Private Pensions

[scottbeard]

Just now, regprentice said:

I wonder if either of you went back in time and spoke to a young Gandhi, or Martin Luther King you would say to them just to take the status quo on the chin 'Deal with reality... The likes of you and I will never....' 

I can see the inequality here, so can you, sadly the younger generation is lacking a totemic figure to galvanise that feeling into action. Hopefully that will come. People are certainly trying to deal with that inequality in the courts, in terms of both pension inequality and wage inequality. 

Martin Luther King was fighting for equality.  But it's not mathematically possible to achieve equality by levelling up everyone to the top of the tree.

Instead what happens is you have to meet in the middle - something less than the advantaged used get, but more than the disadvantaged used to get.

In the current world, some people get a pension of 90 (let's call them the DB people) and some people 10 (let's call them the DC people). 

Mr King I'm sure would be all for everyone getting a pension of 50.

Eventually, either due to legislative change driven by a totemic figure such as you describe, or simply because everyone with a final salary pension dies off, you will get equality.

But it will be equality at 50.

You will never, ever get that pension of 90 that you see people around you with - and neither will I.  That's not because we lack a Martin Luther King, it's because it's mathematically impossible.

[Voltron]

1 hour ago, regprentice said:

I don't care whats in my pension in the same way I don't care whether my car has a timing belt or a timing chain, or disc brakes or drum brakes. A car is a car and a pension is a pension. 

Most of my older relatives have final salary pensions, they haven't had to make a single investment decision yet have a guaranteed income for life, protected from inflation, at around 75% of their working income. Most of my peers at work are also in final salary scheme, as per my earlier post I missed the close of that scheme by a few months. 

Why can these people make zero investment decisions, excercise no financial skill whatsoever, and take away funds paying £30-40k a year, yet I have to find some way to turn 15% of my wages into 75% of my final salary in a low interest rate environment pending a crash. 

It's fundamentally unfair in the same way that the same people were able to buy large houses at 4x income multiples when I'm looking down the barrel of 10 to 12x multiples. 

You being given the 'freedoms' to play with your pension investments is just a way for TPTB to take your eye off the real problem of intergenerational withdrawal of final salary pensions. 

A number of court cases are beginning to be won around employers 'switching off' final salary pensions to younger staff, though largely in the public sector. .. Hopefully something positive will come from this. 

https://gov.wales/written-statement-outcome-court-case-firefighters-pensions

https://www.leighday.co.uk/News/Press-releases-2020/January-2020/Hundreds-of-teachers-are-issuing-legal-claims-chal

This is completely wrong for a Defined Contribution DC pension I.e. most pensions nowadays which employees pay a % (not a final salary pension, which is a Defined Benefit pension).

In a DC pension, no 2 pensions are the same, as someone can choose to invest 100% into goverment bonds, a multi asset fund (comprised of bonds, stocks and shares allocations from UK / Emerging Markers / World, commercial property, commodities) or a 100% equities portfolio (100% stocks and shares, which everyone should be investing in of you are in the accumulation phase of your pension I.e. younger years). The default more all funds is usually a multi asset fund which aims to grow at approximately low single digits.

People should always stay away from "active" pension funds, which aim to "beat" the market average and assign a portfolio manager to use complex algorithms etc as they have higher fees and historically have shown to always performed worse compared to their "passive" counterparts.

Once you get into the last 10 years of your proposed retirement age, the best scenario is to start changing your pension allocation from 100% equities, to a percentage of stocks and shares and bonds, a rule.of thumb is 100 minus your age e.g. at age 55, you should then be 45% stocks and shares, and 55% bonds. As the last thing you want to happen with your pension nearing retirement age is to lose it due to the fluctuations of stock market.

[Killer Bunny]

21 minutes ago, Voltron said:

The default more all funds is usually a multi asset fund which aims to grow at approximately low single digits.

 

People should always stay away from "active" pension funds, which aim to "beat" the market average and assign a portfolio manager to use complex algorithms etc as they have higher fees and historically have shown to always performed worse compared to their "passive" counterparts.

Once you get into the last 10 years of your proposed retirement age, the best scenario is to start changing your pension allocation from 100% equities, to a percentage of stocks and shares and bonds, a rule.of thumb is 100 minus your age e.g. at age 55, you should then be 45% stocks and shares, and 55% bonds. As the last thing you want to happen with your pension nearing retirement age is to lose it due to the fluctuations of stock market.

