Advice for first time pension planner

edinburgher

Surely this proves that the growth projections of the financial industry are way too optimistic and the effect of inflation and management charges are totally underestimated.

Or maybe they do the best they can with the models, but it's impossible to fully allow for real life? For example, the concept of a career for life largely seems to have gone out the window these days. Most pension projections rely upon quite a few assumptions (for example, 30-40 years of contributions at a certain level). These don't really allow for reduced hours during the child raising years, career breaks, changes to earnings etc.

Like Judwin says, it's largely down to contributions

mickflynn39

I don't doubt that some have been misled. But the VAST majority have just misunderstood. Pension illustrations used to give illustrations of what your fund MIGHT be worth if they grew at 5%/7%/10%. There was never any promise that they WOULD grow at these rates. There is a world of difference between MICHT and WILL.

If the industry average is 4% then why do the pension companies quote 5%/7%/10%? The real industry average at the moment is 1-2% after allowing for management charges (I accept there are now some lower cost funds out there than there used to be and 1-2% could be improved on). They quote these figures to con people into giving them their money and 90% are currently very disappointed with what they end up with and wish they'd never bothered.

mickflynn39

Because they only put in thruppence-hapeny a month. If they'd put a shilling in instead, then they'd be on 5K per year.

I think this statement is a bit harsh. If someone actually goes to the trouble of investing in a pension then for the most part I would say they are responsible intelligent people. They just happen to have been let down very badly by the financial industry that are only concerned with getting their hands on our money.

mickflynn39

Or maybe they do the best they can with the models, but it's impossible to fully allow for real life? For example, the concept of a career for life largely seems to have gone out the window these days. Most pension projections rely upon quite a few assumptions (for example, 30-40 years of contributions at a certain level). These don't really allow for reduced hours during the child raising years, career breaks, changes to earnings etc.

Like Judwin says, it's largely down to contributions

Given the vast amounts you would have to pay in and as you say the many complexities of modern life I would argue that saving in a personal pension is a very risky proposition and will not generate anywhere near the return people expect.

Judwin

mickflynn39 wrote: »

If the industry average is 4% then why do the pension companies quote 5%/7%/10%? .

They don't anymore. Those were the values in the 90's and early noughties. I think it's now 3% and %5.

mickflynn39 wrote: »

If real industry average at the moment is 1-2% after allowing for management charges (I accept there are now some lower cost funds out there than there used to be and 1-2% could be improved on). They quote these figures to con people into giving them their money and 90% are currently very disappointed with what they end up with and wish they'd never bothered.

You're quoting % average figures as facts, but not quoting the sources. These figures don't tally with my experiance of the last 20 years in my pension plan. You said your L&G plan was charging £3 per month and 0.75 TER, which is why I brought it up.

mickflynn39

I agree with you that we need to keep our wits about us when choosing financial products and planning for the future, but I also think that you have a bit of an axe to grind and that if we want a fair and reasoned discussion we need to talk in specifics, not general conspiratorial grumblings

It may seem as though I have an axe to grind but all I'm trying to do is dispel the myth that if you put some money into a personal pension you are going to retire with a huge pension pot and live a life of great luxury. The reality is that this will not be the case unless you can afford to put large sums away every month which most people can't do. I just want people to have a reality check. It's very simple. 30 times the pension you want in real terms put away before you retire. Do that calculation and then see how the financial industry projections stand up. Look at the evidence. 90% of retirees in the last 5 years were expecting a lot more than the £1-2 k they ended up with. The evidence is overwhelming that they have been conned.

dtsazza

mickflynn39 wrote: »

dtsazza, you can't ignore inflation.

No, I completely agree in terms of looking at what lifestyle you could buy at the end.

However when comparing savings products you can, because you don't get to opt out of inflation. You might look at inflation at 5% and decide that 3% returns aren't worth it, because you're getting a real -2% return. Still - what's the alternative? If you keep the cash under the mattress you're getting a real -5% return. If you put it in something which has a 50-50 chance of getting you an 8% return or nothing, you've got a 50-50- chance of a real return of 3% or -5%.

