pension craziness

[Graham Breeze]

Probably the best advice I ever got was to open a SIPP (self-invest personal pension). I moved all my 'not so good', (you can use your own words here), small pensions I'd accumulated into it.

At the age of 65+ the return from your pension should be around 4 percent, so X/Y would equal 25. This means that you have to live to 90 to get all the money out that you've put in (last time I looked, life expectancy for both men and women was less than 90). If your X/Y figure is substantially over 25 then I would suggest that you're being fleeced, (again, you can use your own words here), and would recommend you move them.

My employer paid nothing into my pension until they were legally obliged to pay a minimum amount in 2017, so I was shovelling a significant percentage of my salary in for years. Now I use the flexibility of the SIPP to take out what I want, when I want it.

A SIPP isn't for everyone, as you have to manage it yourself (or pay someone else to do it), and accept the considerable ups and downs you get with investing on the stock markets, but if you're a fast-descending fell runner, or fixed-wheel with clip-in pedals type of cyclist, then the 'excitement' is worth it for the rewards.

On Gambatte's general question: I think he should pay for advice across the whole spectrum of what he should do with his money.

The question is about the best provision for a pension. My question is "why does one need a pension?"

If one invests free money in "the stock market" throughout one's life, rather than giving it to a pension provider, and end up with X £million when you are 65 why would one need a pension?

A pension is very restrictive once you start paying money in and difficult to unscramble. Where do the pension provider people you pay your money to put your money but into the same investments that you could (via an investment manager if you choose). But in the latter case you are retaining control of your money. Not letting someone else lock it away.

Cash is king closely followed by control and flexibility.

[Marco]

On Gambatte's general question: I think he should pay for advice across the whole spectrum of what he should do with his money.

The question is about the best provision for a pension. My question is "why does one need a pension?"

If one invests free money in "the stock market" throughout one's life, rather than giving it to a pension provider, and end up with X £million when you are 65 why would one need a pension?

A pension is very restrictive once you start paying money in and difficult to unscramble. Where do the pension provider people you pay your money to put your money but into the same investments that you could (via an investment manager if you choose). But in the latter case you are retaining control of your money. Not letting someone else lock it away.

Cash is king closely followed by control and flexibility.

I agree with you that in Gambatte's situation it would probably be worth him paying for advice

The benefit of having a pension is that you get tax relief. I never paid 40% tax, because I never earnt enough, but as a 20% tax payer I got 25% added to my pension contributions. Because I went down the SIPP route, my money was, and still is, invested in "the stock market", so instead of building up an investment of X £million, I ended up with 1.25X £million.

A pension can be restrictive, and there are definitely rules to follow. But like driving on the road, once you've worked it out they are not onerous or difficult.

[Graham Breeze]

I agree with you that in Gambatte's situation it would probably be worth him paying for advice

The benefit of having a pension is that you get tax relief. I never paid 40% tax, because I never earnt enough, but as a 20% tax payer I got 25% added to my pension contributions. Because I went down the SIPP route, my money was, and still is, invested in "the stock market", so instead of building up an investment of X £million, I ended up with 1.25X £million.

A pension can be restrictive, and there are definitely rules to follow. But like driving on the road, once you've worked it out they are not onerous or difficult.

For the avoidance of doubt:

I receive an employer pension.

I also have unit trust investments. I used to "manage" these myself but now pay commission to a manager whose remumeration is linked to how well the investments perform. "I win - he wins".

By the way, I once interviewed the, now infamous, Neil Woodford for a financial magazine (Moneywise). The hubris he displayed in the 60 minute videoed interview can be directly linked to his later losing £1.5 billion for his investors after he started believing his own propaganda and his investors started believing that he could do no wrong.

I have followed the story of his fall (although he is not quite down to his last shilling yet) with interest and he is featured in the Money section of today's DT.

[JohnK]

Don`t forget to hope for the best and plan for the worst :-


https://www.msn.com/en-gb/money/othe...edgdhp&pc=U531

[Mossdog]

I think generally people towards the end of their careers wish they'd paid more into the pension earlier. Very rarely do people wish they'd paid less in.

That's so very true Noel.

After I left Uni in the early 80s, I did an initial short 2 year spell in the NHS, where I clocked up an early workplace pension. However, before I dived fully into my professional career I took 6 months out to travel around South America (Peru, Chile and Ecuador - climbing, trekking and biking in the Andes) cashing in my 2 years pension to fund it. Decades later those two years would have let me retire earlier with less of an impact on my pension. Oh the folly of footloose youth

Still 'Non, Je ne regrette rien' https://www.youtube.com/watch?v=Q3Kvu6Kgp88

[Eddie D]

A problem for fellrunners, as I understand your situation. Got caught myself on 25 years expectancy (40 years smacks of fraud, to me).

If you smoked while watching tele down at the pub, you'd get a better pension. No doubt, you'd still be lucky to get it back never mind part of the interest.

Moral to young people, take the tax hit and invest elsewhere - if you can be arsed.

[Marco]

For the avoidance of doubt:

I receive an employer pension.

I also have unit trust investments. I used to "manage" these myself but now pay commission to a manager whose remumeration is linked to how well the investments perform. "I win - he wins".

By the way, I once interviewed the, now infamous, Neil Woodford for a financial magazine (Moneywise). The hubris he displayed in the 60 minute videoed interview can be directly linked to his later losing £1.5 billion for his investors after he started believing his own propaganda and his investors started believing that he could do no wrong.

I have followed the story of his fall (although he is not quite down to his last shilling yet) with interest and he is featured in the Money section of today's DT.

