John’s Blog No. 23 Pension Mechanics

If you belong to a Company or Private Pension Scheme, every month money is deducted from your wages as contributions to the scheme; your employer will also contribute towards the scheme. He will  possibly contract you out from the State second pension claiming a rebate from National Insurance.

These contributions are invested in a pension fund on your behalf where they should accumulate and grow to give an income when you retire; the level depending on the amount contributed, over what period, and on how well the funds are managed.

Many of the schemes are run and managed by the major Insurance Companies, although large Company schemes have their own investment funds. How well these funds are managed and how secure they are depends on the investments made; the large Insurance Companies are secure and well regulated, but Private Companies do fail and funds become minor creditors, as many members have found to their cost.

In general schemes are well managed and perform well, but many give poor value for money and over the long period of 40 years are eroded by excessive charges, State taxation and levies. At fruition they are further degraded by the tax free lump sum, which requires a third increase in contribution premiums and also by poor annuity rates which equals a further third.

Yet in spite of all this wastage and cost to the pension savers, individual members take little interest in their funds and the future security and prosperity in retirement, until they get near the event. As a result the funds disappear into a black hole and, if you are lucky, reappear forty years later in an uncertain state which may or may not support you in old age.

You deserve all you get, of course it all is so complicated and hard to understand, but is it? You do not have to understand the detail only the results; are your funds building up the way they need to do?: are they well managed?: are they secure?; do they give value for money?

Private pension schemes give annual statements, which is worth spending a little time on, but these are often not presented in a simple form. Ask your provider to clarify these if needed; only pressure will give clearer and better statements and recognition of customer rights.

The statement should give the current fund value, total units, additions and values, contributions made; forward pension projections and any charges. Comparison with previous statements should highlight movement; changes in unit value gives growth directly, whilst fund value shows accumulated contributions plus growth.

Forward projections of income at retirement are particularly confusing, given for different growth rates, they sometimes take account of inflation, in real terms and sometimes in today’s values. Over the past 20 years the expected performance has been reducing dramatically, so that contributions to give a good pension when taken out now appear inadequate. This is a form of mis-selling, promising one thing and delivering something much lower and is a major problem in private pension provision, reflecting the lack of guarantees and the member bearing all the risks.

Company and Public Sector schemes are less forthcoming, with little information being given, in defined benefit schemes your pension depends on number of service years and final or average salary, with a take it or leave it and almost charitable attitude, although final pensions are usually more generous.

In many ways there is little you can do to influence the final outcome, due to the long timescale, by the time you find out your pension savings are not meeting expectations, it is too late to do anything about it. This needs to change, but will only occur as a result of  active involvement and pressure from members.

Nevertheless there are things that can be done and remedial action that can be taken, but this will only occur by careful monitoring of scheme performance from the word go and this will be dealt with in the next blog.

 Savings   Annuities   Public Sector   NHS  Teachers   Police   Local Government    Hutton   State

John’s Blog No. 22 Pensions

There is mounting pressure for the Coalition to do a U-turn on its pension changes and timescale. This is part of a number of U’s that could do with changing; unfair, unequal, uncertain, unstable, understandable and unfunded, which merit more attention than the present cost cutting proposals.

Pensions are in a crisis which has a major impact on the whole of the UK population; they need long term solutions by the State and Financial Institutions, not a short term bodge up by cowboy builders. All in work contribute in basic NI and additional Public Sector and Private schemes; 75% of the working age population are in work and pay NI; some 66% of these also belong to occupational schemes.

Few get value for money or forward security; the goalposts are continually being moved, contributions increased and benefits reduced; we must all work longer and for less.

Anyone who has contributed to a private pension for over 20 years will have seen their projected pension benefits steadily and drastically reduced, with no time left to correct it. Contribution levels which promised an adequate income in retirement will now yield only top up to a poverty level State pension.  

Politicians proceed at their peril if they do not address the current crisis correctly. Previous blogs have attempted to outline possible changes and press individuals to take action for change.

This blog will attempt to offer simple means in which you can monitor your individual outlook and pension prospects and concentrate on “understandable”.

