Are pensions one big rip-off?

atush

This means I won't get anywhere near my money back unless I live to about 105.

Not really all your money though, is it? you after all, put in less than half.

Do you need a joint life pension? Does your wife not have one of her own?


You are of course, free to invest spare cash outside your pension. If you are a basic rate taxpayer you may be better off having some large savings this way to provide both capital and to enable you to retire earlier. But you won't get tax relief.

sandsy

If it's your annual statutory money purchase illustration, it's important to understand what it's telling you which is:

- it's projecting you'll get back £10k pa in today's money (it will be more than that in monetary terms as the amount has been adjusted for inflation to let you compare it to your current income in terms of what it will buy, eg. if you have 20 years to retirement, it's projecting a monetary amount of over £16k pa but that will only buy the same as £10k today)

- this amount will increase with inflation each year

- when you pop your clogs, half the amount will be payable to your spouse.

jamesd

Walkern, take a look at this annuity rate table in the FT. It's far from perfect and you should not buy an annuity from there but it does give some idea of the amounts you could get per hundred thousand Pounds after taking the tax free lump sum. Then tell us which ages, purchase amount and annuity type you are looking at.

Income drawdown is easy enough. It just means leaving your pension money invested and taking an income from the investments. For those who do not have £20,000 or more of income from the state pensions, work final salary types or annuities there is cap on how much you're allowed to take out. This cap varies with age and one of the government interest rates. It's between 5% and 7% of the total amount each year at the most common sorts of retirement age. You are responsible for not spending so much that you run out of money, though regular recalculations of the limit make this unlikely. I tend to suggest taking out the maximum allowed but investing the part you don't spend inside a stocks and shares ISA so it keeps on growing and can later provide tax free income or a big lump sum. If the money is paid out after death to a non-spouse or to a spouse outside a pension pot there is a 55% tax charge deducted first.

If you want to get rid of that cap you'd need to get over that £20,000 minimum. Easy ways to do that include deferring the state pensions, which go up by 10.4% a year for each year you wait, or by buying a single life level annuity.

One major advantage of income drawdown is that a spouse gets to inherit 100% of the pot into a pension pot of their own. So they get 100% of the income, without a reduction in the amount you get while you're still alive. The disadvantage is that the income isn't guaranteed. So sometimes it can be a good idea to use annuities for enough to guarantee minimum amounts needed to live on and use drawdown for the discretionary amounts and maybe the spouse cover. The spouse can use whatever they inherit to buy an annuity if they like, so unlike buying annuities this isn't a once only decision.

You can also do things like spending £10,000 on an annuity each year. As you get older annuity payout rates tend to rise with age and you might have less good health, so you might get more that way. This gradually changes some of your income from not guaranteed to guaranteed.

You would normally take the tax free lump sum even if you really wanted to buy an annuity because you can do that outside the pension in ways that are likely to be more tax efficient, getting you a bit more income for this part of the money.

walkern wrote: »

I'd rather have the option of taking 100% of the pot, buy a house, live off the rent then leave the house to my children. But that's not allowed I expect as it give me too much of the money I've saved up

Learn about two things:

1. Flexible Drawdown. Get to that £20k target and you really can take out all of the rest on the same day if you want to - though you do pay PAYE income tax on it so you'd really want to spread it out a bit so you don't end up paying 45% income tax on a lot of it.
2. You can buy commercial properties inside a pension pot and are allowed to have a mortgage of up to 50% of the pot value. Residential isn't allowed. some business owners buy the property they trade from and use the rental income for income, or they can use any other non-residential property instead.

Proxy wrote: »

I can get £21k per year. Do i win at money?

Nice try, but no. You should have calculated what it takes to get to £20,000 guaranteed income when including the state pensions then explained how that's enough to use flexible drawdown and take out 100% of the rest of the pension pot at any time, with any money above the 25% taxed as income in the tax year(s) when it's taken.

Those who can get to the flexible drawdown income level can make huge gains from pension use without having the restrictions on taking the money out. It's a particularly wonderful deal for many in the public sector who can have their work pensions and the state pensions get them there relatively easily compared to the private sector.

[Deleted User]

walkern wrote: »

I get the impression we pay a fortune all through our life for the pension companies to make a fortune in trading then they give us nothing back at the end.

walkern wrote: »

Seems like I'd be better off putting the minimum in to get the company part then putting my own money in long term savings/stocks and taking the cash at the end?

Pensions exist for the average Joe, they exist to ensure that people have something when they retire and they aren't dependant on the state to eat. Yes, if you play the financial game properly there are better ways to make money (although you can make money with a pension too!) but that isn't the primary purpose of a pension.

