When is too late to start a pension?

dads_wee_boy · 20 September 2007 at 9:26AM

Hi.

I'm a new member to the forums, although I've been a long time fan of Martins and surfer of the website.

This thread is very current to me. My Dad has just died suddenly, and my Mam has asked me to look into/sort out bits and pieces of their financial affairs for her. I can't help feeling that they have been badly advised in the past.

Before I divulge anything that might compromise your answers (!) is there a general consensus/view as to what age you would have to be to make it unwise to start a private personal pension, i.e. you would be better doing something else with your money?

Thanks.

dunstonh · 20 September 2007 at 9:43AM

is there a general consensus/view as to what age you would have to be to make it unwise to start a private personal pension, i.e. you would be better doing something else with your money?

There is no such age. Indeed, rule changes over the last decade have made late investing into pensions much more attractive than in the past.

Contributing into pensions post retirement is now a common option to consider as a way to boost your income more than other methods.

When it comes to guaranteed income provision, nothing can beat the pension and even if you were retiring tomorrow, the pension could provide an income of around 10% guaranteed after your net contribution (and 25% tfc back). What else can do that?

dads_wee_boy · 20 September 2007 at 1:11PM

my parents both took out a couple of pensions in late eighties/nineties when they were in their 50's, by investing some reasonably small lump sums. i'm just concerned that for the tiny amounts of pension their annuities provide(d), would they have been bettter keeping their money or investing in something else, and then have access to it when they retired. the level of pension per month they are/were receiving means they would have to live for 20-30 years before they got their original investment back, not allowing for inflation, interest growth etc.

Liz_the_Whizz · 20 September 2007 at 1:20PM

Sounds like a typical annuity then.

I read somewhere that it would take a pension pot of £120k to purchase an annuity equivalent to the state pension, and we all know what a pittance we regard that as.

dads_wee_boy · 20 September 2007 at 1:23PM

so, when does that constitute bad advice?? i'm not slagging off pensions for all, I just think that surely in some cases it's not the best way to prepare for retirement. do the fsa control that sort of thing?

dunstonh · 20 September 2007 at 1:29PM

i'm just concerned that for the tiny amounts of pension their annuities provide(d), would they have been bettter keeping their money or investing in something else and then have access to it when they retired.

Why do you think that? What alternative would they have done that was better? ISAs didnt exist. PEPs were only available in regular contribution form in the middle 90s and mostly had a contribution level around £100pm.

So, their choice was endowment or pension. Pension would have wiped the floor over endowment. Especially with tax relief being in the 30% range for some of the period and 25% for most of it.

the level of pension per month they are/were receiving means they would have to live for 20-30 years before they got their original investment back, not allowing for inflation, interest growth etc.

I think you will find that is an incorrect assumption. They would have got between 25 and 30% tax relief on the contributions. They would have taken 25% tax free cash as well. So, the pension only had to cover 50% of their contributions. If you take an annuity rate of 6%, then they only need to live for 8 years to break even (ignoring tax free growth on the pension and interest on the tax free cash when paid).

dads_wee_boy · 20 September 2007 at 2:48PM

i'm not doubting what you say. you obviously know what you're talking about, and I don't really. it's just a gut feel.

from what you say, perhaps they could have invested in PEP's, as it was lump sums that they invested.

also, not sure if the tax break on a pension was much of a break for them. since about 92/93, they were either paying no tax or very little, as my dad had medically retired, and my mum was only working part time.

some of the pensions provided/are providing (sorry...can't recall the exact details) pitifully small monthly amounts which you have to ask...would it make a difference if it was not there? obviously this reflects the initial investment - no complaint there. BUT....would that initial investment sum have been more valuable to them to dip into now and then for treats (short breaks etc) and the like, than the few pounds per month?

i fully understand that they have to take responsibility for their own actions. but still....

EdInvestor · 20 September 2007 at 3:18PM

Of course annuity rates have collapsed in recent years.The state pension would cost you about 150k to buy now (guaranteed index linked to RPI, 100% spouse's pension).

Ten years ago you would have got 10k flat per annum for 100k.So if the annuities are very small, then the lump sums might have been quite small as well.

Your concern about annuities being value for money is very applicable now, with very poor rates, and people living a long time so inflation will eat away the (taxable) income.

With rates fairly similar to what you can get on cash at the bank, people balk at the loss of the capital.

dunstonh · 20 September 2007 at 3:45PM

from what you say, perhaps they could have invested in PEP's, as it was lump sums that they invested.

Yes. Although conventional wisdom at the time was that they were not a retirement product. Plus, they were really only available through IFAs to begin with and many tied salesforces didnt introduce them until much later.

also, not sure if the tax break on a pension was much of a break for them. since about 92/93, they were either paying no tax or very little, as my dad had medically retired, and my mum was only working part time.

If they didnt have earned income then, they wouldnt have been able to contribute to pensions.

some of the pensions provided/are providing (sorry...can't recall the exact details) pitifully small monthly amounts which you have to ask...would it make a difference if it was not there?

The harsh reality is that they reflect what was paid into them. If the figures were small, then the income would be as well. However, that would apply to any investment.

BUT....would that initial investment sum have been more valuable to them to dip into now and then for treats (short breaks etc) and the like, than the few pounds per month?

Hindsight is a wonderful thing. It may have been the case that PEPs would have been better. However you also need to remember that without tax relief, the figures would have been even lower and there was no pension credit back then and the minimum income guarantee didnt come in until well after they did their pension. So, in a PEP, they would have had a smaller lump sum and smaller income.

Of course annuity rates have collapsed in recent years.

Please provide your evidence of that as rates havent changed much at all in recent years. Indeed, the rates for 2007 are the highest since 2002. Plus, we dont know when these pensions commenced. The rates may have been double digits when the pension started. Possibly a sign that the overpayments of the 80s are working their way out of the system.

Your concern about annuities being value for money is very applicable now, with very poor rates, and people living a long time so inflation will eat away the (taxable) income.

Far too simplistic. With tax relief and a provision for a guaranteed income for life, there isnt anything that can beat the pension still.

With rates fairly similar to what you can get on cash at the bank, people balk at the loss of the capital.

Evidence please. Please give us details of a guaranteed for life of 7.549% (male aged 65, non smoker). Indeed, lets make that 9.678% due to basic rate tax taken into account.