The default more all funds is usually a multi asset fund which can never make money again, from Govt Bonds, in a 10-20 year rising rates scenario

The default more all funds is usually a multi asset fund Funny. It's the only was to access the likes of gold miners.

e.g. at age 55, you should then be 45% stocks and shares , and 55% bonds.  First level thinking. 1. See my first point. 2. Investing is to death (80s+) AND even to next generation as what ever is left over will be handed down. I'm out of Bonds, for many many years.  Probably for a generation.

 

[Peter Hun]

2 hours ago, Frugal Git said:

With salary sacrifice, DC pensions can be are awesome if you're a lower rate tax payer too - especially because *current* benefit eligibility takes your P60 figure to calculate entitlement. 27p from net salary to get £1.138 into pension? Thank you very much. Crazy not to do so. Actively keep housing artificially inflated, but allow us to do this? Then do it.

How does that worK??

 

2 hours ago, crouch said:

However, as annuity rates have declined quite substantially over the years,

I don't think annuity rates are relevant to most people, 90% are using drawdown

[markyh]

21 hours ago, CaptainCymru said:

Essentially its 40% plus the company matching my contributions up to a limit , but the point was wondering if the hike in private pension age would be worth it. I don't particularly wont to live past 70 (no offence to anyone that is that age already), wouldn't be able to deal with the vultures circling round me in the care home ? , by the sounds of it though I best stick with it!

Very unlikely unless you already have bad health, a family history of bad health, or some other major health issue? My Dad is 72 now, been retired for 5 years, still has his same 1st floor flat with no lift, his own car, tablet, laptop, flat screen TV etc, etc. 

Pre CV19 he was always abusing the free bus pass all over the place within a 50 mile radius of his home.  He has state pension and his golden Handshake local gov pension (18k p/a) and about £200k of investments and savings.

We have had Skype calls recently on his Birthday and he seems fine.  I would say he has +10 years of youth on my Nan, his mum, who died @ 92 back in 2015.  I remember her going into a warden Home my dads age after my Grandad died and then a proper OAP care home in her mid 80's.

So unless you suspect future poor health or get dementia you are unlikely to need a proper care home until about 85 IMHO.  

[crouch]

4 minutes ago, Peter Hun said:

I don't think annuity rates are relevant to most people, 90% are using drawdown

Maybe but it's risky - if you don't have other resources - which is precisely my point.

[Killer Bunny]

Late 80s is the 'average' age for going into a Care Home.

However, increasingly, a lot of care is done at home before A Home.

[Killer Bunny]

If needing Care (Home) a special Care Needs Annuity is often the best solution, to part or fully pay for the care. Bespoke annuity rate.

[hotblack42]

The money is yours.

If they tried this people would go without or even commit suicide to get it into their inheritiors hands.

Confiscation without blame is up there with murder

[Frugal Git]

48 minutes ago, Peter Hun said:

How does that worK??

I explained it in the post. But here goes if you want the explicit version.

Pension contributions are deducted from the figure used to calculate entitlement to benefits. This applies to both tax credits and universal credit.

If your income is 50k, and you salary sacrifice 30k, you see all of that 30k into your pension. £1 for each pound of gross income.

If your company offers their NI saving in full, that £1 turns into £1.138

Now, of course, you could just take the net income instead If you are a lower rate tax payer, you would see 68p out of that £1 In your hand right now if you took it.

But wait...here's the thing.

If your life situation is such that you rent and have kids, then guess what? If you also have a low income - say £20k - you may qualify for tax credits and universal credit.

Let's use tax credits. For each £1 gross you earn you  lose 32p in tax, and 41p is clawed back from your benefit payment. A 73% effective marginal rate. This is because of the taper rate on that benefit. 

Instead, you put that £1 in your pensionc which turns into £1.138. plus you keep the benefit payment.

Thus for a 27p net loss in income today, £1.138 goes into the pension.

Another Quick example which I've used before

Family one earns 18k gross, family 2, 50k. Both rent, both have 3 kids. 

Gross difference between their incomes 32k.

What's the net difference? Around 8k, thanks to Universal credit. Family 2 would be crazy not to dump that 32k into a pension.

Dyor.

[regprentice]

1 hour ago, scottbeard said:

Unfortunately that also means you need to take responsibility for your pension.  If you need help with it you can always consult an independent financial advisor, just as you consult a mechanic about your car.  

