MSE Pension Guide: a review

jamesd

MSE has produced a pension guide. I'm not linking to it yet because I'm not sure that I will think it is worth linking to.

This is a very detailed review of aspects of the guide that might be helpful in showing where there's room for improvement.

1. It claims on page 5 that the typical lifespans for 65 year old men and women are 18 and 21 more years, which isn't true. The correct UK values are 21.7 years for men and 24.3 years for women.

The 2010-based cohort life expectancy tables from the Office for National Statistics contain the real values to use. The spreadsheet to use for the whole UK for life expectancy planning in retirement is D1: 2010-based cohort expectation of life, 1981-2060, Principal Projection, United Kingdom (Excel sheet 209Kb) unless you want the regional variations because of where you live.

Even if MSE had done the common screw-up and used period life expectancy the values for men and women would be 19.2 and 21.6 years.

2. The guide refers to a when will I die calculator. Given the gross errors in life expectancy in the guide I suggest not trusting it, since it's unlikely to do any better. Again, I'm not linking to it because it's more likely to be harmful than helpful.

3. The guide at least says on page 5 that the money may need to last a lot longer than anticipated but having the guide itself give bogus too short numbers isn't inspiring, since it will encourage the mistake it's warning against.

4. Page 6 claims to give the chances of living to various ages. MSE asserts that the source is "ONS 2014" but they don't tell us which 2014 ONS data they are using and there are a large range of possible data sources that it could be. So I went and looked at what seems like the best ONS data available, the Historic and Projected Numbers Surviving at Exact Age (lx) from the 2010-based UK Life Tables: Principal Projection, 1951-2060 (Excel sheet 420Kb) from the historic and projected mortality data set.

This data set doesn't have the required age at birth for age 65 today, which would most strictly be 1950 to cover everyone who's 65 now so I've checked using the 1951 values for a woman. The MSE numbers aren't too badly different so MSE might have got correct numbers for this from some other source with a fully correct starting year. I'm not sure. Here's how the calculation using that compare to the MSE numbers:

MSE 75% chance of living to 82. ONS: 66587 / 87481 * 100 = 76%
MSE 50% chance of living to 90. ONS: 45097 / 87481 * 100 = 51.5%
MSE 25% chance of living to 96. ONS: 24889 / 87481 * 100 = 28.5%
MSE 14% chance of living to 100. ONS: 13349 / 87481 * 100 = 15.3%

It's very good to see MSE giving chances of living to specific ages and since the numbers seem quite reasonable page 6 looks worth using.

These posts are a work in progress and I'll fill in more as time allows.

jamesd

There's a massive missing piece around the how you can take your money options on pages 13 and 14 that are likely to do very serious financial harm for life to anyone who follows the guide. So bad that I will not be referring people to this guide, it's too harmful to retire income levels.

The guide presents taking an annuity as the only option to get a guaranteed income for life. In reality the state pension deferral option will today pay close to three times as much inflation-protected income for the same amount of money used to buy the income.

It's very disappointing to see MSE encouraging annuity mis-selling to those who should be deferring their state pension instead of buying an annuity.

Martin's Pension Pointer on pages 14 and 15 is frankly a load of cr*p. There's no difference at all, it's just an illusion created by false accounting. The claimed saving comes from completely ignoring the 25% tax free lump sum in one case and using it in the other. Both cases get the 25% tax free lump sum and that can be used to provide tax free income just as in the "other" case. Two cases are really just the same with some sleight of hand to create a fake difference. Very unimpressive. All the "higher tax" case is doing is ignoring the 25% tax free lump sum that was taken and can be drawn on in the other case, so it's pretending that more taxable income has to be taken in that case.

Page 29's claim that "A good annuity at the best rate can still be valuable as it offers a definite income for life" is a load of tosh. Deferring the state pension pays more than buying an annuity.

Don't be scammed by this MSE guide into buying an annuity. Compare what you can get from the best available annuity to what you can get from deferring the state pension. The chance of the annuity paying you more for your money is very low unless you buy an annuity that has no inflation protection and even then it's very hard for a person who has already reached state pension age today to even match the 10.4% plus inflation available from deferring the state pension.

While Class 3A state pension top up is a bad deal compared to deferring the state pension, it also beats buying an annuity at typical ages. If you just want to spend all of your money in one go, this is probably going to get you more income for your money than deferring. It can also be a much better deal than buying an annuity if you just can't practically defer from long enough.

Martin should be ashamed of these pages that will do very serious harm for life to most who do as suggested to get a guaranteed income.

Annuities have their places. Once someone starts to get to age 75-85 depending on health an annuity can pay more than deferring.It's entirely possible that I'll buy one or more around this sort of age. An annuity is also appropriate when deferring the state pension would have to be done for an impractically long time. Some may just not trust that the state pension system will deliver what has been purchased. Others may accept a lower income for diversification. Others may have life expectancies that make a level annuity the most appropriate choice, if they can find one paying more than deferring. But for typical pot sizes in the £50,00 or so range, deferring is the way to go for an increased income of the highest possible inflation-protected level for life. Don't write off annuities, just be aware of deferring and compare to the best annuity you can get. You might be one of those who actually would be better off, uncommon though it is.

jamesd

A missed opportunity to point people under 80 years old away from the Class 3A state pension top-up. Or to steer those buying an annuity to it if they can't defer. Not mentioned at all. Deferring the state pension pays close to twice as much as buying the state pension top-up at state pension age. Don't be scammed by the top-up, compare it to what you can get from deferring instead.

