My view on Pensions

AnotherJoe

Rachel_Pierson wrote: »

What on earth are you on about? Are you under the mistaken impression noone has paid NI since the last World War?

No, I was under the misapprehension that it was introduced in WW2 but I see it was as actually introduced in 1911. My point was you are harking back to what its original purpose was. That was more than 100 years ago yet you rant about that's what it was for them as if it's relevant today. It isn't. Get over it.

As I said, you are continually harking back to the past

Anyway I'm out as despite your "convince me" words, your mind is obviously more made up than a third generation Jehovahs Witness.

ex-pat_scot

I really can't be @rsed quoting chunks of your rant, but here goes on my general thoughts:


1. historic DB scheme failure. Yes. It did happen. 20 + years ago. Painful for Maxwell group, Equitable Life. For the last 10 odd years, and for the future, there is the Pension Protection Fund that will step in to guarantee 90% of the pension promises for existing DB entitlements. That includes BHS and any of the current headline scheme "failures".


2. current scheme failures are not generally due to fraud or negligent mismanagement. They are an unfortunate consequence of the unforeseen QE leading to zero interest rate and negative bond yields that have artificially exploded the calculation of scheme liability. Companies are generally stepping up to the mark and making pretty eye-watering contributions to address. If they fail, then see 1. above.


3. DB transfers. You DO NOT have to transfer to DC. Part of the high (relative) cost of transfer reflects the huge risk to the advisor of helping you to do so, when it is not usually to your favour.
Whilst I would love some sort of opt-out for financially-savvy people, sadly the rules are written to protect the incompetent and sometimes wilfully negligent consumers, and there doesn't seem to be another solution that satisfies both camps.


4. tax relief now vs political risk.
There's absolutely no reason why any individual should not step up and try to understand how pensions work, how investments work and what a low-cost suitable product might be for their investments.
Controversial to state. However it's no more tricky than learning how to program a sky box, mobile phone or use a modern microwave...
The difference is that it is (a) dull and (b) not of visible benefit for decades.


Tax relief con? I don't think so.
Basic rate taxpayer under salary sacrifice would benefit from 32% tax relief. HR taxpayer 42%. When they withdraw, including their investments that have grown tax free, they will suffer a mix of zero and 15% effective tax (15% = 20% basic rate less the 25% tax free element of withdrawal). Whether BR or HR taxpayer, that's a considerable benefit.


Add the employer contribution. Some employers are !!!!!! and look to take advantage - playing off elements of the package is part of their game. Whether or not you are a member of their pension scheme, these employers are dysfunctional and you would be better elsewhere. Pension or no pension.(I admit this might be easier in central london than where you are at the mercy of one local dominant employer).


My employer sticks roughly £10,000 pa into my pension. That's nice of them. They avoid a wedge of ers NI to soften the blow. It's not an unusually generous proportion of the package. Sorry if I come across smug, but I either use it or lose it. I have no ability to wriggle around the HR team to negotiate a zero pensions package.


Behaviour. Pension contributions generally come out of your payroll package before it hits your bank account, so is invisible to your month-to-month spending and budgeting. Were I to have to make non-pension investments for my retirement, then i'd be very hard pushed at times not to divert the funds to the endless emergencies that arise in my large family.
If I lost my job and looked for benefits, then any non-pension investments would be considered available for my use before receipt of benefits.
if I were bankrupt, I'd lose any non-pension investments to the creditors.


Set against this, is political risk. That is- the risk that the state in its infinite wisdom decides to move the retirement age, Lifetime allowance, access to annuities etc. This is a worry to me, but not sufficient to stop me making as full use of pension as possible.


Finally: as you recognise above -what are you going to do, if not to put into a pension?
I don't see that it is a Ponzi scheme, any more than any other non-pension investment. My funds (note "mine" - noone else has the ability to access or divert them) are invested in exactly the same investment vehicles (shares, funds, etfs, trackers) as they would be if they were in an ISA or other savings vehicle. I pay my SIPP provider a grand total of around £200 pa in fees, and fund costs of on average 0.25%.


I have a plan. It's not a great plan, but it is a plan and it's mine. It involves making sensible sacrifices now, that have resulted in large amounts of funds being in my pension account (due to the twin combination of tax relief and investment performance), and will see me self-sufficient in 7 to 10 years.
or they might not. I have no certainty over investment performance, interest rates or political whim. I have some control over stability of funding the plan (ie remaining in a decent job, and contributing the max I can).


I expect that I will have some access to SP when I reach SP age. I have little faith that the SP will be unchanged from its current projection. I have some faith that most of my SP entitlement will remain. That's part (and a small part) of my cunning plan.


