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Page 19: Financial: Personal and Stakeholder Pensions.

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Pension planning is a sensible idea. By the time those of us that are starting out in our first jobs retire, there will be an enormous amount of retired people drawing down their pensions while perhaps a smaller number of people work and pay taxes that are used to generate the state pensions. Oops. The government will go bankrupt. Bad idea. So, the government, Conservative and Labour, have been promoting Personal Pension schemes and now even more attractive Stakeholder Pension schemes so that we save a bit each month for our own retirement and don't burden the state. They even come with tax relief incentives so that, if you are a basic rate taxpayer, you pay in £78 for every £100 contribution, while the government adds the extra £22.

Please read on.

The trouble is, if you look at the mechanics closely, you realise that this personal pension/stakeholder vehicle isn't exactly a chauffeur driven Jag heading for your Golden Years. There are some defects that might prevent it passing the MoneySurgery MOT. Here are some MoneySurgery Vital Signs for personal pension plans:

  • What infuriates us most about Personal Pensions is that you have to use at least 75% of the fund to buy an Annuity. These are the government's rules. The Capital from which the Annuity comes cannot be accessed. The returns are at best 8% per annum TAXABLE which compares well to interest from a Cash ISA which can be 5.75% per annum Tax Free ...BUT YOU HAVE COMPLETE ACCESS TO THE CAPITAL IN AN ISA. These Pension Funds, many of which will be big chunks of £1,000,000, are in-effect owned by the insurance industry, not the pensioners. And they have the nerve to charge 1% of the fund total each year for managing it. And listen to them moan when we have a strong wind or a flood.
  • Low charges are great. Stakeholder Pension Schemes promise low, transparent, 1%, annual charges. Great. But at what cost? To keep charges so low yet company profits as high as possible, the performance of the fund may be affected. Its fine shaving a percentage point off the charges from say 2 to 1 percent but if that means that the fund growth is reduced from 10 to 8 percent, you've lost out. This is a worry for many analysts. Yes, low charges are here. Now give us good performance.
  • Please read on.

    NI Rebate for Pension Compulsion

    (16:30 Thursday 16th June 2005 news story)

    Companies that persuade staff to join occupational pension schemes should get National Insurance rebates, according to the Association of British Insurers (ABI). If at least two thirds of staff became scheme members, pension saving could be boosted by £1.5bn a year, it said. It also called for automatic membership of company pension schemes with, confusingly, the option to opt out.

    You've got to hand it to the ABI, they certainly know how to try and drum-up business for the insurance companies that they represent.
    Question 1: What have pensions got to do with insurance companies necessarily?
    Question 2: Why do insurance companies (annuity providers) get to keep pensioners' annuity funds after death, after drip-feeding a measly 6% a year to the pensioner until he/she dies?

    Compulsory joining of personal/occupational/stakeholder (money purchase) pension schemes must never happen as long as the rules serve the insurance industry at the expense of the workers. As we've suggested in earlier articles, all that needs changing is the rule that currently says the bulk of accrued savings in pension schemes changes ownership from pension holder to insurance company at retirement date, should be changed to pass to pension holder's heir upon pension holder's death. Or maybe if insurance companies paid considerably more than mere deposit-account interest on annuities, that would fix it. Or maybe we dispense with the compulsion of annuity purchase at retirement date and get something of better value for retirees.

    The ABI is getting increasingly vocal on compulsion; trying to force the government's hand on dealing with the looming pensions crisis by forcing workers to invest in pension schemes with the annuity rules intact.

    The ABI see the government juggling with ideas on how to revamp pensions and are getting desperate, as evidenced by this NI rebate carrot-dangling brainwave. We see the picture from an impartial, independent perch and say, "ABI, is this A Brilliant Idea?". In fact, one of our patients says that each time she reads a new proposal from the ABI on this or that, she has at the back of her mind "Another Brilliant Idea", or was that "A Brazen Irony"?