People aren't told to pay into pensions to get rich, people aren't encouraged with tax breaks to pay into a pension so that when they retire they'll be sitting on millions, they're encouraged to pay into a pension so that they will be able to exist with a dependence on the taxes being paid by still working citizens.

Thinking of pensions as a scam or rip-off is misguided, they're certainly not an easy way to secure your 6 holiday a year retirement but they're a way for the average person to have something for when they retire because a large number of people just don't care about the future. If you're confident that you can make better money elsewhere (and that is what matters most to you) then maybe you are better off focusing your investments and money saving elsewhere.

Everyone has a different situation, a common problem with regards to public opinion on pensions is people assume everyone is the same, that a pension being not great for one person means they're terrible for everyone. A pension is a very good idea for a lot of people, how many people who had £200 deducted from their pay cheque every month for their pension would save that £200 if they had it to take home instead, how many would instead buy more stuff? Just look at how many people are choosing to opt-out of the required pension schemes employers are required to do: people are not sensible.

JoeCrystal

citricsquid wrote: »

Just look at how many people are choosing to opt-out of the required pension schemes employers are required to do: people are not sensible.

Just wondering, do you have any firm statistic on the number of opt-out? I was under an impression that fewer than expected people actually opt out than expected. I think DWP was hoping less than 30% will opt out. But according to NEST (which I get press releases for my own amusement) suggest that 10% have already opted out. ASDA reported 8% and Legal & General mentioned less than 10% opting out.

Of course, the statistic can lie and very likely that in some companies, it would be much higher than 10%. Morrisons reported 20% for example. Hopefully, there will specific amount for the whole country published but it seems that it is lower than DWP predication which I considered as a very good sign.

Sorry for going off the rail a bit, I do agree with the fact it is lots better to have it from your payslip, rather from cash. But I think the fact the employer has to offer you a pension scheme and contribute to it is a lot better as in the case of my employer, they do not contribute and offer stakeholder pension scheme and its minimum number of funds which is much less to my liking.

So auto-enrollment and the knowledge that the employer will have to contribute to it (small but still something) could be a great motivator in getting them interested in pension!

Cheers,
Joe

jamesd

Morrisons is a special case. It has a spectacularly lousy scheme for those who are not close to retirement, so bad that the rational thing for those under age 40 or so is to opt out and start a personal pension instead, because the expected pension is higher even after losing the employer contributions. The actual changeover age is higher than 40, that's just to give some idea.

It's one of the two schemes that I tell younger people to try to avoid joining.

somethingcorporate

jamesd wrote: »

Morrisons is a special case. It has a spectacularly lousy scheme for those who are not close to retirement, so bad that the rational thing for those under age 40 or so is to opt out and start a personal pension instead, because the expected pension is higher even after losing the employer contributions. The actual changeover age is higher than 40, that's just to give some idea.

It's one of the two schemes that I tell younger people to try to avoid joining.

Which is the other?

JoeCrystal

I believe Jamesd considered that the other evil scheme is called NEST. It does have a few disadvantages.

Cheers
Joe

margaretclare

Jamesd has explained it really well. You do not HAVE to buy an annuity. James has explained the other options. It's also possible, if you have money to spare or if you don't need to take the pension at a particular age, to continue saving and to get the tax breaks and the growth. You may not need it in your 60s but you are likely to need it in your 80s. We are all - statistically - living longer and we need an income for when we can no longer work. That, in a nutshell, is what pensions are all about.

You mentioned living to 105 as if this was completely out of the question. HM the Queen now sends out many more centenary cards than she did at the start of her reign. You'll still need the basics of life even at that age!

Do you need a joint life pension? Does your wife not have one of her own?

I agree. We should all have our own pension plan.

jamesd

somethingcorporate wrote: »

Which is the other?

NEST. You can't transfer out before age 55 and it has a limited range of investments as well as choices for new joiner that aren't great from an investment perspective. Good companies don't need to lock people in by banning them from transferring out for very long periods of time. The initial and ongoing charges are higher for the investment types involved than can be obtained from the most competitive providers in the whole market and it has failed to meet the charges target set by the Lord Turner Pensions Commission.

The effect of the restricted investment choice is that those who take the trouble to learn about investments and who are sufficiently young might well end up doing better by not taking their employer contribution and investing in a personal pension instead.

From age 55 you can transfer out, only all of the money, and the account will then be closed. You have to ask your employer to enrol you again. An employer covered by the auto-enrolment legislation is required to accept at least one enrol request per year.

But the Morrisons scheme makes NEST look great by comparison for younger members. Whole different order of bad.

The NEST issues are nothing they couldn't fix if they had the will to do so. They just haven't.