In the end, it comes down to a simple balance, in the same way as most things do in life.
I recognise I cannot control all elements of pension planning.
I recognise those elements outside of my control, and seek to minimise their impact.
I take those elements I can control and plan for them to deliver.
it's the same, whether we are talking pension, relationship goals, managing a family or working on career and peronal relationships.


The alternative is to drift, and you do so with the nagging feeling always that you have no idea where you might be headed and what's in store....


My final thought (honest!). You know noone outside of MPs who can live on their pension alone. Most of those I know who are retired are living on their pension - where there is non-pension assets or income, these are not core to their basic requirements.
I plan to take the same approach.
You either have an unusual circle of acquaintances, or are perhaps asking the wrong questions!

RuleTheWorld

Interesting to know the age of the OP.

I think the pension freedoms of recent years are just the start of it. No one will have heard of annuties in 20 years time

Rachel_Pierson

MoneyLover wrote: »

If only there was some sort of lifeboat which paid you the majority of your pension when your scheme collapses...

What, like this one?

I suppose it's still better than the scheme the government proposed last time a major pension scheme went bust. A lot of those pensioners died without receiving a penny, whilst politicians were faffing about offering as little as 25% of what was due.

I personally don't fancy a 10+ year legal fight when it comes to drawing down a pension if promises aren't honoured. Time is not on your side if the worst comes to the worst at that point in your life.

Rachel_Pierson

RuleTheWorld wrote: »

Interesting to know the age of the OP.

I think the pension freedoms of recent years are just the start of it. No one will have heard of annuties in 20 years time

I am 43. More text because apparently that is too short a post.

AnotherJoe

Incorrect. At BR tax when earning you get 25% tax free when you withdraw At HR tax you get more than half of it tax free.

So, you'll need to explain to me again how paying tax on 25% of it (or is 50% - probably is if you take it all in one year, eh?) constitutes being "tax free". That's like saying your post is "ranty red text free", because only half of it is ranty red text.

---

> OK. I put in £100. My employer gives me £55. Gvt bumps that up to about £200 (probably more but I cant be bothered to work it out now).
When I withdraw that, i get 25% tax free (£50) and pay 20% tax on £150 (£120). So my £100 has turned into £170. Ka-Ching. Thank you.

Plus, you do get free money. For example, if I pay £100 into my pension, my employer pays in maybe £55. This is aside and before tax. So, yes that is free money

No. The pension scheme gets free money. From me, and from my employer. I get less money each month I'm working. When I do eventually get some of it back, by contrast, it's taxed.

See above - £100= £170. If you arent a HR taxpayer when earning, then your £100 would end up as around £150.

That financial advice cost refers to DB pensions not DC. Most pensions going forward will be DC

Until they change the rules in the future to suit themselves. Again. You think they won't because they've promised not to? That's what they did with the state pension. They made it means tested, when at the time pensioners were having NI deducted they were told it was a cast-iron guaranteed future pension. That turned out not to be the case.

OK so now you criticise them because of what they may do? Maybe they will tax your ISA or maybe you dont use an ISA. Maybe they will tax non ISA finds more?

Again, irrelevant when it's a DB pension you are very backward looking in all your rants.

Not really worth responding to, beyond saying "rants" is the codeword people generally use when they mean "uncomfortable arguments I can't actually find a flaw in but don't want to believe."

£100 = £170. Proved.

What you mean like it's all good idea to eat healthy food and exercise so the idea doesn't need to be sold and no one had to be encouraged to do it?

No. What I'm saying is don't sign me up for a gym membership, then make me have to argue with you to get my money back. For all you know I could be very fit indeed and not need your self-serving 'help' to 'improve my health' (whilst increasing your wealth.)

But you dont have to sign up for gym membership. Its your choice. Though I'm at a loss as to how giving me £70 is "your wealth"

And now I'm really out.

Rachel_Pierson

ex-pat_scot wrote: »

I really can't be @rsed quoting chunks of your rant, but here goes on my general thoughts:

OK. I understand. I couldn't be arsed reading your post after that opener either.

Linton

Rachel_Pierson wrote: »

.......
As for ISAs, I don't see anybody requiring me to obtain compulsory independent financial advice (permission?) to do whatever I want with an ISA. That's just one of the differences between them and pensions. There's also the fact that they are actually tax free at the point of drawing down, rather than just free at the point of saving.

Your comment on the 25% tax free lump sum is "interesting". It is tax free. But only if you let someone else tell you what to do with the other 75%. Which might not be what you wanted to do with it, or what would make you the most money or make the most sense to your personahttp://www.morningstar.co.uk/uk/portfoliomanager/portfolio.aspx?Portfolio_ID=1853515&tab=0l circumstances at the time. If you're dying of cancer and have only two years to live, do you really want to take 25% tax free then be forced to buy an annuity with the rest? Or take the whole sum as cash (which may well be a very high tax bracket by taking it all in one year.) If that money were in an ISA instead, you could do what you liked with it, actually tax free. Not just nominally.

You really havent followed what has happened to pensions over the past 10+ years......

1 - You only need to get IFA advice if your pension provides a guarantee. Most people in the private sector these days are in DC pensions without guarantees so there is no requirement to involve an IFA. Pensions with guarantees are more restricted, however the fiinancial benefits are much larger than could be gained purely from your contributions.

2 - There has been no general requirement to buy an annuity since 1995 when drawdown was permitted for people under 75. Constraints were relaxed by successive governments in 2006 and 2011 and complete freedom came in 2014. After the age of 55 you can buy an annuity or you can drawdown as much or as little as you wish whenever you wish.

3 - A mistake you are making is your apparent belief that it must be pensions or S&S ISAs. I think you will find that most people on this board with significant savings, especially those who have taken or plan to take early retirement, make full use of both pensions and S&S ISAs. Both have their advantages and disadvantages so use both. Put as much into pensions as required to get the maximum employer benefits and put the rest of your available money into S&S ISAs.

4 - One advantage of pensions that hasnt been mentioned is that it can be very much more tax efficient to use pensions for inheritance as they are outside one's estate. ISAs form part of one's estate. For those with less wealth, but this is not my field, money in ISAs can limit your access to benefits far more than money in a pension can.

zagfles

Rachel_Pierson wrote: »

I was reading this article by Martin today. I need to say, whilst a lot of the advice on MSE is useful, I found this particular article to be ill-informed and wrong.

I'm old enough now to have seen several incarnations of pension schemes come to disappoint the people who paid into them all their working lives. From the Maxwell pension scandal over twenty years ago to BHS today, pension schemes can and do collapse. And when they do, it's those that have been paying in for 20-40 years that suffer.

Ever heard of the PPF?

And this line that keeps getting trotted out that opting out of workplace pensions schemes is like "giving up free money" is just so much self-serving rubbish. Lets look at the reasons why:


Many of the people who make so much of the fact that pension contributions are tax free, conveniently forget to mention that you do actually pay the tax when you draw down the pension at retirement. So it's deferred tax, not "tax free". The only time the money is "tax free" is when it's in the pension scheme's hands. Claiming it is "tax free" without qualifying the very limited window in which it attracts no tax is like saying purchases on 0% interest introductory offer credit cards is "interest free", because you don't pay interest right away. Just some time after the money's gone and it's time to pay it back.

The tax advantages of pensions are well documented. A quarter is tax free. Many people pay lower rate of tax in retirement than when earning. Most people using salary sacrifice will cut their tax in half or much more by using a pension. Even a basic rate taxpayer both in work and retirement would save 32% (tax and NI) and only pay 15% when withdrawing from the pension (25% tax free, 20% on 75%, overall rate 15%).
Personally I'd rather pay 15% tax than 32%, or 42% for higher rate taxpayers, plus get to keep child benefit for some people, plus be able to claim tax credits for others, plus get university bursaries for the kids, the list goes on...

You'd need to get a hell of a lot of that "free money" to pay for the compulsory independent financial advice that's required in some cases if you want to spend your own money your own way. At present, it typically costs about £2.5k to obtain such advice. How much do you think it'll be in the future compared to your pension pot when it comes time to retire?

Zero. Nil. Nada. No financial adviser will get any of my money. I have a DB scheme which I will keep as a DB scheme, a DC scheme with no special guarantees and a SIPP, for which there is no requirement whatsoever to take any financial advice.

• Many of the past incarnations of pensions from the 70s, 80s and 90s were presented in just as cheery and rock-solid "guaranteed" terms as the current incarnation. Then politicians discovered that National Insurance contributions promises couldn't actually cover all the pensioners that are expected in the future. Because too much public money had been squandered on illegal wars and MPs expenses, so not enough was left for the actual purpose for which it was collected. Their solution? make the state NI pension means-tested instead of just being based upon years of contributions as previously promised.

• What are you on about? That article says nothing of the sort. No credible political party or politician is suggesting means testing the state pension. It would be political suicide. Things are moving the other way, the new state pension is set at the level of the previously means tested Pension Credit.

Your disposable income now goes down when you fail to opt out of a workplace pension. So you have less to invest using your own acumen. So, instead of relying on your own competence to make money for yourself from your own investments, you instead have to rely on some pension scheme organiser doing what's in your interest instead of theirs. Good luck with that.