    The Pensioner Time Bomb

    (18:40 Wednesday 20th April 2005 news story)

    The looming pensioner time bomb is something that's discussed in party election broadcasts and we think it's about time the rosetted minority actually grasped the nettle and came-up with a radical solution, as we did back on 21st March.
    The thing that worries Money Surgery is ...what if the pensioner time bomb goes off?

    One went off in Bournemouth High Street in 1985. There were zimmer-frames embedded in the side of passing vehicles and beige flat caps hurled up hundreds of feet before landing upside-down on flat roofs. The post office, having taken the full-force of the time-bomb was so devastated that it had to be levelled. The brickwork on the nearby pound-shop still bears shrapnel scars from fragments of false teeth and NHS glasses.

    This impending crisis has been looming for years. The time-bomb is certainly ticking. But where? Maybe the army could be called-in. They could take sniffer dogs into Bingo Halls or OAP homes to search-out the device, and then get it defused.

    Talking of the army, one option that hasn't been considered, not even by the Conservatives as far as we know (are they thinking what we're thinking), is the notion of a National Service for OAPs. Providing pensioners with an activity, nay an employment, on a mass scale with the by-product of an ever diminishing pensioner population through combat, friendly-fire, or plain over-exuberance, sad though that is, must have tempted at least one party campaign manager. The figures stack-up irrestibly.

    Until the pensioner time bomb is "defused", we must all be vigilant. Look out for anything suspicious: Are they curly red and blue wires poking out of the top of that little old lady's tartan shopping trolley or just packing ribbon? Is that a pack of dynamite sticks or some dodgy sausages in that old-fella's basket? Listen out, too, for the tell-tale tick-tick-tick wafting over from coach parties stopping-off at motorway services on their way to Stratford-upon-Avon. Don't tackle the pensioner yourself, they may be armed (with walking sticks or thermos flasks), often use sophisticated listening devices (hearing aids), and are capable of concealing weapons (under their summer-season overcoats). Only the army is suitably equipped for the situation.

    If and when the pensioner time-bomb goes off, it won't be pleasant, but at least you've been warned.
    And, yes I know, I'll be a pensioner one day myself, if I'm lucky. Can't wait.

    (With a nod to Deborah Ross of The Independent newspaper).

    Pensions For Insurance Companies

    (20:50 Monday 21st March 2005 news story)

    We were just watching the Money Programme on the BBC, concerning pensions. Isn't it amazing how Boots' directors pay themselves 35 or 38% of their salaries into their pension funds, yet will only contribute 3% of the salary of any employee who decides to take up a Boots pension? These directors aren't paying into their pension funds themselves, they're making Boots plc pay into it - the same company that, by only offering 3% to staff, is discouraging 92% of the staff from having a pension at all via Boots. If pensions aren't the responsibility of employers, how come the directors of some companies make damn sure they'll spend retirement in luxury the expense of their employees?

    Significant in the programme's study of Australian rules on compulsory pension contributions was a representative of Standard Life who was wholeheartedly in favour of compulsion and would recommend that we follow suit in Britain. The trouble is, in Britain, when a person who has contributed to a personal pension retires, they must purchase an Annuity from an insurance company with between 75 and 100% of the fund value. (Up to 25% of the fund total can be taken as a tax-free lump sum). Annuity rates for a man retiring at 65 pay at best a taxable 7% of the annuity bought until the man dies. That's it. When the man dies, the fund disappears.

    Oh no it doesn't. At 7% and taxable, the annuity payment compares well with Halifax's 5.70% Fixed-rate tax-free ISA, and HSBC's taxable 8% Regular Saver (with catches), looks generous in comparison. In short, the annuity payments are like getting interest off a good savings account.

    But with a savings account, the capital is owned by the account holder - the pensioner. With an annuity, the capital is kept by the insurance company. This is wrong. This is the reason above all reasons why workers must not be compelled to contribute to a personal pension plan.

