Pensions: The press, the myths and the reality

Posted on August 7th, 2013 | Categories - Pensions, Retirement, Savings

iStock_000016454287_ExtraSmallOne of the joys of the internet and social media is that it allows people to exchange their views more freely. However, this new found freedom can allow misinformation and urban myths to be treated as fact; nowhere more so than when pensions are being discussed.

We thought we’d have a bit of fun, by analysing some of the comments posted in response to online articles, in various national newspapers.

“With Annuity rates around 5% what incentive is there for people to pay into a private pension? – 20 years to get ‘your money back’ doesn’t make me want to rush out and put my cash into a pension. No, I’ll just stick my ‘contributions’ in a savings account, earn a bit of interest and then be able to draw what I need when I need it. And ‘ll take out an ISA just for good measure.”

Where to start with this one?

Whilst it’s true that Annuity rates are relatively low at the moment and at a 5% rate it would indeed take 20 years to get your money back, it is of course perfectly possible that someone retiring today, at age 65, could live a lot longer than 20 years.

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Furthermore an Annuity is just one option. For those people with larger pension funds, Income Drawdown could also be considered and if you are prepared to accept some risk, then so could an Investment Linked Annuity.

As for the savings account, this is frankly a sure fire, guaranteed, cast iron way of actually losing money. The best fixed rate Cash ISAs currently pay around 2.5% per year, with inflation at 2.90%, that’s a real terms loss each year. To make matters worse, you don’t get tax-relief on contributions into a savings account, which you do when you pay into a pension.

If you are saving for retirement, which is generally a longer term goal, it’s vital you target a real return above inflation, at the moment though, Cash just isn’t the place to do that.

“I’ve paid into a pension for 30 years and the latest statement shows max I can expect is £5,000 per year. At the rate of inflation this won’t get me very far. Thankfully I enjoy working so if I want more this is what I’ll have to do.”

Ok, here goes with this one.

The amount you get back from your pension is the result five key factors, none of them particularly complicated:

1. The amount you pay in; the more you pay in to a pension the more you should get back
2. The amount taken in charges; the less you pay in fees and charges the more you should get back
3. The rate of growth you achieve; the better the return, the higher your pension will be
4. The amount of time you invest; the longer you invest, the more time your fund will have to grow
5. Gilt yields when you retire; most methods of turning your pension into an income, Annuity, Income Drawdown etc, are linked to gilt yields, the higher the yield, the better your income will be

Clearly we don’t know the personal circumstances of this person, but if you are disappointed by the return from your pension, the answer will lie in one of the five points above.

One last thing to remember, the income projected on the annual statements from pension providers is based on a series of assumptions, which may or may not be right for you.

“The return on pension schemes is an absolute disgrace, better to keep any spare cash under the bed!”

We’ve not seen the old “I’ll keep it under the bed” argument for some time, but it surfaced again on the Daily Mail website in a comment on a recent article.

Two very simple points here.

Firstly, a pension is just a tax-wrapper, the same as an ISA (Individual Savings Account) is. It’s the investment held within the pension or ISA which over or under performs. There are good performing funds and poorly performing funds, but the return is frankly the same, whether you hold the funds in an ISA or a pension.

Secondly, the absolute minimum anyone should look to achieve from their savings or investments is an above inflation return. Are you going to get that under your bed, from a savings account or Cash ISA at the moment? The answer is almost certainly a resounding, no!

Unless you get an above inflation return you are guaranteed to lose money. Whilst Cash might make you feel great, because you have the same amount available in pounds, shillings and pence, it’s an illusion, you have actually lost money in real terms.

“Hate to spoil your plan but if you have savings and a private pension you’re unlikely to get the state pension.”

Clearly we can’t predict what changes future governments will make to State Pensions and let’s face it, neither of the two main parties have a track record of leaving it will alone. But, what we can say, is that under current rules, the flat rate State Pension is not means tested and will be received by everyone retiring after 2016, irrespective of any private pensions you may have. Providing of course you have paid National Insurance for the required number of years.

“In fact by the time you retire your private pension is likely to be almost worthless due to taxes and fees.”

These types of lazy, throw away comments really annoy us.

There is no reason why a pension should cost any more than other forms of investing, for example an ISA. Whilst some pensions have been very expensive to run in the past, with charges which were unfair, this really isn’t the case now.

As for taxes, a pension is a very tax-efficient way of investing for your retirement. In fact a pension pays hardly any tax whatsoever in the years you are building up your fund and you get tax-relief on contributions; although the income you take when you retire is of course taxable.

“No wonder people aren’t saving into pensions. My husband stopped paying into one of his private pensions when his “pot” was only increasing by a fraction of the sum he was adding to it. The pension providers are taking too much out of our pensions themselves in invisible fees for it to benefit us. As a result I am saving, but not into a pension.”

There really is no reason why a pension should be more highly charged than the obvious alternative, an ISA.

We’d agree that in years gone by charges on pensions were in some cases too high and many of these old contracts still exist, with large amounts of money invested in them.

The answer is simple, every couple of years review the amount you are being charged by your pension provider. If you can find cheaper, then consider moving, providing of course you factor in any costs of moving and ensuring that you are comparing plans on a like for like basis.

“We all keep talking about shopping around (for an Annuity) and getting advice, but the fees charged by IFA’s are putting people off and as mentioned, IFA’s aren’t interested in those with small pension pots… so what should be done?”

We’d agree many IFAs are not interested in helping those people with smaller pension funds when they come to retire.

However, this isn’t always the case and there are many advisers, including Investment Sense, who are very happy to advise people with smaller pension funds.

Furthermore, if you happen to have a small fund, don’t immediately write off talking to an IFA and paying their fee. There are many advantages which can outweigh the cost of advice:

1. IFAs can access some Annuity providers who you can’t approach directly
2. An IFA can help you qualify for an Enhanced Annuity, which will increase your retirement income, due to their experience and knowledge of the system
3. A good IFA will haggle with Annuity providers to make sure you get the very best deal
4. You won’t avoid paying commission if you go direct, Annuity providers still charge it, even though they won’t give you any advice!

Do you need help with your retirement planning?

If you are confused about the myth and reality when it comes to pensions and retirement planning, we are here to help.

Our team of Independent Financial Advisers are experienced in developing retirement income strategies for clients the length and breadth of the UK.

Whether you have just started your first job or are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk