Should pensions be compulsory?

Debt_Free_Chick

nrsql wrote:

One thing is to give guarantees about pension funds. When they will be available to you. What conditions will be prevalent when you access them. How much control you wll have up till then...

The difficulty with guarantees is that someone has to underwrite them. Commercial organisations can't, as Equitable Life demonstrated. Governments could - provided the tax-payer coughs up.

As to the conditions at retirement ... again, it's simply too far in the future to be able to predict with any acccuracy.

Control .. yep, if that's what you want. Many people don't though. They simply want to pay now and collect later. There's nothing wrong with that, but the flexibility given to those who want control is often coupled with complexity which inflicts all.

Removing dividend tax relief did a lot to stop people investing in pensions and also has a lot to do with the deficit.
Increasing the age at which you can take the state pension sends a similar message.

the removal of ACT certainly had companies red with fury. Their long term pension costs (in DB schemes) went up overnight! Not good for the members of the pension scheme and not good for the shareholders of the company either.

The biggest issue, however, is one of increasing age expectancy. Let's take a retirement age of 65. 50 years ago a man could be expected to live to about age 68. So a working life of 50 years (starting at age 15/16) only had to provide a pension for 3 years. Now, a man aged 65 retiring today is expected to live until (about) age 74. And he probably went to Uni or served an apprenticeship. So he's had about 45 years of working life to provide for 9 years worth of pension. And that's just at age 65 ... very many people want to retire at age 55 when 30 years of working life needs to provide a pension for 20 years.

It simply doesn't stack up.

I agree that the impact of an increase in retirement age is likely to increase the public's sceptism, but is that a valid reason for not taking such action? Wouldn't it be better if those that whinged actually tried to understand the enormity of the problem? It's not so much a today issue, but current children will live even longer than their parents. Should we (via the Government) continue to make promises on their behalf (about State Pensions) that are going to be financially crippling for the tax-payer to meet?

I no longer contribute to a pension scheme (outside ni) and won't until I consider the benefits outweigh the risks. All it takes is for companies to offer uncompetitive annuities and high transfer fees or for the government to raid funds and you are stuck. Maybe they'll decide that those with large private funds should subsidise state pensions?
Doesn't mean that I'm not saving for retirement though.

I can understand your position. You fortunately have not ignored the need to plan for retirement. Many people are relying on the State Pension and nothing else! They think they are "owed" and that pensions are "a rip-off". In reality, the investment risks are no different for any other type of long-term savings plan, but I agree that the regulatory complications and the temptation for Chancellors to raid is a concern. Let's have a long-term commitment from both current and future Governments on that one, eh?

Regards

nrsql

>> It simply doesn't stack up.
Agree - that's why I don't trust pensions funds or (especially) the state pension.

There's a choice between 1. saving now and relying on it later 2. relying on future workers to subsidise your retirement 3. never retiring and a combination of these.
And maybe always being retired - i.e. living off benefits which I guess is 2.

Raising the retirement age means that more people will be taking option 3. and will mean that more benefits can be provided for option 2. - which on it's own seems to be unsustainable without a social change.
So what to do? I would say once you invest in a pension fund you're at the mercy of the administrators/rules. Remember all those vastly overfunded pension funds that companies were allowed to raid followed by a vast deficit? Funds that now decide that to prevent large bonus swings we shouldn't receive any bonuses now to compensate for those we have received in the past?

Wonder how many people are contributing to ISA's and property rather than pensions - maybe the problem isn't as bad as is made out.
Similar to the debt problem - how much of that is due to offset mortgages (do they take into account how much is offset?) and 0% interest loans.

Pal

I am not sure how anyone who appreciates the impact of increased life expectancy can possibly not "trust pensions".

If you know that you are likely to live for in excess of 20 years after you retire, surely you have to make some kind of plan to fund your retirement during that period. If you don't trust pensions or the state pension, then what are you relying on? ISA's? Housing? There are major problems with both of those.

It just strikes me that anyone who really understands longevity must be either planning to retire much later or saving like hell to make sure that they don't have to rely on the state.

dunstonh

Agree - that's why I don't trust pensions funds

and

Wonder how many people are contributing to ISA's and property rather than pensions - maybe the problem isn't as bad as is made out.

Yay, this allows me to repeat my flavour of the month comment.

The same investment funds available for ISAs are also there for pensions. You cannot blame the pension wrapper for the performance of the investment fund(s) you have chosen to invest in. Anyone moving out of a Pension into an ISA because of performance clearly doesn't understand what they are doing.

