MSE News: Guest Comment: The route to retirement riches 12 May 2011 at 6:04PM edited 13 May 2011 at 9:14AM in Pensions, annuities & retirement planning 25 replies 3.2K views

Former_MSE_Guy

This is the discussion thread for the following MSE News Story:

"It's amazing how confused people get about the benefits of property, pensions or Isas when saving for old age ..."

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Guest Comment: The route to retirement riches

Milarky

Britain faces a £9 trillion savings gap so what should you do so you've enough for your retirement? Bob Bullivant (right), chief executive of retirement specialist Annuity Direct, explores the options.

Where's this come from?

It's amazing just how confused most people get about the benefits or otherwise of property, pensions or Isas as a route to retirement riches.
Most people have a favourite and champion it to anyone who will listen. In reality, they all have advantages and disadvantages and I suggest that the best solution is a mixture of all three.
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Pensions have a bad name mainly brought on by the best efforts of life insurance companies who were short-sighted enough to use them as a way of trying to get rich throughout the last two decades of the twentieth century bringing on untold bad publicity and mis-selling investigations by regulators.
Charges were very high, often with the first year's premiums disappearing into the hands of greedy insurers. Things were cleaned up in 1997 with the introduction of stakeholder pensions but, as always, mud sticks – and there was a lot of it.
Pensions, perhaps?
First thing – a stakeholder pension is good value where charges are low and completely transparent.
Add to that income tax relief at either 20% or 40% and you are getting a very big bang for your buck. As with everything, the tax man does not give free lunches and so he makes you wait until age 55 before you can touch your fund and taxes much of the income.
Perfection is getting tax relief at 40% or 20% and then having the income taxed at 20% or nil. You no longer have to buy an annuity (where you give your pension pot to an insurer in return for a regular income) so that objection is removed. Time to look again at pensions?
What about Isas?
Or should you choose an Isa? You do not get tax relief on contributions but you can have your cash at any time and it is tax free.
It means more flexibility but can you trust yourself to have enough in the kitty at retirement? If pension tax relief is available when you are close to retirement your Isa funds could be converted to a pension with tax relief automatically increasing the fund size.
And from a tax viewpoint an Isa fund is taxed exactly the same as a pension fund with the only tax being 10% on dividends.
Property: pain or gain?
So what about property? Traditionally, it has produced good returns but is subject to cyclical fluctuation.
Throw in costs of purchase and sale, void periods and its illiquid nature and it does have a number of issues.
Rent is taxed as income and any gains are subject to capital gains tax. We are an island, we have a limited amount of land and so over time property should be a good investment. That is probably right – but bear in mind the pitfalls.
Why all three are the answer
The biggest issue in planning retirement income is the unknown. You need to have total flexibility to enable you to cope with life's little downs – the ups are easy. A mixture of asset types enables you to do this.
Imagine a situation where, for whatever reason, you are unable to work up to retirement age. Income from property will ease the situation, Isa withdrawals may also help and, of course, the pension will provide income for life.
You have maximum flexibility – not forced to sell property when values are depressed – not forced into an annuity at an unattractive rate. All markets are cyclical and a mix of investments means you can choose your moment to buy and sell each asset type.
Views expressed are not necessarily those of MoneySavingExpert.com.

See comments next post @dunstonh, I deleted my knee-jerk posting - sorry for that - thank you for interpolating my stream of consciousness intelligently though.

dunstonh

Things were cleaned up in 1997 with the introduction of stakeholder pensions

Stakeholder pensions were introduced in 2001.

As usual the 'advice' is confined to the tax treatment of different products - completely generic - and of course not guaranteed not to change in the future just because it might be true of the system today. Discussion of investments and ('savings' which confuses people when they get used interchangeably)

You have to remember that it is an adviser. So, he will have the regulatory constraints on him that a journalist would not have or a general member of the public. The rule of thumb on official adviser comments is keep it generic. Plus, to go in the detail we all love in this section where we do aim to look at the fine tuning and getting what is best cannot be done on an article that the adviser has probably only been asked to provide around 200 words for a low knowledge audience.

