Why should I start a pension?

thor

I'm 35 and am in 2 minds about staring a private pension. I have had doubts about how safe my contributions would be well before all the recent pension scandals and would like to see if anyone can persuade me that it would be a good idea to get one started.
I am aware of the 22% contribution made by the government and also assume that the state pension will be gone long before I hit 65(too many oldies around and the economy will go downhill due to the consequences of a degrading environment and the eventual drying up of oil, so there will not be enough money in the pot).
I do have bank savings I could use to pay into a pension but I'm reluctant to shift this money because at least I have control over it unlike waiting for a pension annuity and I would never be tempted to spend unneccesarily so I have no problems about keeping money out of reach in order to avoid temptation.
So any takers?

dunstonh

You get to choose the areas you invest in so if risk concerns you, then pick low risk funds.

I'm not sure what pension scandals you are referring to. Probably the occupational pensions that have "dried up" but then that only affects around 60,000 people and you make no mention of an occupational pension.

thor

I am risk averse. When I referred to pension scandals I was thinking about the problems with pensions in general i.e. end of final salary schemes and the misselling of pensions.
Can pensions lose value in the same manner as shares? If so then it is very dangerous putting your life savings into such products and this is what I am trying to weigh against the prospect of increased returns.

deemy2004

Ensure your cash-isa allowances are fully utilised.

I'm like you, thinking its criminal that THEY don't let you control your fund once you retire i.e. 75% annuity rubbish.

I manage my own pension via a SIPP, which to my amazement is doing quite well . I contributed a lump sum several years ago, since which the only new contributions are from my employer
Still whatever happens, growth wise, at the end the annuity will STILL take 75% !!! I want it ALL !!! Its MY MONEY AFTERALL !!!

Okay tax it, but I don't want to be forced into annuity, waaaaaaaaaaahhhhhhh :-X

MarkyMarkD

I know what you are saying, but annuities are not a con!

All they do is spread the value of your pension maturity value over your expected lifetime.

What is wrong with a product which means that, if you live extra long, you get extra money, and if you live for a shorter time in retirement, you get the money until you no longer need it?

Honestly, I cannot understand why people rant on about annuities being so awful, just because the nominal rate of return on them has fallen (which is just because nominal interest rates, and inflation, have also fallen). They are no worse value now than they were years ago.

deemy2004

Becuase I could get the SAME return without GIVING the capital away !


Heres £100k, give me £5k per year.

Or

I have £100k which returns £5k per year, now I may spend more some years or less other years, i.e. add or subtract, but its all in MY control !

Say I'm 80, and the doc tells me Ive got 6 months to live, !!!!!! I've got to live out life on a measly £2.5k, Now if I had the capital - Its viva las vegas time  ;D

dunstonh

When I referred to pension scandals I was thinking about the problems with pensions in general i.e. end of final salary schemes and the misselling of pensions.

Misselling of pensions was between 1988-1993. Over 10 years ago. Ending of final salary schemes isnt a scandal although disapointing.

Can pensions lose value in the same manner as shares?

If you pension contains stockmarket funds, then yes it can go down as well as up.

If so then it is very dangerous putting your life savings into such products and this is what I am trying to weigh against the prospect of increased returns.

Everyone is different which is why high risk and low risk funds exist.

MarkyMarkD

Becuase I could get the SAME return without GIVING the capital away !


Heres £100k, give me £5k per year.

Or

I have £100k which returns £5k per year, now I may spend more some years or less other years, i.e. add or subtract, but its all in MY control !

Say I'm 80, and the doc tells me Ive got 6 months to live, !!!!!! I've got to live out life on a measly £2.5k, Now if I had the capital - Its viva las vegas time  ;D

£5k per year?

£7,604.40 is the annuity for a 65 year old man according to http://www.annuities-online.com/Rates.html. You cannot get a return of 7.6% risk-free without eroding your capital. Another site I looked at says £7,224. £5k is nowhere near!

Or you could get £5k but with indexation, which you won't get from your other source.

You are, of course, quite right that those who lose out from annuities are those whose life expectancy changes dramatically after they buy the annuity. But they are foregoing the opportunity to blow their money in an extravagant way, if they are suddenly diagnosed with a fatal illness, in exchange for the guarantee of a secure income for their whole life, even if they live to 110.

I think personally that it's obsession with leaving money to your offspring, not living happily during your own life, that drives people to rail against compulsory annuity purchase. And if you want to do that, don't put the money into a pension in the first place - give it to your offspring whilst they are young enough to need it, or save it in a different vehicle and give it to them whilst you are alive.

Pal

I agree with MMD. In the end an annuity provides protection for people in the same way that any other insurance product does, by pooling the risk. Some will lose and some will gain. The problem is that most people badly underestimate the huge financial impact of living a long life, especially if they are ill and/or need long term care arrangements. Retirement planning would be much easier if everyone was willing to top themselves at a specific age (say age 85). ;D

The other arguement in their favour, is "what else would you invest in?" Cash is eroded over time. Bonds have to be reinvested at some point or can fluctuate in value over time, shares are very risky for someone who has retired, property requires professional management. Unit trusts or other pooled funds investing in any of the afformentioned asset classes can fluctuate significantly in value.

Annuities are not the answer for everything but they should at least be included within everyone's post retirement planning, whether they have saved for their retirement through a pension or through some other investment mechanism. At the very least I would want to secure myself a reasonable minimum income level with an annuity, and then be given any excess in cash to spend as I like.