The property vs stockmarket issue as another short term issue that will go full circle once housing prices drop and the stockmarket has a sustained period of growth. The last 12 months have seen the UK equity and income sector perform better than property so the corner may have already been turned. The problem is that the average person reads the papers, looks at past performance comments and then goes and places their investment (in whatever area it is). In the early90s it was property, in the late 90s it was various stockmarket sectors. We have just had the stockmarket crash and people now favour property (although there is a return to stockmarket beginning to show). The problem it that many seem to switch over at the wrong time. After it has made its short term gain and is prime for a drop.

EdInvestor

One of the (many) problems with pensions is the impact longevity is having on current annuity rates. You're looking at a (taxed) 5-7 per cent return (not index linked) and for this princely sum, people have to give up their capital.:eek:

You can get something pretty close to that in a decent bank or BS account these days and keep your capital. People are not happy about this situation.

It is IMHO one of the most unattractive features of pensions, and with the advent of D/C company schemes the problem will get a lot worse.

The new rules ending the compulsion are a step in the right direction but don't go far enough.And most drawdown arrangements are still way too expensive for smaller funds.

Until some of these problems are tackled I predict the unpopularity of pensions will continue and people will find alternative ways to save and invest.

EdInvestor

Hi nrsql

nrsql wrote:

Wonder how many people are contributing to ISA's and property rather than pensions - maybe the problem isn't as bad as is made out.

Guess what, you're absolutely right.

Over the last 15 years or so, household assets in the UK have been increasing by about 3% a year after inflation. In 1999, excluding cash savings, household wealth was about two thirds in pensions and life assurance (ie endowments, investment bonds) and one third in property.

Now it's about half and half. This reflects the fall in the stockmarket and the rise in property prices. Cash savings have also shown quite a big increase.

So the crisis is nothing like as bad as some people claim.There are of course some current problem areas - Equitable, pension windup victims -but not very many people are affected.

The main concern is longer term and relates to longevity and the fact that we've given up having kids, so that in 30 or 40 years time there'll be fewer workers to support more retirees.

But to be frank, even there one wonders whether the actuaries have got the figures right.After all the reason for the longevity panic now is that they earlier got it wrong, by predicting that AIDS would kill off far more people than it actually did.

Have they got it wrong again? There are a hell of a lot of obese people out there, have you noticed?

Debt_Free_Chick

Editor wrote:

One of the (many) problems with pensions is the impact longevity is having on current annuity rates. You're looking at a (taxed) 5-7 per cent return (not index linked) and for this princely sum, people have to give up their capital.:eek:

You can get something pretty close to that in a decent bank or BS account these days and keep your capital. People are not happy about this situation.

It is IMHO one of the most unattractive features of pensions, and with the advent of D/C company schemes the problem will get a lot worse.

The new rules ending the compulsion are a step in the right direction but don't go far enough.And most drawdown arrangements are still way too expensive for smaller funds.

Until some of these problems are tackled I predict the unpopularity of pensions will continue and people will find alternative ways to save and invest.

I see an annuity as an insurance against living too long

Currently, you can get 5% interest in a savings account, but what will you get in 10, 15 or 20 years time? If you actually need a certain income in retirement, then you need to be able to generate that for so long as you live. An annuity is the only way to do this - it pays out the income for so long as you live, no matter how long you live.

And, as time goes on, you probably want your income to increase - at least in line with inflation. Your savings account won't achieve that. If you increase the income you take from your savings then, without a corresponding increase in the rate of interest, you end up eating into the capital. Keep doing that and you could run out of capital before you die!

There's a lot of hype about the poor value of annuities, but with people living longer and lower investment returns, they still provide the only "long-life insurance". At least you can plan your retirement income with absolute certainty with an annuity - and there isn't any other product or investment that will do that.

Michel_Z.

Editor wrote:

Since it's a bit quiet around here, thought I'd ask what others think as it seems Mr Blunkett will be out and about seeking input on this soon

My view is they already are, since you are forced to pay NI contributions which entitle you to the basic state pension plus the state second pension (S2P). You don't get these pensions if you don't pay NI (though these days you can get credits for the NI if you're a SAHM/carer, etc.)

Given this existing compulsion, possibly it's more important to focus on saving to buy a house in the early years?

Views?

It's very important to focus on saving to buy a house in the early years, but don't pull your attention away from pension building till it's too late!