Attn Dunstoh Poor Pension plans

[Deleted User]

Hi Dunstoh,

Please see below extract. How can we trust pension plans when we read reports such as this. I would be very interested in your comments and from anyone else in the financial sector.



Falling annuity rates plus poor performance on high- charging with-profits funds have compounded to produce shockingly bad figures that will throw millions of people's dreams of a comfortable retirement into disarray.

The result is that many who've saved into a personal pension - and their forerunners - for 20 years will get less than a sixth of the income they were promised when they started saving 20 years ago.

Add the effects of inflation, and the spending power of their pension will be one-twelfth of what they might have expected.

According to a survey of with-profits personal pension plans in March's Money Management magazine, payouts on with-profits pensions are in freefall.

A £10,000 lump sum invested in the average-performing with-profits personal pension 20 years ago would mature today with a value of £61,903.

Assuming that the policyholder is a man now aged 65 who wants an annuity which won't rise with inflation or pay an income to his widow if he dies first, today that pot would buy him an income of just £4,365, says financial adviser Annuity Direct.

But when he was sold that plan 20 years ago, the salesman is likely to have shown him figures suggesting the pension pot would reach £182,000.

exil

I'm not in the financial sector but this is just nonsense. What is the journalist saying? That annuity rates have fallen since the mid 1980s, and so have returns on investments. Only the 1st of those facts is directly relevant to personal pensions. The 2nd would affect any form of investment - shares, endowments, TESSAs and ISAs. Advisers in the 1980s were not to know either of these were going to happen.

Advisers today are also not in possession of crystal balls. But the choices remain the same.

1. Invest in a pension
2. Invest in something else
3. Spend everything you earn and rely on Gordon Brown's successors to pay you a decent pension

Between 1 and 2 you might be tempted to go for 2 as with other investments you are not obliged to take the proceeds as an annuity - but annuity rates only reflect the long-term returns you would get on a low-risk investment and with an average lifespan - you are only likely to beat annuity rates if you
take a high-risk strategy - or die early!

My thoughts on endowments are rather similar. Sure, all advisers were pushing people to go for them to repay mortgages. But who of any kind of financial expert was saying otherwise? Wouldn't the same advisers have been accused of mis-selling if they'd sold repayment mortgages and investment returns and inflation had continued at the rate they were at the time?

Paul_Herring

The article concerned is http://www.thisismoney.co.uk/retirement/article.html?in_article_id=417963&in_page_id=6 if anyone wants to read the rest of it.

nrsql

>> I'm not in the financial sector but this is just nonsense. What is the journalist saying? That annuity rates have fallen since the mid 1980s, and so have returns on investments. Only the 1st of those facts is directly relevant to personal pensions. The 2nd would affect any form of investment - shares, endowments, TESSAs and ISAs.

Not really - the law to do with pensions has changed which has reduced returns.

dunstonh

annuity rates have dropped but thats not going to go on forever and it should still be noted that at age 65, the typical annuity rate is still higher than most savings accounts at this point in time. Go back a few years ago when savings rates were lower and annuity rates were beating them with room to spare.

You cant compare annuity rates in the 80s today and to make a headline out of it just shows that the reporter hasnt got a clue. Where has inflation been taken into account? Where have the higher charged products of 80s been compared with the leaner lower cost products of the 00s? Where are the remarks about the insurance companies paying annuities which were too high in the 80s? Where is the comparison between the better investment options available today and those of 20 years ago.

Too many people paid £20-50pm in the 80s and kept it at that level. Never increasing it despite the ravages of inflation over those years. You cannot expect a £20pm contribution for 20-40 years to give you a 10k a year income.

EdInvestor

Too many people paid £20-50pm in the 80s and kept it at that level. Never increasing it despite the ravages of inflation over those years. You cannot expect a £20pm contribution for 20-40 years to give you a 10k a year income.

But that is what people were promised.

It's the same problem as endowments.

[Deleted User]

EdInvestor wrote:

But that is what people were promised.

It's the same problem as endowments.

And that is the problem with these type of investments. A lot of promises and projections, and in the end, they all fail to deliver. As for me, when I read these kind of stories about people who trusted these professionals and then realise they been let down, I just think it's all so unfair. Afterall, I'm sure the IFA, insurance companies and all the fund managers etc - they all took their commisssions and fees to help them live to a good standard. However, it's the gullible investers who take the rap in the end - it's them that are told there is a shortage in the fund.

However, I keep an open mind - there is always 2 sides to every situation and everybody has their opinions.

exil

"But that is what people were promised."