A mechanic will fix my car for a set price, and if he fails or damages my car he will put that right. 

Ive been to a couple of financial advisors and all they do is read a set of investment notes, or a product outline for a limited set of off the shelf funds and ask you to sign an Indemnity waiver. To my mind a financial advisor is useless unless they are willing to take responsibility for acheiving a set goal. That is the difference between a mechanic and a financial advisor. 

My mother in laws financial advisor advised her to use her 25% pension lump sum to buy a touring campervan. 

[Frugal Git]

Of course, the above assumed that family 2 can take that 8k p/a hit on their net income now, but when the carrot is 32k in the pension....

Certainly I'd consider that an easy choice before saving £700 p/m into an ISA....

[regprentice]

1 hour ago, Voltron said:

This is completely wrong for a Defined Contribution DC pension I.e. most pensions nowadays which employees pay a % (not a final salary pension, which is a Defined Benefit pension).

In a DC pension, no 2 pensions are the same, as someone can choose to invest 100% into goverment bonds, a multi asset fund (comprised of bonds, stocks and shares allocations from UK / Emerging Markers / World, commercial property, commodities) or a 100% equities portfolio (100% stocks and shares, which everyone should be investing in of you are in the accumulation phase of your pension I.e. younger years). The default more all funds is usually a multi asset fund which aims to grow at approximately low single digits.

But that's not what I want. 

That's not the right that my family and peers have. 

They have the right to treat a pension as a black box to drop 15% of their wages in the box and when they retire they get 75% of their wage back out 

The person I sat next to at work had the same job as me and a final salary pension, simply by virtue of starting the year before I did. For him his pension was that metaphorical black box - he didn't have to excercise any skill or talent to generate that positive result from It.

He wouldn't of known what an emerging market was... So why do I have to stress about civil wars in South Sudan impacting access to cobalt mines, or earthquakes in Japan destroying factories producing resin for semiconductors. The only guarantee in life is that of all those options I'll select the poorest performing one, despite my decision being relatively sensible at the time it was made. 

What going to happen next... will I get covid 19 and have to calculate and input the correct airflow to my ventilator myself. 

Or perhaps my car won't start until I manually calculate the correct air/fuel mixture for the current ambient temperature. 

Life is supposed to get easier, as society progresses, not harder. 

[Killer Bunny]

17 minutes ago, regprentice said:

A mechanic will fix my car for a set price, and if he fails or damages my car he will put that right. 

Ive been to a couple of financial advisors and all they do is read a set of investment notes, or a product outline for a limited set of off the shelf funds and ask you to sign an Indemnity waiver. To my mind a financial advisor is useless unless they are willing to take responsibility for acheiving a set goal. That is the difference between a mechanic and a financial advisor. 

My mother in laws financial advisor advised her to use her 25% pension lump sum to buy a touring campervan. 

Financial advisers do not understand investing.  All they know is A Diversified Portfolio, init.

Some understand...

They are trained to slot apple people into apple slots. Not think how to actually make people money.  You may be surprised to know that is not their job.  It does ok just for client and adviser keeps his job/stays in business.

To be fair, it has worked for the advisers (far more than) and clients for donkeys.  Not brilliant for clients but good enough. I seriously doubt it will going forward as Bonds can't make money in a rising rate era.

 

He didn't advise that. She said I want to do it and he said ok.

[ucnvpe0]

The majority of the population are 'wages slaves'.

There is a finite amount of salary within a working life. If housing takes up such a large proportion, where is the pension or retirement money going to come from.

This doesn't even factor in the debt culture, student loans, real term wage stagnation, childcare costs etc.

In the past, housing was used in part to pay for care costs. What about people who will rent in retirement.

If the governments can screw over a whole generation with housing, what's to stop them raiding pension?

I think the key is diversifying. Placing all retirement hopes in a private pension is likely to end in major disappointment.

[Killer Bunny]

What else is there that is superior?  Serious question, given 20-45% tax relief (maybe higher if in the £100-120k earnings band), tax free gains, 1/4 tax free at the end.

[regprentice]

1 hour ago, Frugal Git said:

What's the net difference? Around 8k, thanks to Universal credit. Family 2 would be crazy not to dump that 32k into a pension.

Dyor.

That has deprivation of capital written all over it. 

I understand you can pay £40k Into a pension a year. 

I understand benefits are calculated on wages bet of deductions. 