Ever heard of SIPPs? You can invest them in practically anything you want, with a few exceptions. I have a SIPP, I choose exactly what I invest it in. It's just a "tax wrapper", it's no different to investing outside a pension, other that the massive tax advantages. The only real downside is no access to the investments until 55, but this also protects the investments from being considered if you need to claim means tested benefits. Invest outside a pension and then lose your job - tough - no means tested benefits because you have "savings".

Think about it. If these pensions were such a great idea, wouldn't they sell themselves? Instead, they are one of the few products that it is legal to inertia sell by signing up people to them who haven't asked for them and don't want them. Then make those people jump through hoops to extricate themselves from a financial product they didn't want in the first place. Then do it all over again every three years. Imagine supermarkets worked that way. Imagine they delivered food to your house unsolicited. Then had the cheek to try and tell you it was all in your own best interests, as otherwise you might starve to death. Because you're Just That Stupid. That's about the level of disingenuousness involved in the arguments for inertia selling pensions. It's a terrific wheeze. I bet lots of other industries wish they'd paid political parties to pass legislation that was so favourable to their own interests.


Anyone have any counter-thoughts? I'm always willing to be proven wrong. Then again, we'll only really know who is right and who was naive in 20 years time...

You don't need to. Ask retired people now. I know lots of people coming up to retirement or who've already retired. I've heard loads say "I wish I'd joined the pension scheme earlier" or "I wish I'd saved more in my pension". I've heard none say "I wish I hadn't bothered with the pension scheme".

Yeah yeah there's the odd exception, there always is. Maxwell etc. But these days even schemes where they've gone bust, pensioners will be better off than had they not joined the scheme as the PPF steps in.

You don't seem to understand that a "pension" is just a wrapper. There are all sorts of pros and cons to the different types of pensions, workplace, defined benefits, defined contrubition, auto-enrolled, stakeholder, SIPPs, just like there is with other types of savings schemes or investments. But the pension wrapper is hugely advantageous, if you understand it.

AlanP_2

Rachel_Pierson wrote: »

I didn't ignore employer contributions. I addressed them by stating that many employers use contributions as an excuse to pay less or not give pay rises. The reason they'd pay more in salary if you didn't cost them that amount in pension contributions is simple market forces. If you're good at what you do and it's cheaper to keep you at a higher salary than replace you (which pension contributions will factor into), then they'll pay more for your services. At least that's what I've found.

As for ISAs, I don't see anybody requiring me to obtain compulsory independent financial advice (permission?) to do whatever I want with an ISA. That's just one of the differences between them and pensions. There's also the fact that they are actually tax free at the point of drawing down, rather than just free at the point of saving.

Your comment on the 25% tax free lump sum is "interesting". It is tax free. But only if you let someone else tell you what to do with the other 75%. Which might not be what you wanted to do with it, or what would make you the most money or make the most sense to your personal circumstances at the time. If you're dying of cancer and have only two years to live, do you really want to take 25% tax free then be forced to buy an annuity with the rest? Or take the whole sum as cash (which may well be a very high tax bracket by taking it all in one year.) If that money were in an ISA instead, you could do what you liked with it, actually tax free. Not just nominally.

I read the OP before anyone had replied and bit my tongue figuring it just wasn't going to be worth trying but reading this post the misunderstandings seem to be getting worse.

If you are talking about a Final Salary or Defined Benefit scheme as you had in the Police then you never have a "pot of money" and what is within the Pension Scheme is not yours.

The contributions from you and your employer are held in trust and invested with the intention of paying out £x per year for however many years is necessary once you retire.

If the overall fund is short and can't cover the pension liabilities then the employer makes up the shortfall.

In simple terms, that's it basically, end of story.

However some pension schemes will let you take out the nominal value of what they "owe you" and transfer it to a "cash" based pension scheme via a Cash Equivalent Transfer Value.

To make that transfer (if notional value >£30k) you need independent financial advice from a qualified and competent person to comply with the law.

If you don't like that law please contact your MP and explain why it should be changed.

If you are talking about a Defined Contribution scheme whereby you and your employer contribute to a "cash pot" that is used to buy investments at market price and sold at market price when you need an income in retirement then you don't need financial advice at all - you can do your own thing as you can with a S&S ISA.

As for annuities, the requirement to purchase one of those went years ago and again what you do is under your own control - same as with a S&S ISA.

Terminally ill - Take a look at the chart on page 2 here http://www.scottishwidows.co.uk/Extranet/Literature/Doc/FP0440

Admittedly 1 year to live not 2 but the basic flexibility is there.


Employers always have and always will look at the overall cost of employing someone so what point are you trying to make?

Are you seriously suggesting that if employer's stopped contributing to a pension scheme that would give their staff the equivalent amount as a pay rise?