Modern pensions for many people are a tax wrapper that has advantages that have little to do with providing a pension. You can use them for estate planning now for example and many pensioners use them to build up a pot in the spouse name for kicking in at 75 because the provision is uneven. A long way from the old "pension product" for providing an income in retirement from 75. its a shame there isnt a link to the ISA vs Pensions thread in this section which contains a great deal of detail and examples (although perhaps early posts are looking dated now due to rule changes).

gadgetmind

I've had sucky old pensions in the past, and have moaned (long and hard) about them, but things have changed. They are now just another wrapper, with benefits and restrictions on money going in, and ditto for money coming out. ISAs are the same, just another wrapper, different restrictions, different pros and cons, but they also have a (very important!) role in your savings strategy.

Within both, you can save in cash, fixed interest, equities, trackers, ETFs, and many more esoteric instruments, and this is all a matter of matching your risk attitude, mental aptitude, and precognitive abilities to your asset holdings.

Between the wrappers and the assets sit the platforms and the advisers. Both need a good shake up, and it looks like they are about to get one. I wish they'd had the same a few decades ago when I started on the whole pensions and investments journey as things have *really* improved already, and the signs are good for further progress.

FATBALLZ

We are an island, we have a limited amount of land and so over time property should be a good investment.

I think we can safely dismiss this 'guest' as a fool. I wonder which countries he has been to that have unlimited amounts of land.

jamesd

Russia, China, United States (most parts), most of Africa, much of central and southern America all often have effectively unlimited amounts of land for residential building. Not literally unlimited, but plenty of supply.

Lokolo

jamesd wrote: »

Russia, China, United States (most parts), most of Africa, much of central and southern America all often have effectively unlimited amounts of land for residential building. Not literally unlimited, but plenty of supply.

Yeh but who the hell wants to live there?

Joe_Bloggs

The CII say:-
http://www.cii.co.uk/app/news/default.aspx?endstem=1&id=1008
J_B. (who day think day are?)

Le73Uq86Uv

What is the point of saving for a pension?

You are not in control of it, it could go bust, It could be used by your employer leaving no money in the pot for you or the goverment change the rules when you are in your late 50's and you get less than what you thought you would for 30 years.

Put it under the matress is my advice.

gadgetmind

For many people, the tax advantages of saving for a pension outweigh the risks. Trusting your employer with the funds is very old fashioned and increasingly rare, and instead the pot accumulates with a pension company that invests (often under your direction) in a combination of cash, bonds, equities, etc. Yes, HMG do like meddling with the rules, and have made big raids on private pension funds, but as I say, the rewards outweigh the risks.

I could model how your advice would have affected my retirement funds but a rough figure is that I'd have a third of what I have now, and your cash under the mattress will just continue to be rendered worthless by inflation.

Of course, I do have other retirement pots, such as ISAs, ITs, equities, and property, but holdings in pension pots will be 50% of my retirement funds.

Linton

Le73Uq86Uv wrote: »

What is the point of saving for a pension?

You are not in control of it, it could go bust, It could be used by your employer leaving no money in the pot for you or the goverment change the rules when you are in your late 50's and you get less than what you thought you would for 30 years.

Put it under the matress is my advice.

It cant be used by your employer - that stopped after Maxwell. The worst they can do (for the increasingly rare number of final salary pensions only) is not put enough into the fund. If it's not a final salary scheme it cant go bust either, unless the trustees invest the pension in something really silly. Finally, again if it's not a final salary scheme, you are in control of it if you want to be.

Carrying on your train of thought - you might be dead before you live to enjoy your pile of worthless paper (or pile of gold/silver bullion!!) under the bed, why not spend it all now....

and then spend 30 years of retirement on the breadline.