News Archive - February 2009
Personal Pensions are a rip-off - discuss.
26/02/2009Pensions get such a bad press that I would just like to go over a few arguments in their favour.
The first thing to note is that the basic state pension in the UK at present is just £90.70 per week. If you are married and have no other savings, then your joint income could be topped up by additional state benefits (the Pension Credit) to a heady £189.35 per week.
Another thing you might not know is that the state pension age is rising. If you are 39 or younger on today's date (26 Feb 2009), then your state pension age is currently 67. If you are 29 or younger then it is 68. The chances are that this will rise again in the future as average life expectancy rises.
If you are happy to rely on state benefits, and you have no plans to retire early, then there is no need for you to save. However, for the rest of us, some form of provision for retirement is a good idea.
Saving into a pension is the most tax-efficient way to build up a lump sum for retirement. The reason for this is that basic rate taxpayers get an extra 20% paid into their pension by the Inland Revenue / HMRC. For every £80 that you pay into a pension, the Government adds in an extra £20. If this was a new savings scheme pioneered by the Government, consumers would be jumping at the chance to get a free 20% return on their investment.
So why do people STILL not like pensions? Well, it's because personal pensions always go down in value.
This is not strictly true. Most personal pension funds are linked to the stock market and when the market falls, so does their value. Over the long term, share values tend to recover and provide better growth than cash. However, if you do not want big variations in the value of your pension then you have the option to switch into safer, less volatile funds that are not linked to the stock market. Your prospects for long-term growth may be lower, but you would still be benefiting from a 20% bonus from the taxman. Speak to an adviser about your investment options if you are very averse to risk and would prefer a steady return.
Some unfortunate people with company pension schemes have seen the value of their pensions demolished through no fault of their own when their former employer became insolvent and the scheme is wound up. This is something that cannot happen with a Personal Pension. Your unit-linked Personal Pension 'pot' of money belongs to you and is safeguarded even if the company running your pension goes bust.
So what else is bad about pensions? Well, when you retire you can only get 25% of the fund as a lump sum, and the rest has to be used to provide income, usually in the form of an annuity, which is taxable. "Why can't I just have it all as cash?" I hear you cry.
The answer is " because you would spend it all" - which negates the object of saving to provide retirement income. If you deplete your retirement nest egg, then you will end up living on state benefits.
The obligation to buy an annuity is actually a great benefit to many. As you progress into your seventies, eighties and even nineties, do you really want to be managing the investment of a large lump sum to produce sufficient income to fund your bills? Or would you be better off with a guaranteed income which arrives in your account month after month? The recent falls in interest rates have been a wakeup call to those who were surviving on income from cash savings.
Other reasons not to get a pension?
"I will downsize my property when I retire - that's my pension".
Again, this is reliant on a great deal of self-discipline to maintain a nest egg which can generate enough income to support your needs. This is irrespective of any problems or delays that you might face when trying to sell your property. When you reach retirement age, will you be up to the challenge of selling up and moving to a smaller house?
"I'm using an ISA"
Stocks and Shares ISAs have charges broadly similar to personal pensions, and they tend to have a similar selection of investment funds to choose from. The disadvantage is that you get no tax relief on your contributions -so no 20% bonus from Gordon Brown. The "advantage" is that you can get at your ISA fund when you want - so you will have to maintain the willpower to retain your retirement nest egg without dipping into it for the next 30 years.
"I'll start a pension later and catch up".
Ok, that's fine. But if you can't afford to save now, then exactly when will you be able to? After the kids are born? When the kids are older? When the kids have left home?
It is a tired old statistic but a good one - the sooner you start your pension, the better. This is simply down to compound growth.
£100 per month compounded over 40 years at 5% p.a growth gives a fund of around £153,200. £100 per month compounded over 30 years at the same growth rate gives a fund of just £83,500.
So if you delay starting your pension by just 10 years (starting at age 35 instead of 25), you would need to put in almost double the amount each month in order to get the same pension at 65, if we assume everything else remains equal.
Incidentally, the cost to you of the £100 per month would be just £80 because of the tax relief. £80 per month for 40 years is just £38,400. To put the same amount into an ISA would cost you £48,000.
Do you still think pensions are a rip off??
If so, you really need to call Mulberry Financial and we will try to convince you that planning for retirement can be painless.
The material here is for general information only and is not intended to be relied upon for individual investment decisions. Appropriate independent advice should be obtained before making any such decisions. Mulberry Financial Ltd does not accept any liability for any loss suffered by any user as a result of any such decision.
The information is based on our understanding of current HMRC rules and practices (as at the news article date) which are always subject to change. Taxation and trust advice and Cash ISAs are not regulated by the Financial Conduct Authority. This site is aimed at UK residents only.
Please remember that the prices of shares and other investments can fall sharply. You may not get back the money you originally invested. Past performance is not necessarily a guide to the future.
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