Pension tension (Personal Pension Schemes in general)

Member Name: ChaCha

Product:	Personal Pension Schemes in general
Date:	17/03/02 (868 review reads)
Rating:

Advantages: Decent stakeholder dodge, some tax breaks, good final salary schemes

Disadvantages: Poor annuities, high and hidden commission, can't get your hands on the cash

The traditional match-play knee-jerk response to the concept of the private pension was until fairly recently that it was 'a good thing'. The tide is changing somewhat now. I am one of the increasing band who think that they are a bad thing, a poor deal. I have made no significant provision whatsoever for my old age in the way of a pension, except for a few stakeholder carpet-bags, although, as I discuss below, I do not intend to spend my retirement too badly.

I may as well declare that I don't share this view of pensions with regard to the final-salary pensions schemes, which guarantee you e.g. two-thirds of your final salary when leaving. If you have one of these - good - if you're offered one - dive in (unless you happen to work for someone called Maxwell). Trouble is, they are a rare beast now, particularly for new employees - their expectation that the pensioner will have served for several decades for an employer doesn't reflect our non-jobs-for-life culture, and they are also very expensive for employers, with pensioners enjoying increasingly long retirements.

But your standard private pension scheme - an odd concept.

(1) Entrust a significant stash of your earnings to commission/bonus-led macks who will invest it fairly sensibly for the first few years to add to their bonuses, then allow it to underperform once/if it becomes a 'closed fund' (no new pensions being added, therefore no need to have any level of performance from that time). Did someone mention 'Equitable Life'? Lovely.

(2) On the 'commission' bit above - note it may well be 90% for the first couple of years. Invest £10,000, becomes £14,000 with tax-back, becomes £1,400. Sweetness - for the pensions industry. Stakeholder pensions are much better - you should be looking at commissions of 1% or less - but you're restricted in the sums you can pay in each year to £3,600, which simply isn't enough to get
a decent whack with today's annuity rates. I have in fact bought a few stakeholders as carpetbags and tax-dodges, and I have also set out at the end of this piece a get-rich-quick scheme involving the stakeholders (to be avoided like a mouse should avoid peanut butter and tuna on a metal spike) for those of you lucky enough to have passed the 'half-mile stone', i.e. of golden years.

(3) Yes the tax-back. Superficially a good thing; Mr Brown will reimburse your tax on your pensions contributions at your highest rate. Well that's fine - until you take your pension. Mr Brown's granddaughter will simply tax it then. Much more transparent is to use the ISA as your vehicle - no tax-back now, but no tax in the future. This allows you to plan much better, because for the present you won't know what the granddaughter's tax rates will be.

(4) Anyway, getting back to the pensions investment. You will hand over a significant portion of your salary - do you know where and how it's being invested? Of course not. The most detail you'll be lucky to get is the spread of shares/bonds/property/cash. Why? Nominally, because it's a trade secret. Actually? Because they are making pretty bog-standard investments, and wouldn't want Joe Public to know they're taking 90% of your money to research such unknown potential companies as Unilever, Tesco, and Coca-Cola. The bulk of pensions money goes into such blue chip investments. Its odd that the government trusts you to provide for your old age but won't, unless you're in the mega-rich bracket, allow you to administer your own pensions scheme. Pure nannying. If they're worried about the tax-back somehow being extracted prior to retirement, schemes or accounts could easily be set up, like the ISA's, to ensure that early withdrawals are not permitted - or, if they are, to make sure that the tax-back element is also withdrawn.

(5) Then th
e final con - the annuity. More sweetness for the industry. By 75, you're going to have an annuity, with more commissions rolling in for the advisers and assorted hangers-on. In reality, you'll be buying this when you retire, probably at 60 or 65. From today's Times - 'A man aged 65 buying a joint pension with his 60-year-old wife can use their £250,000 savings to buy an annuity of just £18,025 a year.' And their children and friends will have lost any chance of inheriting that hard-earned and hard-saved cash. And Ms Brown is going to snatch a quarter of it every year as well. You could invest the sum in a deposit account and do almost as well, while keeping your capital to cascade through the generations. The advantage of the annuity is of course that if you happen to live to 105, the same sum (index-linked if you choose, for a lower income) will still be coming to you. However, the likelihood is that the pension will be going straight into the LPG-tank of your nursing home owner's Aston Martin by then.

So what are the alternatives to pensions?

The best is the ISA - gives you tax-exempted savings, which you can deal with and plan and, nearing retirement age, consider how to deal with to fund you to death, or thereabouts. Maximum investment £7,000 per year at present.

There's always property. The hey-days are gone - if the old trends continued houses will cost a million even in Railway Terrace, Rugby. Still, the property market is an odd anomaly amongst financial bubbles, sustained by inheritances and a divorcing demographic, cash-rich and clamouring for housing. The most important property is your own manor. This is one of my chief financial schemes. I'm throwing the pension wad into the mortgage to pay it off early, get the true equity, move up the old ladder. Then, in simplest terms, once I've stopped earning, as I need cash, either remortgage or move to a wee-er place. Makes sense t
o me, although little evils such as stamp duty do complicate the issue. Buy-to-let is also a possibility, although so many are trying to get into and have got into this area, I think the bubble is due for a big pop in terms of rental incomes - more beer money for the students though, a good thing for youth and brewers.

But, and I hate to say this, my main pension plan will be the state pension. Daft? I don't think so. Guaranteed minimum pension is £100 per week from April 2003. House paid off - add whatever per month currently paid into mortgage. Add spouse's pension/income. Once you're not worrying about paying a mortgage or rent, £200 per week isn't all so bad (my God, I'd earned less than that for long enough and still had a whale of a time), when you have lots of cash/equity/savings to slosh about. Best of all, if I do need my money in the meanwhile, due to sickness or dole-days, I can get my paws on it, or at least borrow on it.

One thing I will be doing though - if it's still available at the time. You can draw down 50% of the cash value of your stakeholder pension from age 50 to 75. Maximum contribution £3,600 a year. Pay it in at age 50, get the 40% added (£5,040), then withdraw 50% (£2,520) - pay that in again, topped up to £3,600 the next year, 40% added again. Withdraw again and so on for 25 years. You will make a sweet mint, effectively getting 40% compounded from the Treasury.

Here endeth the rant.

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