Friday 30 November 2012

John’s Blog No. 104 – Pensions – Your Money

It is time that pension provision changed drastically, contributions are your money resulting from years of hard labour and the associated wages and Employers contributions and should work equally as hard for your future security and not for the benefit of anyone else.
Yet the Exchequer, pension providers and even Employers treat it as their money to use as they will, invest where they want or just to sit idle earning nothing, which occurs with many defined contribution schemes, where the money is at you risk but their pleasure.
The State is the worst offender, they collect substantial National Insurance contributions for your work insurance and retirement, put it in the State spending pot and spend it as they get it so that is not there when you want it. If and when you get a return, it is treated as benefit to be shared with all and sundry, join the queue.
It does not go forth and multiply, give any return or guarantee that it will be there when wanted, certainly in any adequate amount to reflect the contributions made. It becomes part of the social idealistic charity in which those who do not bother to work and contribute get most and are better off.
Even if you pay extra in a private scheme, which now all are being forced to do, you have no guarantees, your Employer may spend the money and default, the State will tax your investment returns, will raise a levy against default, due to their lack of financial control and your provider will make excessive charges.
This doom and gloom is not a good reason not to save but a need to demand more from those precious savings, it is essential that each individual puts away an adequate amount during his working life to support him in retirement, that they should be self sufficient.
Unless you wish to live in poverty, misery and uncertainty, you must not rely on the State but fend for yourself, that does not mean that existing National Insurance should remain unchanged, those in work who make these contributions need to insist they return to their original purpose.
They were intended as a national insurance for those in work and contributed, as a protection against potential hard times due to unemployment, ill health and a pension contribution for retirement, to reflect the money paid into the scheme.
Such savings for the future have not been put aside for future benefit, but have been spent as they arise, often used for other purposes or even squandered, with the intended benefits severely reduced, discarded or paid to non- contributors. Unemployment benefit is restricted to a poverty level payable to all , and pensions are almost at the same position, with the proposed single tier system abolishing the last remnant of State second pension.
If this money had been put aside, protected and made to work as hard as its contributors, we would not be in the present sorry state, put away as a proper insurance and pension fund, properly managed and invested it would be worth in real spending terms many times its original value, besides funding employment and growth.
It is not too late to change, in fact present and projected increases in the retired population make it imperative that we do. With this population due to double or more in the next 40 years, contributions will need to follow suit or the State pension will disappear altogether, the most likely outcome as those in work will be unable afford the cost.
All the pension reviews have ruled this out as impossible, but although difficult, it could be achieved with the will and determination to do so and the rewards would be large for both the State and the individual, however it is urgent, the longer the delay the higher the cost, until it will become impossible.
National Insurance contributions need to return to basics, removed from Treasury control to an independent body to be used for pensions, unemployment payments and job creation; half the present income would be needed to fund basic pensions, which would need supplementing with the new contributory scheme to give a “living wage” pension.
It is time for a change in pension provision, the contributions being made in State and private schemes, including N,I are more than adequate to meet all elderly needs of income and care, they just need managing properly.