But that doesn't mean that, if an investigating manager takes a step back then it won't be apparent that the large pension payment was made to qualify for benefits. 

Like lots of 'loopholes' in the past like recent offshore loans and IR35 rules show that legislation can be applied decade's after the fact and that it can be used retrospectively. These wheezes were all above board and legitimate until suddenly they weren't. 

I certainly wouldn't want to quit my job, take a paycut for a job that qualifies for this at the optimal rate, and then live in relative poverty on universal credit. If nothing else your statistical chance of living long enough to draw the private pension will drop materially once you become a benefit recipient. 

Edited May 23, 2020 by regprentice

[scottbeard]

1 hour ago, regprentice said:

A mechanic will fix my car for a set price, and if he fails or damages my car he will put that right. 
...

To my mind a financial advisor is useless unless they are willing to take responsibility for acheiving a set goal.  That is the difference between a mechanic and a financial advisor. 

That's not realistic, because the outcome of your investments isn't under their control - for example, this year markets fell due to COVID19: it's neither sensible nor realistic to expect a financial advisor to take responsibility for that.

A mechanic will only guarantee that your car is working when it leaves his workshop.  What you're asking of your IFA would be like saying to the mechanic "I want you to guarantee that nothing will ever go wrong with this car again in its 20 year lifespan, and pay me compensation if it does".  No mechanic will guarantee that.

1 hour ago, regprentice said:

That's not the right that my family and peers have. 

They have the right to treat a pension as a black box to drop 15% of their wages in the box and when they retire they get 75% of their wage back out 

The person I sat next to at work had the same job as me and a final salary pension, simply by virtue of starting the year before I did. 

This situation definitely isn't fair - and I'm in the same boat as you - people who joined 3 months before me got a final salary pension. 

I think I've just gone beyond the Anger stage of the process of grief about it and got to the Acceptance stage.  I'm just looking to do the best I can.

Realistically though we can never get a situation where every person has a pension of 75% of final salary.  It's just not affordable.

Even amongst the Boomer/Gen X generations they don't all have final salary pensions.  Those that do are just an over-provided for blip in history that won't be repeated.

If I can claw my way to a retirement income of about 40% of salary I'll be fine with that.

[GregBowman]

5 hours ago, Frugal Git said:

Partial Transfer into a sipp annually. Often nets you a bonus for doing so, lowers the fees and you can access the 800 lb gorilla that is vanguard funds a lot easier..most WP schemes don't have those I've found.

 

With salary sacrifice, DC pensions can be are awesome if you're a lower rate tax payer too - especially because *current* benefit eligibility takes your P60 figure to calculate entitlement. 27p from net salary to get £1.138 into pension? Thank you very much. Crazy not to do so. Actively keep housing artificially inflated, but allow us to do this? Then do it.

Sigh. A good pension scheme is a liquid as running water. You can choose to hold cash, gold, bitcoin (it does make sense), real estate, funds that rebalance themselves, direct equities. Whatever you want, whenever you want. Try selling an actual house on a whim.

All good stuff. I had always paid direct from my companies so didn't  see the effect of the tax relief. But after getting a smallish lump I put some directly into a pension £20k six weeks later the tax man threw in £5k  and I could also claim extra relief against my 40% band on the return. That fund following  @wish I could afford one strategies is still at £28k this morning so however you look at it I am £8k up over a 30 month period a pretty decent return. Some Vanguard funds in there. Since I am 58 it is virtually a no notice withdrawal account very liquid. I know the amount I put in will be restricted at that point but still £8k  a year between my wife and I the rest can go in ISA's and other investments like fast cars LOL

[Frugal Git]

42 minutes ago, regprentice said:

That has deprivation of capital written all over it. 

? Where is the deprivation of capital?

Anyone who does this has *less* money now and nothing to show for it for many years ahead. There is no Ferrari spent from savings. This is an allowed deferral of income.

Why is it that the rules allow this?

Go check every HMRC site. Go check tax credit and UC calculators. There is no limit on you doing this. It is a personal choice. Where do you draw the line? Is £100 into the pension OK, but 40K not? Should anyone entitled to benefits not be allowed to make pension payments at all, because it has this effect?

Who says you cannot prioritise your retirement? This is an effect of doing so, not a reason to do it - it's a by product. I'd be prioritizing it anyway.

Why are there people in government, and at HMRC who know about this, who happily say it's within the rules, not jumping up and down?