    We understand why the government is keen to ensure that pensioners don't fritter away their pension funds, then ask the state to bail them out when the money's gone, but there must be a way to stop this annuity robbery. Why not put all the government and employer contributions into a separate fund which pays ISA standard interest, that can be transferred from one bank or insurer to the next, depending on the interest rate, like ISAs, and that can be passed-on to heirs, but only to the heirs' pension funds?

    For that part of the fund contributed-to and built-up by the fund holder, access should be far less restricted. It's his (or her) money after all. Why not make that amount wholly accessible? Then compulsion can be encouraged, however, within a generation or two, we'll have no pensions crisis due to the massive amounts in passed-on pension plans. The government might even make a fortune from the income tax. Right, that's pensions sorted out...

    Well Done to Wales who won a Grand Slam last Saturday, by the way.

    TUC say Make Pensions Mandatory

    (Monday 17th June 2002 news story)

    The Trades Union Congress has today called for all employers and employees to contribute to personal pension schemes. They believe that all employers should contribute by law and in their Prospects for Pension report demand that all employees become members of occupational pension schemes. The report accuses employers of having a herd mentality in closing final salary schemes.

    A glance at the latest best annuity tables is startling reading for those of us planning for retirement, let alone those of us approaching retirement. Best bargain for a Joint Compulsory Purchase for a couple, male aged 65 and female 60, is Norwich Union's £605 a year, based on £10K purchase price. That's a taxable 6.05%

    Money Surgery applauds further debate about what's wrong with our pension system, lets face it, there's plenty to talk about. But lets face facts too and realise that final salary schemes are an enormous burden on companies in todays low inflation, low interest rate environment. At the other extreme, what is the point in saving hard in a personal pension scheme when all you get is the same return as a good savings account but without the access to your own capital? Especially when our government is so keen to beef up state pensions.

    Government Urged to make Stakeholders Compulsory.

    (Monday 10th September 2001 news story)

    Abbey National has asked the Government to consider making stakeholder pensions compulsory after estimates put the targetted low-earners' take-up at just 30%. It also urged employers to contribute to new schemes after surveys reveal that when employers contribute, the take-up percentage jumps to 60%. In many cases the new stakeholder schemes are simply repackaged and rebadged existing schemes.

    Clearly "Stakeholder" has failed to capture the imagination of the public whose wages are between the government's target range of £9,000 and £20,000. Without the incentive of an employer contribution, there is little attraction to these lower cost schemes. There is still a need for clarity with pension scheme performance and the mechanics of annuity regulations urgently need to be reviewed so that they become less restrictive and simply better value. There is no incentive to save money in a pension scheme when the government gets re-elected (partly) on the back of an increased basic state pension that would equate to a pension fund total of about £80,000, at current annuity prices. Pension schemes also are tarnished by recent misselling. Above all pensions are simply boring.

    At MoneySurgery we can only see two good reasons for saving money into a pension scheme, as opposed to a mini-cash ISA:
    1. When the employer also contributes at least as much as the employee.
    2. The fund remains untouchable until retirement, so that it is safe from being "squandered" by the policyholder.

    Lets hope the government gets the message that we need a better value personal pension system AND that it RESISTS the Abbey National's call to make everyone pay into the existing bad scheme.

    Stakeholder Pensions Released Today.

    (2001 news story)

    The new tax year begins today and among all the other investments that can be bought for 2001-2002 is a new kid on the block: Stakeholder Pensions.

    A few years ago, Tony Blair argued the case for all people having a "stake" in Britain and in their futures. The Stakeholder Pension is aimed at people on more modest incomes that are not already in occupational pension schemes and, by definition, the stakeholder pension must have charges capped at 1%. Social Security Secretary Alastair Darling said that stakeholder schemes must meet a number of standards "to make sure they offer value for money, flexibility and security".

    Sounds good. We believe that pension planning should start when you are young, after getting rid of debts if possible. Money Surgery surgeons are busy writing up our definitive guide to Stakeholder Pensions and will publish it under our "How to..." section shortly.

    Please read our other pages.

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