Unless you can point to something in writing which GUARANTEED a return of 7% or 11% or whatever it was, or that you would get a certain level of pension - then you have nothing to complain about. The point is - that in the conditions of the time, salespeople were entitled to make the forecasts and illustrations they were making. Now if some salespeople claimed those forecasts were guaranteed - then there was mis-selling. But did those salespeople KNOW that interest rates, inflation, the stock market etc would conspire to lower long-term investment returns at the time they sold these products? Were they actually lying? What people are complaining about here is that market conditions have changed over time.

How do I know what inflation will be over the next 30 years? Will there be a couple of world wars before I retire? Oil prices hitting the roof as we exhaust the easily exploited reserves? Massive unemployment?A collapse in property prices? Global warming? An asteroid hitting the earth? Frankly, I don't know. And neither does the most brilliant financial adviser in existence.

My own adviser points out that an adviser who advised a client to take his money out of a company pension in the 1990s is likely to be castigated for mis-selling - but if the company had gone bust with an insolvent pension scheme a year later he could well have done his client a huge favour!

dunstonh

But that is what people were promised.

It's the same problem as endowments.

There isnt a thing in common with endowments. The mortgage debt doesnt increase each year. its a fixed target. Retirement planning isnt fixed like that. The final figure required increases every year.

And that is the problem with these type of investments

What do you mean by these type of investments? A pension is not an investment. It is a tax wrapper. If you say pensions are bad then you are saying every single investment available in the UK is bad.

A lot of promises and projections, and in the end, they all fail to deliver.

There are no promises. Just example projections. Some have failed, others have exceeded expectations. Thats the nature of investing.

Lets look at some things the article ignored:

In 1988, you would have been planning for a pot of £100,000. To achieve that you would have needed £58.10pm going in (and getting 7% p.a. over 35 years). Tax relief was 25% back then so the net contribution required was £43.57

in 2006, you need a pot of around £250,000 because the cost of living has gone up. So, those that stayed at £58.10 are not even going to get half what they need.

The fault isnt with the adviser that sold it in the first place. The fault is the individual not reviewing their planning and keeping contributions up with the costs of living. That £250k target on the same period and return needs £145 a month. Nearly three times more.

The other thing is that investment returns have dropped as inflation dropped. In the 70s, you would quadruple your money in a 10 year period. in the 80s, you would treble. In the 90s you would double. So, any projection in those periods would have been based on what was being achieved at the time. Currently expectation is double every 10 years.

jamesd

A pension isn't a black box you can ignore. In the past you often had no choice. Today you do. If it's a work pension you can ask the trustees for regular reports. If it's private you get regular fund values and can adjust contributions and change investments to meet the target.

Ian_W

lindabea wrote:

However, I keep an open mind - there is always 2 sides to every situation and everybody has their opinions.

And my opinion is you can prove just about anything with figures if you choose the right periods and massage the circumstances to fit what you're setting out to prove in the first place [ads for annuities might be a clue ].
Questions:
1. Why pick 20yrs when 40yrs or at least 30+yrs is more appropriate for a pension?
2. Why use "With Profit" when we all know from Endowment hind sight that it fails in a low inflation/interest/investment return era such as we have had over more recent years?
3. Why a lump sum when IIRC they weren't allowed for pensions 20yrs ago or at least, if they were, Inland Revenue rules limited them - wasn't 15% of salary the annual limit in those days?
4. Why would someone use a pension in a "fire & forget" way the article suggests?

The article mentions the affects of inflation but conveniently ignores the fact that inflation and investment returns [which dunstonh mentions] for the previous 20yrs would have been the basis of the implied grossly misleading illustrations it quotes - so I ran the figures through an RPI calculator.
£10,000 invested in 1965 would have had to have grown to £63,026 in 20yrs to have stood still.
£10,000 invested in 1985 would have had to have grown to only £20,712 to be worth the same amount in 2005.
The £180K projection would only have happened if returns and inflation had continued at the same pace - but it has slowed so much that the £60K pension of to-day has pretty much the same buying power value as the grossly misleading illustration!

It surprises me that the average WP return over 20yrs is as high as that. It's doubled in value every 8yrs which in modern terms I wouldn't have considered half bad. As for annuity rates - my mother is 80 this year, MIL 81 next month, my next door neighbour 87, his wife 83 - yet none of my grand-parents survived beyond 72yrs of age. Yes annuity rates are poorer but shouldn't we all be glad we're likely to live longer in retirement?

My other opinion is that you should take what financial [or any] journalists write with a huge pinch of salt and a very questioning mind but I doubt the average reader will. The result - pensions = bad, pensions = poor value, investments = rip-off, financial services = con artists. All of those are true some of the time, none of them are all of the time - but that will be the lasting impression of the average unquestioning reader.