Workers facing a bleak old age?

edinburgher

Those in work today fund the state pension of those retired.

The problem with this has been the worsening ratio of those in work to those retired.

Some suspect this is the reason why the previous government chose to let immigration grow the populace.

In a lot of ways, letting the population grow would be a very good thing if the pension contributions were being ringfenced into a superannuation fund that was going to be used to pay the pensions of future pensioners (and the salaries of the younger migrants who would be looking after them).

That said, I can't see the government suddenly holding on to money and I can't see a workable solution that means we get the 'right' sort of migrants coming to the UK who actually want to work in these sorts of jobs.

Not bashing immigrants - just aware that there's no simple solution that ensures we only get motivated people coming to settle here who don't compound our problems.

StevieJ

edinburgher wrote: »

You've lost me here, happy to get back to you if you can clarify what you mean

For some very poorly paid workers, every penny put into a pension fund will be a penny reduced in benefits, only someone with strange libertarian principles would think that was sensible financial planning.

dtsazza

kabayiri wrote: »

I don't think that pensions are attractive to all sectors of the population :-
- the charges are high for those who can only make smaller contributions
- the annuity rates have gone down dramatically in the last decade
- the products are not at all transparent. The public sector equivalent is a role model for transparency. Every teacher knows how much they pay in and what they can expect to get by way of pension. The private sector person paying equivalent money has no such guarantees.

Again this is based primarily on misunderstanding, which seems to be pensions schemes' biggest enemy, collectively.

Charges are almost always percentage-based, so if you contribute a tenth as much as someone else you'll be charged a tenth as much. Some schemes may have minimum monthly contributions putting them out of the reach of smaller savers, but that's not the same thing. Plus stakeholder pensions are required by law to have AMCs of no more than 1.5%, and accept payments of £20/month, so that sets the baseline expectations. There's no reason to pay 4% in annual charges (as one commenter on the original article did) unless you either took them knowingly hoping for higher performance, or you accepted them without thinking/comparing.

Annuity rates have obviously gone down as life expectancy goes up. This is not strictly related to pensions anyway; if you saved up your retirement pot in ISAs or current accounts the cash cost to purchase an annuity is the same, regardless of the wrapper. And if you don't intend to take an annuity, you can access money inside a pension via drawdown/flexible drawdown. (In other words, an annuity is something you can do with your saved money once you retire, and isn't erally related to how you save it.)

Pensions are required by law to have transparent "key features" panels, which summarise all of the relevant facts (including, critically, annual charges). Their tax-related performance is also clear (full rebate of income tax, if you're contributing less than £50k a year), and the time limits are also clear (no access to the pot until you reach a statutory minimum age, currently 55).

The only thing that isn't set in stone is the return you'll get from investment-type products. This is nothing to do with the fact that the pension is a tax wrapper, but is related to the fact that you've chosen to hold your money in investments (no guaranteed return) instead of savings (guaranteed interest rates). If you really wanted you could hold your pension entirely in cash, so as to "enjoy" guaranteed returns of 3-5%, though this would almost certainly underperform an equities-based pension. Again, if you were to amass several hundred thousand pounds in any other form of account, you'd have the same option of deciding whether to give up the guarantee of returns in exchange for a higher expected return.


It's all based on misunderstanding what "a pension" is - and again, thinking they're quasi-magic rather than answering the question of "how am I going to accrue £400,000 of savings throughout my working life?"

ILW

The trouble with pension schemes is that the management charges are based on the value of the "pot" rather than any increase in it's value. Means a useless fund manager can actually lose money for you and they still get paid, which does seem slightly unfair.

dtsazza

kabayiri wrote: »

There was a program on a few years ago where Ros Altman (sp) gave advice to a guy in his early 40s who had no private pension. She suggested 400 per month was the figure he should save into a pension.

Here's an alternative idea for saving 400 a month. Take 3 years and its equal to circa £11K (+). Invest in a PV solar setup and the Feed In Tariff could generate £1100 a year for the next 25 years.

