and every year,

...will they?

Somehow I doubt that these warnings will have been delivered.And will they have lost/destroyed the file, as they have with endowments?This time there won't be the pre-1988 cloak to hide behind.I suspect you may have to budget for payments to FSCS going up DH......

Plus there are distinct advantages of contracting out and they can be more important to people than having to wait until state retirment age. Last week I commenced a protected rights fund of £40k for someone aged 61. Hes got 10k in the bank now an income from the rest 4 years earlier than he would have done had he contracted in.

Yes, I agree with you that contracting out can be thre right thing to do. .But how many people made the decision based on a proper explanation of the risks and rewards in the past? Not a lot methinks...

dunstonh

It's not hard to work out.The average overall pension annuity is 35k ( and I'm probably flattering PR funds by using this figure, one suspects they may be smaller). For a 60 year old man a fund of this size increasing at RPI as the second state pension does, will pay an income of 26 pounds a week.

So you are working it out in your head. I prefer to use the recently published stats. I'm sure you have the articles recorded at your website.

I see, is that the get out of jail free card?So the advisors will all be able to show
a)that they warned the punter about the risk in year 1 and
b)that they also warned the punter that they needed to revevaluate the risk and retake the decision on contracting out each and every year,

...will they?

Somehow I doubt that these warnings will have been delivered.And will they have lost/destroyed the file, as they have with endowments?This time there won't be the pre-1988 cloak to hide behind.I suspect you may have to budget for payments to FSCS going up DH......

FSA say there is not likely to be any issues with contracting out as the changes that made contracting out less desirable than in the past to many took place because of a political change and not something that an adviser could expect to occur 10 or so years earlier. This is not like endowments where you are comparing no risk vs investment risk. This is a balance of two risks.

And yes, contracting out is an annual decision and I remember documenting contracting out back in 95 with warnings that it should be reviewed on a regular basis to ensure ongoing suitability.

With the average UK retirement age being 63, anyone retiring then can take their contracted out benefits. Contracting in would mean they would have to wait until 65 (rising to 68) and get no lump sum benefit.

EdInvestor

So you are working it out in your head. I prefer to use the recently published stats.

Apologies for omitting the link that you complain about so much, post now amended. :rolleyes:

That's the one to the FSA's stats.