In the spirit of disclosure, I have to declare that I was a member of a company pension scheme some 35+ years ago. In fact, it was one of the reasons why I took the job with the long-established, prestigious company with the royal warrant hanging on the wall.

11 months later I discovered, the hard way, that prestigious does not mean scrupulous when they made me redundant without any redundancy pay. (You had to have worked for a company for 12 months back then to qualify .)

I was somewhat surprised, however, when leaving to be given a cheque for just over £200 for 'my pension contributions'. I was expecting my contributions to be trapped in their company scheme until I was 65, when I was expecting to receive something like £1.28 a year. It was explained to me that this was less than I'd paid in, due to the considerable entry and exit fees. I wasn't unhappy with this, as I used it to buy a Yashica FX3 2000 camera with a 28-70mm lenses that I used for 20 years until I went digital.

I also wasn't unhappy to have received my fee-reduced contributions when the long-established, prestigious company with the royal warrant hanging on the wall closed four years later. I'd lost all contact by then, so I have no idea what happened to their pension scheme, but I take the view that I probably didn't do that bad out of it after all.

In a working life with 3 redundancies, 4 different careers and a constructive dismissal that is the only time I was offered a company pension.

[Gambatte]

I agree with you that in Gambatte's situation it would probably be worth him paying for advice

The benefit of having a pension is that you get tax relief. I never paid 40% tax, because I never earnt enough, but as a 20% tax payer I got 25% added to my pension contributions. Because I went down the SIPP route, my money was, and still is, invested in "the stock market", so instead of building up an investment of X £million, I ended up with 1.25X £million.

A pension can be restrictive, and there are definitely rules to follow. But like driving on the road, once you've worked it out they are not onerous or difficult.

No, if you are a 20% tax payer during your working life, and also a 20% tax payer during retirement, there is no tax advantage. The tax advantage is present ONLY if your tax rate is lower during your pension years.
It works like this:
you earn a gross 100, you either A) take home 80 and pay 20 in tax, or B) you put the whole 100 in a pension.
Say you go for the latter. What happens to this 100 come retirement age? You take home 80, and pay 20 in tax.
So the tax is simply deferred.

Different if you are a 40% tax payer during worklife, and a 20% tax payer in retirement:
You earn gross 100, either A) you take home 60 and pay 40 in tax, or B) you put the whole 100 in a pension. Come retirement age, of your 100 (that costed you a net of 60), you take home 80 and pay 20 in tax.

And of course there is also no tax advantage if you are a 40% tax payer both during worklife and in retirement.

[Gambatte]

I think generally people towards the end of their careers wish they'd paid more into the pension earlier. Very rarely do people wish they'd paid less in.

Say I pay regularly into a pension scheme, this matures to 100k by retirement age when they offer me an annuity of 1/42nd of the fund.
Pension industry keeps telling us we should expect a long term yearly average return of 6%.
So I take their annuity from age 65 until I pass away at 107, 42yr, at 100k / 42 = 2381/yr.
You'd like to think that, on average, they either go even or they make a small profit. Some folks live longer than 107 (more expensive), some less than 107 (cheaper), on average they level out.

So, by the time I pass away at 107 I should be neutral for them, neither win nor loss, right?
But during these 42yr, what about the growth of the capital that they have not yet disboursed me? They always told us we must expect a long term 6% average return.

So after year 1 the pension provider has:
(100k - 100k/42) * 1.06 = (100k - 2381) * 1.06 = 103476

at the end of year 2 they have:
(103476-100k/42) * 1,06 = (103476-2381) * 1,06 = 107161

at the end of year 3 they have:
(107161-100k/42) * 1,06 = (107161-2381) * 1,06 = 111067

...

at the end of my 42nd pension year, when I finally pass away at age 107 they have:
673737.

No bad as a deal.

My preference is NOT paying into a pension scheme if this forces you buying so an overpriced annuity. Rather invest it elsewhere, like a random mix of index funds SP500 FTSE100 or whatever, long term average return 6%. Come retirement age start withdrawing from it in small chunks, say 2381/yr, and always keep the rest invested. When I finally pass away my heirs inherit the 673737.
Of course it would be different if the price of the annuity was realistic, rather than 1/42nd.

Your opinion?

[Marco]

Say I pay regularly into a pension scheme, this matures to 100k by retirement age when they offer me an annuity of 1/42nd of the fund.

At 55, and needing to take money from my pension, I was offered an annuity of 1/62 - meaning I would have to live until 117 just to get my money back. I didn't take their 'kind' option.

Over here, there is a government service called Pension Wise that offers people over 50 free advice. It is also important to stress that in the UK you don't have to take an annuity, and you can take out lump sums instead (which is what I am doing). There are risks involved, so if you don't understand it fully you should pay for financial advice.

My preference is NOT paying into a pension scheme if this forces you buying so an overpriced annuity. Rather invest it elsewhere, like a random mix of index funds SP500 FTSE100 or whatever, long term average return 6%. Come retirement age start withdrawing from it in small chunks, say 2381/yr, and always keep the rest invested. When I finally pass away my heirs inherit the 673737.
Of course it would be different if the price of the annuity was realistic, rather than 1/42nd.

Your opinion?

In the UK if you are eligible for a personal pension you can opt for a SIPP, which I have previously mentioned. If you have under-performing pensions, that you are not happy with, you can transfer them into your SIPP. Once there, you can invest them in shares, index funds and the like. You do need to manage it, or a pay a qualified and well incentivised person to do so, but it should produce what you want.

I remember you saying that such a pension was not available in Germany, which surprised me, but if there isn't something similar then a low-fee, easy to manage and trade, portfolio is what you want