And also compare it to what your spouse, if any, can get. If one of you has reached state pension age before 6 April 2016 and the other hasn't it'll probably pay you to defer for that one and use life insurance to protect the other because of the big difference in income increase from deferring: 10.4% inheritable mostly before 6 April 2016, 5.8% not inheritable for those who reach state pension age after.

Class 3A NI, a usually rubbish deal because it pays far less than deferring at the ages where it is normally considered. Deferring instead will get more income for the money for those who are not over 80 years old. Compare the age and percentage you get with the 10.4% for deferring:

Age Increase Calculation, also multiply by 100 to get %
63 5.56% (52 / 934)
64 5.70% (52 / 913)
65 5.84% (52 / 890)
66 5.97% (52 / 871)
67 6.14% (52 / 847)
68 6.29% (52 / 827)
69 6.49% (52 / 801)
70 6.68% (52 / 779)
75 7.72% (52 / 674)
80 9.56% (52 / 544)
81 10.12% (52 / 514)
82 10.74% (52 / 484)
85 13.20% (52 / 394)

Note that the benefit from deferring gradually decreases due to the time value of money so while it starts out higher at 10.4% it eventually will deliver less and by perhaps ten years after reaching state pension age it can start to get close to breaking even with buying Class 3A. So a person considering deferring for ten years might usefully consider buying Class 3A as well if they want additional secured income at a better than annuity rate.

Even the age 63 rate provides far more inflation-linked safe income for life than buying an annuity, for those in reasonable health so class 3A tends to trounce buying an annuity, even if it in turn tends to be trounced by deferring.

jamesd

Reserved for future use 4.

jamesd

Reserved for future use 5.

Ivrytwr3

Reserved for future comments 1 - 5.

jamesd

Ivrytwr3 wrote: »

Reserved for future comments 1 - 5.

LOL, I'm being cautious with the post size limits in part because I don't have the time to do a really thorough job at the moment.

I'll be filing feedback on the guide with MSE so hopefully Martin and the team will get a chance to take on board the feedback and get something we can all be proud of.

atush

I hope you have sent your comments to the MSE team?

You can't rely on them to read these threads/posts?

jamesd

Thanks. Yes, I used the error reporting form since there are some clear errors as well as the bad deal aspects.

Don't expect any rapid changes or responses. The MSE folks will want to check and they are also quite likely to be very busy with Martin's current live appearances.

SnowMan

jamesd wrote: »

Even if MSE had done the common screw-up and used period life expectancy the values for men and women would be 19.2 and 21.6 years.

MSE are using the period life expectancies and I think their figures are correct on this basis (based on the 2010-2012 and the recent 2012-2014 data) see

http://www.ons.gov.uk/ons/rel/lifetables/national-life-tables/2012-2014/stb-life-tables-2012-2014.html

In 2012–2014, a man in the UK aged 65 had an average further 18.4 years of life remaining and a woman had an average further 20.9 years of life remaining.

I agree cohort life expectancies are much better to use, but I can't get overexcited about that.

I really like the ONS calculator which does use cohort life expectancies. The thing I really like is the 1 in 4 and 1 in 10 chance points (and the chance of making it to 100 is fun)

http://visual.ons.gov.uk/how-long-will-my-pension-need-to-last/

On a side point the recently published 2012-2014 data seems to me to suggest a sudden falling back in the rate of mortality improvements, although there may be some reason to explain that.

It will be interesting to see what the 2012-2014 cohort life expectancies are when they are published between 15th December and 16th January 2016, as these will be used as the starting point for determining State Pension Age increases.

jamesd

SnowMan wrote: »

MSE are using the period life expectancies and I think their figures are correct on this basis (based on the 2010-2012 and the recent 2012-2014 data) see

http://www.ons.gov.uk/ons/rel/lifetables/national-life-tables/2012-2014/stb-life-tables-2012-2014.html

Thanks! The UK table there gives 18.42 years for men and 20.87 years for women so that could be where they got the wrong numbers from.

SnowMan wrote: »

I agree cohort life expectancies are much better to use, but I can't get overexcited about that.

I can because the difference is significant:

For men: 21.7 vs 18 is 19.3% longer life expectancy
for women: 24.3 vs 21 is 15/7% longer life expectancy

That then feeds in to things like value for money calculations and can make things look like less good deals than they really are.

SnowMan wrote: »

I really like the ONS calculator which does use cohort life expectancies. The thing I really like is the 1 in 4 and 1 in 10 chance points (and the chance of making it to 100 is fun)

http://visual.ons.gov.uk/how-long-will-my-pension-need-to-last/

Thanks! I didn't know about that - it's interesting. It's also interesting that it can be embedded in other sites, so MSE could just "steal" it.

SnowMan wrote: »

On a side point the recently published 2012-2014 data seems to me to suggest a sudden falling back in the rate of mortality improvements, although there may be some reason to explain that.

It will be interesting to see what the 2012-2014 cohort life expectancies are when they are published between 15th December and 16th January 2016, as these will be used as the starting point for determining State Pension Age increases.

Yes, I've seen some discussion of a possible change to lower rate of increase in life expectancy or maybe even a change to a slow decrease. Those SPA changes will be... interesting... as well. Particularly for those of us who may retire say 15 years or more before their current SPA, as I could if I compromised on some of my new objectives.