If you are fortunate enough to be in a defined benefit scheme then you will be in a fairly secure position, but even that is increasingly uncertain and you will receive very little confirmatory information on your requirement prospects. There is a need to press for annual statements and reviews to monitor progress.

If you contribute to a private scheme, then you should receive annual statements which merit the same close examination and query you should give to bank and mortgage statements. Of course they are confusing , almost deliberately so, with little real information and lots of if, if and if projections.

The fund value and pension projections should increase steadily, and are made up of two parts; the accumulation of contributions and the annual growth of the fund, which should increase by the sum of  contributions paid and the increase in unit values. Below age 50, growth should be high reflecting risks and values fluctuate, but above this funds should stabilise as retirement approaches. Charges should be clearly stated.

This is not necessarily so; Fund managers who made the original high promises suddenly have no responsibility and expect the clients or expensive advisors to tell them what to do. Even at retirement one finds that values are fluctuating wildly and if you take the popular annuity option, this can even change drastically during the final stages.

The iniquitous Bid – Offer differential of 5% makes change during the contribution stage costly if you try to change investment options or even providers, particularly in the latter years when this is required. The minimum Fund of say £100,000 will lose £5,000 in value overnight plus any investment variations.

If your fund is performing badly these changes may be necessary and worthwhile, they should be done automatically without cost, but this is rare. In this position, question you provider, visit his website where fund performance should be displayed and if you want changes, find out the cost and charges, another site to visit is  www.Trustnet.com which gives all the pension funds and allows comparisons on performance.

Generally all pension funds give poor value for money and the State is the worst offender, none treat you as the valuable customer that you are, with the State treating you as a benefit claimant, in fact you are better off as such. The value and purpose of NI contributions and pensions need clear definition.

The next blog will continue to explain pension savings and their performance assessment.

Savings   Annuities    Public Sector   NHS  Teachers   Police   Local Government    Hutton   State

John’s Blog No. 21 Pensions – Update

There were several items recently of pension interest, one was the suggestion that to encourage self provision, pension scheme members should be entered into a lottery with a million pound prize. This appears to make pensions more of a gamble than they are at present, and to take even more money out of pension funds.

The aim should be to make pension savings more affordable and secure, that is reducing contributions, all charges and defining and improving benefits.

Another was the announcement of strike ballot action in the Public Sector, which may improve publicity, but is difficult to enact and can lose public support. Will a nurse leave a dying patient, or a teacher lock out children from schools, this would only alienate public support.

The modern approach using internet and post could be more effective, if all 5.4 million PS workers E-mailed their MP’s, DWP, the Ministers and the Prime Minister; contacted the social network sites and the media or wrote and telephoned them the effect would be dramatic.

If organised on a given day, as a day of action, the effect would be overwhelming; websites would crash and the State system could be brought to a standstill. Someone would have to take note and listen.

More has come to light on the proposed changes to State pension; existing pensioners would be unaffected, the £140 per week will still be based on contribution records and welfare benefits unchanged for non contributors, but denied to those on full pension.

Effectively this means that the State pension will be brought up to the Pension Credit minimum poverty level, but without any extras of welfare benefits. There is also the suggestion that the State second pension and SERPs rebate will be phased out.

This again raises the question of what are NI contributions for and are they just a welfare tax. In pensions as in work, you are worse off after earning a living. There needs to be a clear separation from welfare and the rewards of work, the purpose of NI needs to be clearly defined in financial terms.

Tax and NI thresholds together with basic pension are now clearly set at the defined poverty level of £140 pw, the minimum the State says a single person needs to live on. The advantages of work should progress from that and be apparent, with welfare clearly defined for both non and low earners.

All pension payments whether State NI, Public Sector or private should give good value for money, a guaranteed result above poverty levels and benefits proportional to contributions paid.

The new basic State pension level is 28% of the National average wage; in a funded scheme this should require contributions of 8% over 40 years with modest growth of 4%. NI contributions, all spent on the retired, are now 25.8% which should yield a pension of some 90% of average wage in real terms.

