When is too late to start a pension?

dunstonh

EdInvestor wrote: »

Historic annuity rates

http://www.annuity-bureau.co.uk/AF_CMS/Resources/Annuity%20bureau/rates_historic.html

You should really qualify your comments and posts.

For reference, the table Ed posted was for an increasing (3%) annuity and not level basis and includes 50% spouse. Hence why it was at the 4.5% mark. Still looks better than a savings account though.

Within 10 years its at 5.87% and 15 years has it at 6.8%.

For level pensions male aged 65 single life on £100k purchase

1991 £14,430
1992 £13,158
1993 £11,684
1994 £10,270
1995 £11,078
1996 £10,674
1997 £10,472
1998 £10,472
1999 £8,876
2000 £9,098
2001 £8,997
2002 £8,492
2003 £7,422
2004 £7,352
2005 £7,302
2006 £7,356
2007 £7,549

Source, Taxbriefs, Pen/31 05/07

EdInvestor

dunstonh wrote: »

For level pensions male aged 65 single life on £100k purchase

1991 £14,430
1997 £10,472
2007 £7,549

IMHO it's reasonable to say that the above changes represent a collapse in annuity rates.

dunstonh

IMHO it's reasonable to say that the above changes represent a collapse in annuity rates.

Yes but its not recent.

dads_wee_boy

i can see your a pension fan.

Quote:
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.

i did make the point i think that they made lump sum contributions, not ongoing ones. obviously, they were not in a psition to make ongoing contributions.

interested in those figures re annuities. looks similar to what happenned with endowments doesn't it? i.e. people invested at a time when performance was good. were they warned adequately that future performance could be as bad as to drop by half?

potential pitfalls were often ignored or glossed over when endowments were sold back then (not by all I know), hence the crisis many faced. were pensions sold the same way?? is not having enough for your retirement any less important than not having enough to pay off your mortgage??

dunstonh

i can see your a pension fan.

Absolutely not. Unfortunately, my comments may come across like that because I have to balance out Ed's anti-pension comments. I'm not a fan or biased against them. They have pros and cons like any of the tax wrappers and they are the best choice for some and not for others.

Pensions have become less suitable since around 1997 but prior to that, they were the best option for most people. You are looking at historical contributions and there is little point looking at current rules, products and knowledge and retrospectively applying it to 10-20 years ago.

i did make the point i think that they made lump sum contributions, not ongoing ones. obviously, they were not in a psition to make ongoing contributions.

If there was no income, they were not in a position to make single contributions or regular. The ability to pay into a pension without earned income is something came about this decade.

interested in those figures re annuities. looks similar to what happenned with endowments doesn't it?

No. Endowments were built with a high inflation, boom/bust economy in mind and thrived on that. The move to a stable, low inflation, low interest rate economy made the product expensive. Plus target growth rates were too high for modern returns. The concept of investment mortgages still exists and using modern products like ISAs you can do very well out of it.

were they warned adequately that future performance could be as bad as to drop by half?

Not unless the person had a crystal ball. They would have had illustrations and projections issued showing three example growth rates though and these would include a warning that you can get back less as well as more.

potential pitfalls were often ignored or glossed over when endowments were sold back then (not by all I know), hence the crisis many faced. were pensions sold the same way??

No they were not. You are also forgetting that had they used alternatives, they would have got less.

is not having enough for your retirement any less important than not having enough to pay off your mortgage??

It is not any less important but what you get back is very much linked to what you pay in. If your parents didnt pay in much, then they werent going to get back much either.

It doesnt matter if you put money into Pensions, PEPs, endomwents or unwrapped in unit trusts or investment trusts. The amount you pay in is key to what you will get back.

dads_wee_boy

I fully accept and take on board your point about what you get out of a pension depends on what you put in. That has never been a gripe of mine.

My main issues (which I still have despite your very well informed responses!) are:

1. were they too old to start a pension with one-off lump sum payments, with no ongoing contributions, when they were in there fifties.
2. were they adequately warned that the value of their investment could seriously underperform the projections they were given.

Quote:

were they warned adequately that future performance could be as bad as to drop by half?

Not unless the person had a crystal ball. They would have had illustrations and projections issued showing three example growth rates though and these would include a warning that you can get back less as well as more.

I know about the 'warning'. Endowments also came with a warning did they not, except of course that it was often completely overlooked, or glossed over.

Quote:
potential pitfalls were often ignored or glossed over when endowments were sold back then (not by all I know), hence the crisis many faced. were pensions sold the same way??

No they were not. You are also forgetting that had they used alternatives, they would have got less.

You can't say unequivocaly how pensions were sold, in the same way that some people/companies obviously sold endowments poorly. Your point about alternatives may be correct - perhaps they should have just stuck their cash in the bank! What were interest rates over the same period?

dunstonh

were they too old to start a pension with one-off lump sum payments, with no ongoing contributions, when they were in there fifties.

It doesnt matter about age. It matters about need. Did they need an income in retirement? If yes, then pension is the best product to provide that as nothing else would pay the same level of income.

were they adequately warned that the value of their investment could seriously underperform the projections they were given.

Doent matter either. The FSA doesnt allow complaints about investment performance. The illustrations would have used projection rates defined by the regulator at that time. They would also have a warning on them that you could get back more or less. Again, that is was a regulatory requirement. The adviser has to use those rates.

perhaps they should have just stuck their cash in the bank! What were interest rates over the same period?

They would have got far less than the pension if they used cash. They would have got lower returns, no tax relief and no tax free growth.

Here is an example of a pension totally ignoring growth. You pay £3600 in. Due to tax relief, you only pay £2808. If you ignore growth and take the pension, then you can take 25% back. So, thats £900 returned. That makes your net contribution to the pension £1908. Assuming age 65, that would pay an annual income of £199. That is equivalent to a gross interest rate of 10.43% p.a. That is using todays lower annuity rates and lower tax relief than what they would have had.

Can you think of any savings accounts that pay close to 10%?

You can't say unequivocaly how pensions were sold

Correct. However, you cannot either as you were not there and you have to remember any complaint you make is based on the rules that were in place when the advice was given and also the distribution channel used. For example, a complaint upheld against an IFA may be rejected against a tied agent because tied reps only have to offer the best match from their product range. If the only options for long term investing were investment bonds or pensions and the goal was income in retirement, then pension wins hands down.