Am I missing something?

jamesd

ceng wrote: »

Am I missing something? If this is really the case why should I contribute to the pension scheme, I'd be better putting my contributions into a savings account.

You're missing quite a few things. I'll cover some:

1. From age 55 onwards you can take 25% of the pension pot as a tax free lump sum. You can use income drawdown on the rest, or even all of it, to take an income without buying an annuity. If you die during this your spouse can inherit 100% into a pension pot of their own or they or anyone else can get it outside a pension after a 55% tax charge.
2. Tax relief on the way in, personal allowance and 25% tax free lump sum on the way out.
3. Employer contributions and possible NI as well as income tax saving if salary sacrifice is used.

The effect of those things is that you just can't hope to beat a pension with savings. If nothing else, you can put the pension pot into savings accounts and get income from the amount in the pension pot, including the tax relief and employer contributions. The result is that whether you're using savings accounts or investments, the pension will pay out more both before and after tax.

Where the non-pension investments can be useful is to provide an income when a pension isn't available or to allow drawing on capital at a faster rate than allowed by pension rules.

FatherAbraham,

Annuities are neither safest nor most efficient. Nor is the income from the alternatives far lower or even necessarily at all lower than from an annuity.

They are safe against some risks but not as safe as say holding gilts directly, eliminating the risk from the annuity provider in the middle.

The level annuities or those with capped inflation cover have more inflation risk than a wide range of other investment options. The ones with good inflation protection suffer from a marginally competitive market with poor pricing due to limited competition.

They aren't most efficient in part because they are priced on the basis of a low return investment option, gilts, where a "perfect" annuity is often considered to be one that pays out 100% of what gilts would pay out. The problem with that is that gilts are a lousy investment choice at the moment and even in good times are not a particularly good one. There's huge inefficiency in using gilts as comparison investment instead of something with better returns. 100% payout compared to gilts may be actuarially perfect but that isn't anything close to the whole picture.

Annuities are inefficient for spousal income provision because of the reduction in spousal income it takes to get that, while alternative approaches like drawdown can offer a 100% spousal income with no initial reduction in income while both are alive.

There is no great gain from the sharing of longevity risk at common retirement ages because death rates do not start to significantly increase until some time after age 75 and only become very significant in the 80s. Once those ages are reached annuities can become much more competitive than they are at younger ages.

Annuities are a very risky product in another way, though. At times like those around today you lock into a low income for your money for the rest of your life.

Annuities inherently mean spending money that could be used for an inheritance. If there's a desire for one, the safety margins for alternatives can just end up being inherited instead of lost if not spent. Whether this will matter depends on the individual. Some will prefer the simplicity of annuities more than they prefer an inheritance.

Annuities have a wide range of useful roles, notably for those who have money to burn, no interest in investments or who are willing to accept the risks for the simplicity of the product. The last two of those apply to a lot of people and mean that for a lot of people buying annuities is the best choice in spite of their inefficiency and inflexibility. There's a huge market of such people, who will be willing to use a less efficient product to get simplicity.

dunstonh

I have a pension pot of £100k that will get me an annuity of about £3k per year (very approx.)

That suggests you are looking at a joint life, index linked pension as the annuity rate you are using is in that ballpark. (i.e. its too low to be level basis).

so I would have to live to 98 (very unlikely) to get my money back.

That is incorrect as you are ignoring the indexation.

I will only get £45k back so the pension Company walk off with a cool £55k.

That is not correct.
£100k fund. Take 25% tax free = £25k. The remaining £75k buys you an annuity. Lets use level basis rather than indexed. That annuity rate is currently around 5.4%. So, that is £4050 a year. That gives you a breakeven point of under 19 years. About age 84 in your case.

Then we have to consider how you got to that pot of £100k. Firstly tax relief. Lets assume basic rate taxpayer. That pot has actually cost you £80k as the other 20k is tax relief. You have also had employer contributions. You dont say what they are but lets assume matched contributions until you update us. So, 50k of it is paid by the employer. You get tax free growth as well. Ignoring the growth (as that can be matched by an S&S ISA), the pension would have cost you £40k (with tax relief and employer making up the other 60k). With you taking back 25% of the 100k, you get £25k back. So, your net contribution iis actually just £15k.

If you are going to compare savings to pension then you would need to look at what £15k would do in savings for £100k in pension. Also, cash is awful for retirement planning. You typically need to pay around three times more than you would for investment backed contracts. So, you could divide that £15k by three as it will suffer inflation risk and shortfall risk whereas a pension may only suffer inflation risk and shortfall risk.

RobertLamb61

it's a complicated issue, but I always advise people to look after their own money if they are capable or have a good advisor. company schemes might not be the best places to invest in, as history shows on many occassions.

margaretclare

Why do you think you 'have to' buy an annuity? You don't.

Nor do you have to take the first annuity on offer. Go to an IFA and get him/her to search the market for the best one.

DH and I have both done pretty well from annuities that we took some quarter of a century ago. We've each had more back over time than the original pot. Nowadays we wouldn't do that - there are far more options open now than there were then even though interest rates are much lower. We're also much more savvy now than we were then. It's possible to learn, even in later life!

atush

company schemes might not be the best places to invest in, as history shows on many occassions.

This is based on decades old information if you are talking pension pilfering a la robert maxwell which can no longer occur. The PPF takes care of those whose company goes bust.

Not to mention that most companies will only pay into a pension on your behalf if you contribute to their scheme. So to not use a company pension, you'd be giving up this free money. Madness.

Then you come across auto-enrollment. which if you opt out, you could find a private provider hard to find as you would come across mis-selling.

kidmugsy

Most complaints about annuities serve only to reveal the stupidity or ignorance of the complainer. One, however, is pretty legit, namely "ooh, rates are low at the moment". They shouldn't complain here, though, but write to Mr Greenspan in the United States, and Mr Brown in the United Kingdom. They might even like to write to Messrs Bernanke, Osborne and Carney, who are charged with repairing the damage done by Brown et al.

I do hope they won't reply "you ain't seen nuttin' yet".