Teachers, NHS, police and fire have total contributions of 19% which should give 66% and not the current miserable level of 25 to 30%. The 3% increases being implemented brings employee and SERPs levels up to massive 14.6%, which alone should give 51% before NI.

The majority of schemes give poor value for money, mainly due to the undervalued annuity rates and high charges, levies and dividend taxation. It is time for drastic changes or a new system of pension provision, this will only occur from individual customer pressure and action.

Savings   Annuities    Public Sector   NHS  Teachers   Police   Local Government    Hutton   State Savings   Annuities        Public Sector   NHS  Teachers   Police   Local Government    Hutton   State

John’s Blog No. 20 Pensions - Reality

This blog will consider pensions as they exist today and the means of getting best value for money from a common sense point of view without making any claim on expertise as a financial advisor.

Take out a banknote and you will read across the top

            “I promise to Pay the Bearer on Demand the Sum of ........”

This promissory note is the basis of our financial system replacing barter. It depends on trust and confidence and works well until abuse, speculation and greed take over, as happened recently.

With pensions this is taken even further, you do not need to “pay the bearer”, just service the loan until death occurs, currently at fairly low rates. This does not appear to be fully understood by the State,  experts, or Financial services, otherwise there would be a surge in pension provision, which offers cheap, unlimited investment finance.

Customer should therefore be King, but is not, almost treated with disdain, making it essential that they look after their own interests and get value for money.

Pensions are no different to any other financial service, although on a longer timescale. One does not renew insurance without shopping around and the web has made this much easier with comparison sites.

In practice schemes offer few options and all are effectively run by the same Insurance Companies, except for the large Company and Public Sector schemes.

Choice therefore only occurs in Private schemes on retirement when the policy matures and at that stage the options have recently become much wider. Traditionally annuities have been the favourite choice; they are based on a co-operative almost collective basis centred round life tables / mortality rates, with the surviving members benefiting from the deceased.

If one does the sums for Population v Fund survival, taking into account the investment income the funds should attract one finds on current values that :-

            A 4% income will sustain a payment / annuity of 6% increasing by 2.5% per year.

This is some 2% above annuity values available, which have been steadily dropping, in fact twenty years ago they were 16% !

One therefore needs to shop around, in private schemes you do not have to wait until 65, but can take pension from age 55 and the tax free lump sum. You should receive an annual statement showing the current fund value and projection of value at selected retirement age and associated pension.

Whether you are about to retire at age 65 or earlier; get a quote from your pension provider and then try other major competitors.  Even simpler go on the web, where like car insurance, you fill in details and get a quote, you unfortunately have to re-run for each option. One other little known fact is on SERPS opt out, surprisingly this can be taken from 55, with cash lump sum, it is worth exploring.

You need to explore the options, many make little difference to payment sum; a guaranteed term reduces the risk if you die early, take 10 years; as does a dependent relative, do both; annual or monthly payment also make little difference. Annual in advance is a good option, it gives one more year and can meet annual bills; the tax free sum option is usually worth taking, you can clear debts, re-invest it, or make a capital purchase. If you smoke are ill etc., you can get an enhanced annuity up to 20% higher.

I recently organised my 56 year old disabled son’s pension; he had two policies, private and SERPS; shopped around got an enhanced annuity, better than existing providers, used the lump son and first annual payment in advance to put a PV solar system on his roof and the FIT income will pay energy bills for next 25 years, besides increasing the house value!

You now do not need to take an annuity but drawdown from the final fund, but there are drawbacks. You need a fund of £100,000 and charges are high; the 5% bid offer loss and set up costs; then annual costs as drawdown has to be approved by the Revenue each year. It may be better to take the annuity.

Finally, out of context, on the referendum; 28 % of electorate said no; 14% said yes; 58% did not bother. So much for democracy, it is only as good as you make it and such indifference allows Dictators. If you don’t use your legs they will wither and be useless, so will your vote!

Savings   Annuities    Public Sector   NHS       Teachers   Police   Local Government    Hutton   State Pension