Since inflation is a constant regardless of what you're invested in, it doesn't change the status of whether one type of investment outperforms another, or by how much. This is partly why I gave my example based on someone who was retiring today, because then projections about future inflation are unnecessary and all one needs to do if desired is look backwards (just how much was £74 a month in 1971, etc.).

Besides, if we take inflation into account and decide that equity-backed pensions are infeasible - what's your alternative? Save nothing and (try to) live off the state pension?

all I'm trying to do is dispel the myth that if you put some money into a personal pension you are going to retire with a huge pension pot and live a life of great luxury.

I definitely agree with that, especially with emphasis on the some. It takes more than just token payments to yield a comfortable retirement, especially with rising life expectancies. Part of the problem as well is perhaps the concept of "a personal pension" as if they're all fungible - the performance of different funds, as well as the charges, varies enormously. I wouldn't be surprised if someone could double their eventual pension pot simply by choosing a decent fund with low charges, rather than trusting the bank's default investments to be competitive.

I guess it comes back to Martin's favourite thread of education. People should be able to perform pension calculations themselves - they're not too tricky - and thus see what they could expect to get under a range of situations. If people blindly accept the two or three lines of data they get from banks, they're never going to have the appropriate control over their money that's needed to ensure a comfortable future.

mickflynn39

They don't anymore. Those were the values in the 90's and early noughties. I think it's now 3% and %5.

I think you make my point beautifully even though inadvertently. It was you that quoted the bigger figures and anyway that is what people in the past were promised and were expecting. They've changed the rates because they've been found out by the likes of me. Surely you can see that my figure of 4% stacks up as they are now quoting 3-5%. Rest assured that my figures are accurate. They can be easily checked with a little detective work. Do you think I could get away with posting erroneous information on such a well informed forum? The truth is that we are being conned by the financial industry and need to wise up. I appreciate the stuff I'm posting is not what people want to hear but it is the truth to the best of my ability.

mickflynn39

Besides, if we take inflation into account and decide that equity-backed pensions are infeasible - what's your alternative? Save nothing and (try to) live off the state pension?

I think personal pensions can have their place in a portfolio of investments. What I strongly disagree with is the mantra of the financial industry that unless you invest early and for many years you are going to be doomed to a life of poverty in retirement. Their claims are wildly optimistic so people need to realise this and do the maths for themselves. As I've said earlier a rough guide to how to work it out is 30 times your proposed pension (in real terms) needs to be invested in a fund. Once you've got this then you can look at other ways of topping up your investments to meet the inevitable shortfall that will be there if you believed what the financial industry were telling you. I've suggested a few other ways of making money in a previous post.

edinburgher

It may seem as though I have an axe to grind but all I'm trying to do is dispel the myth that if you put some money into a personal pension you are going to retire with a huge pension pot and live a life of great luxury. The reality is that this will not be the case unless you can afford to put large sums away every month which most people can't do... The evidence is overwhelming that they have been conned.

If people genuinely believe that they are going to retire in luxury with minimal or no effort or sacrifice, then more fool them. The assumptions re. contribution levels etc. are widely advertised, so I can't agree with your assertion that anyone is being 'conned'.

Rather than getting into an argument about historical rates of return/fees etc. (that do make a real difference to our final pots), I think that dtsazza has hit the nail on the head - it's about education. If people took the time to learn a little bit more about the assumptions I think they'd very quickly realise that the old adage about putting all your eggs in one basket will always be true.

People are far too quick to assume that simply making a minimal pension payment once a month entitles them to the moon on a stick. Then again, that seems to be the pervading mentality in the UK these days

What I strongly disagree with is the mantra of the financial industry that unless you invest early and for many years you are going to be doomed to a life of poverty in retirement

I think a big part of it is that paying into a pension from a young age helps to put people into the saving/investing mindset (while it won't guarantee them an easy retirement). I very much doubt that many people who say, skip paying into a pension until they're 35+ are investing the money elsewhere, for whatever reason they've probably not planning for their future at all..