 

Edited May 23, 2020 by Frugal Git

[Frugal Git]

Look, the vast majority of young people are going to be f**ked in retirement unless they are lucky to inherit. 

It's choice between one of a house, kids, or retirement. Some families might be able to do two of those, but only very few will manage all three.

That *will* be a problem for governments to come, where pension age benefit payments are going to have to be a lot greater than today. A much bigger problem than a few people who might have worked out they'll take their pension jam today, and manage it themselves tomorrow.

Prioritising being able to look after yourself when you're old *is* a good thing. Use all the tools available.

[micawber]

Please please please invest in a pension if you can. I was lucky to have a DB pension but I built up far larger value in the additional scheme (a little bit like a DC but not quite the same).

I paid in as much as I could to avoid the 40% tax rate. The beauty is that the more you (can) pay in, the lower your net take home pay, the easier it is for the pension in payment to reach a set % like 75% (net).

I stuffed my pension for 20 years from age 30 and managed to retire at 51. I know that the age has increased to 55 or 57 now, and that I was lucky to have a middle management job that let me do that.

But don't obsess about reaching 40% or 75%. My gross pension is only 25% of my gross pay when I left. And it is all I need. In fact I try as hard as possible to minimise tax by receiving as little over the annual allowance as possible.

Someone earlier mentioned that pensions would increase with inflation. Don't make that mistake. Mine are limited to a maximum of 5% so when inflation hits 10% to 15% in a few years time I know that the value of my pension will be hammered.

Someone also said that you can't get 75% now. That's not necessarily true either. It will depend on many factors but largely how much you put in and how your investments perform. Buy a good investment book like the Permanent Portfolio by Harry Browne. And use that advice.

 

[scottbeard]

18 minutes ago, micawber said:

Someone also said that you can't get 75% now. That's not necessarily true either. It will depend on many factors but largely how much you put in and how your investments perform. Buy a good investment book like the Permanent Portfolio by Harry Browne. And use that advice.

That was me and I feel I need to clarify - I said that it's unaffordable for EVERYONE to have a 75% pension.   

The basic logic being, not everyone will be able to save that much, and even if by some miracle they all did squirrel away the amounts required then that itself would reduce spending in the economy and hence company profit and hence reduce investment returns.

It's sort of the same logic as the American Dream - *anyone* can end up a billionaire if they hit on the right business idea, but not *everyone* can end up being a billionaire, because for every Jeff Bezos there must by definition be several thousand Amazon foot soldiers.

(Good post by the way @micawber)

[Si1]

3 hours ago, Killer Bunny said:

.

e.g. at age 55, you should then be 45% stocks and shares , and 55% bonds.  First level thinking. 1. See my first point. 2. Investing is to death (80s+) AND even to next generation as what ever is left over will be handed down. I'm out of Bonds, for many many years.  Probably for a generation.

 

Definitely my view. The Rothschild's don't divert their wealth to gilts the older they get

Edited May 23, 2020 by Si1

[Peter Hun]

2 hours ago, Frugal Git said:

I explained it in the post. But here goes if you want the explicit version.

Pension contributions are deducted from the figure used to calculate entitlement to benefits. This applies to both tax credits and universal credit.

If your income is 50k, and you salary sacrifice 30k, you see all of that 30k into your pension. £1 for each pound of gross income.

If your company offers their NI saving in full, that £1 turns into £1.138

Now, of course, you could just take the net income instead If you are a lower rate tax payer, you would see 68p out of that £1 In your hand right now if you took it.

But wait...here's the thing.

If your life situation is such that you rent and have kids, then guess what? If you also have a low income - say £20k - you may qualify for tax credits and universal credit.

Let's use tax credits. For each £1 gross you earn you  lose 32p in tax, and 41p is clawed back from your benefit payment. A 73% effective marginal rate. This is because of the taper rate on that benefit. 

Instead, you put that £1 in your pensionc which turns into £1.138. plus you keep the benefit payment.

Thus for a 27p net loss in income today, £1.138 goes into the pension.

Another Quick example which I've used before

Family one earns 18k gross, family 2, 50k. Both rent, both have 3 kids. 

Gross difference between their incomes 32k.

What's the net difference? Around 8k, thanks to Universal credit. Family 2 would be crazy not to dump that 32k into a pension.

Dyor.

Thanks, my company refused to pay me the NI savings and my wife (and I) earn to much to get the tax credits.