I know which sounds more attractive to me.

It's definitely worthy of consideration - as reiterated through the post the point isn't to have "a pension", it's to have thought about how much money you'll need in retirement and have taken affirmative steps to ensure that you'll have that money available.

That said, the scheme doesn't attract tax rebates (that I'm aware of) so your money is already 25% (67% if HR taxpayer) behind. And I'm not sure whether the returns are guaranteed for those 25 years - if they're not there's potential for shortfall there. Also it seems you may be locked into an agreement with a single energy company - what happens if the energy company goes bust and can't continue paying 10% yield, what's the legal recourse? Plus the rate is flat, not compounded, so over a 25 year period it's returning an effective 5.14% AER.

(Still, this does look like an attractive scheme; since £11k is a small part of the total savings you'd accrue, investing in one of these schemes looks sound.)

dtsazza

ILW wrote: »

The trouble with pension schemes is that the management charges are based on the value of the "pot" rather than any increase in it's value. Means a useless fund manager can actually lose money for you and they still get paid, which does seem slightly unfair.

That feature is common to all investment-type vehicles, AFAIK. Some funds offer a flat rate fee with an additional "outperformance" fee, which means that if they do badly they get less (percentage-wise) than if they did well. But there's still the flat rate there.

I don't think this is necessarily a bad thing; it's not too dissimilar to paying for an IFA on a fees basis vs,. a commission basis. In order to generate a reasonable return, the commission is often high enough that a flat fee would have been much cheaper. Likewise if all fund management companies moved to charging only a percentage on outperformance of the index, that percentage would likely be vastly higher than the current amounts (double-figure percentages, most likely).

I'm much happier with the current situation whereby I can pay a reasonably small annual charge (less than 1% overall), and just move my money away from bad fund managers, to good ones.

edinburgher

For some very poorly paid workers, every penny put into a pension fund will be a penny reduced in benefits, only someone with strange libertarian principles would think that was sensible financial planning.

But where did I say that my opinion was universally applicable and should be used by everyone?

Life is full of personal choices - while I can only make my own, it doesn't mean I have to approve of everyone else's.

Anyway - you're muddying the waters. The person I was having some back and forth with was saying that you shouldn't save anything because they were less than impressed with the performance of some of their fund choices. At no point were we discussing what those on low incomes should/shouldn't do. Basically I feel you're shoehorning in a theme that wasn't present in our discussion/disagreement.

dtsazza

kabayiri wrote: »

It's an interesting point, because that is exactly how our state pension scheme looks.

Those in work today fund the state pension of those retired.

The problem with this has been the worsening ratio of those in work to those retired.

Sounds like a Ponzi scheme to me, and relying on it could prove unwise.

If I had the choice, I would much rather my NI contributions were returned to me immediately so that I could steward them myself. (Contracting out is being abolished with the death of S2P, but I'm talking about contracting out of the basic state pension.)

StevieJ

Forest_12 wrote: »

Thats being changed though. The madness of having people who have made a small pension provision being worse off than those with no pension provision is being addressed and pensions credit, which only came in with Labour will be removed, possibly by having a flat pension payment for all. Any additional savings people have made will be to their benefit, especially in a pension because this is not means-tested for benefits and is protected from bankruptcy.

Wait a minute, are you saying that someone could have a £40k private pension and still get their rent and rates paid?

StevieJ

Forest_12 wrote: »

If the pension has not been crystalised (i.e. it is not in payment) then yes a person could hav £40k in a pension and still receive benefits. This is in contrast to ISAs that have been used for retirement savings, where a person would have to support themselves from their ISA savings until they fell below a set limit, wiping out their retirement savings.

I meant £40k a year actually So you are saying that people won't be docked £1 for £1 in benefits until they actually receive the pension, so I assume that when they do receive the meagre pension they will lose any benefits pound for pound. How is this encouraging the low paid to save into a pension?