Friday 23 November 2012

John’s Blog No. 103 – Pensions – Annuities 2

Last week we were considering annuities, the need to shop around and consider the various options available, of course one needs to know how much income is going to be necessary to maintain the present standard of living. One can start by looking at your latest pay check and the final take home pay after deductions of tax, NI, pension contributions and any other amounts.
This is what you are living on at present, when you retire, you may pay tax at a lower level but nothing else, you should also be free of mortgage payments, travel and work costs and children’s expenses (hopefully). This results at around 40 to 50% of your gross wage and is the amount good pension provision aims for.
The aim should also be to clear all debt and mortgages before retirement, to give a clean position; one must also add on costs associated with the extra things promised for retirement; travel, short breaks, hobbies, sport and leisure activities, visits and meals out  and other well deserved indulgences. These may be short lived as by age 80 you may be less able or want to indulge in these, so living costs would then reduce.
Another area is the 25% tax free lump sum that can be taken from Fund value; your provider may ignore this and quote the annuity on the full fund, but this may not be in your best interest as you could possibly put the money to better use. Take the money, even if you buy an annuity with it you will get a better rate; use it to clear outstanding debt in the first place as the interest due will cost you more than you can earn.
Otherwise invest it,  someone who spent £13,000 on solar panels on his roof yielding some 2,200 Kwh of electricity and also FIT payments giving £900 to £1,000 per year (almost 8%), tax free, inflation linked and guaranteed for 25 years; the money goes into the electricity account to pay his dual fuel bills. It also adds to the house value.
If your pension falls short of your needs, you could be entitled to benefit, particularly Council Tax or Housing benefit, don’t be afraid to claim, you paid for it whilst at work and are entitled. If you own your house, then equity release is being pushed hard, recent interest rates charged have dropped to 5.5%, but this soon erodes the balance asset value and is not a good option.
A better option is to downsize, using the money released to drawdown from the invested fund, any savings could be used in a similar manner, just keep a minimum contingency amount in reserve; you can’t take it with you!
However the whole pension scenario leaves much to be desired and gives a poor return on contributions made, particularly from annuities, which are the main reason for the poor performance and high contributions of pension provision particularly in defined contribution schemes which are almost totally dependent on annuities, losing money in real terms. This is the major problem with the new contributory scheme just introduced.
Doubling the return on annuities or pension payments will halve the contributions needed for a given pension, if the fund grows at the modest rate of 4% then over 40 years it will be worth in real terms 60 times the annual contributions, if this only gives 3.5% then the overall yield is only 2.1 times contributions, losing money in real terms.
At this level to obtain a pension of £7,350 would need a Pension Fund of £210,000 requiring total contributions of £3,500 per year, a massive 14% of average wage, the new 8% contribution (£2080 pa) would only give £4,368 pa pension, a poor and inadequate return due entirely to annuity shortfalls.  
It is not necessary for pension schemes to effectively finish at retirement and fund continuity through work and retirement has a lot of advantages, particularly if combined with more stable investment. One gets the best o f all worlds, the advantages of annuities, the smoothing out of the ups and downs, the strength of large investment funds and low costs and charges, with asset transfers across the age distribution.
Such Super Trusts would have large inherent strength and could afford to invest in a secure and social manner in UK infrastructure and business; some Councils run schemes for investment in sound local businesses, which give returns of 6.5% and with a good mix could go down to 4% giving worthwhile returns.
There is little doubt that pension funds and annuities could perform better and reduce contributions or increase returns, allowing greater security and confidence in the retirement future.

Saturday 17 November 2012

John’s Blog No. 102 – Pensions – Annuities

Annuity values are now at their all time lowest value causing uncertainty, suffering and misery at retirement to the point of uselessness. Forty years of patient pension provision are wasted in the short time available to decide, they are now outdated and unreliable.
They suffer from the speculative nature of the present commercial markets, unsuitable for dependable long term savings. Based mainly on Government Bonds which should be stable, they have become increasingly susceptible to supply and demand and the “quantitive easing” buy back makes matters worse.
 They arose from the need for a guaranteed income from a given individual pension fund, which were secured by Insurance Companies who balanced up the risk of whether the money would last longer than you This risk was reduced by  combining individuals into groups in which one person’s death was to the gain of the survivors.
The funds still had value and earn their keep, hence the dependence on the stable return from Bonds, at one time in the 1980’s there gave returns as high as 16%, with a £100,000 fund yielding £16,000 per year income, now you can expect at best £3,500 (3.5%) for a joint life increasing with inflation, to £5,800 for a single person with no increase.
At 3.5% on a straight draw down earning nothing, tucked under the bed, the fund would last 29 years, nine years longer than female life expectancy, if it earned enough to keep pace with inflation, draw down could do the same. This illustrates the absurdity of annuities today, which in fact perform at half the level they could do and should yield at least a 6% inflation proofed pension on a modest 4% earning power.
Retirement is one of the big steps in life and deserves preparation, at least six months before the great day arrives you should start looking at the pension options and planning budgets and how you will manage. If you are in a Company or Public Sector scheme, your Employer should provide you full details, otherwise in a defined contribution scheme you will need details of Fund value and expected Annuity returns.
 One of the main problems with Private pension schemes is that the State, Revenue and even provider act as if the money belongs to them and they are allowing you to use it, not that it is your savings by right. As a result there are strict rules on what you can do, the short timescale to decide and at what age you can do it.
In general, you can retire from 55 with penalties in DB schemes; DC schemes are dependent on adequate Fund values, also Funds from AVC’s (additional Contributions) and surprisingly SERPS rebate are treated more easily, in fact you can retire on a SERPS fund at 55, whilst S2R is not until 65,66….
The various options for consideration are:-
Drawdown – the Revenue will allow this if the Fund is over £100,000, but they assess the amount annually, which can inccur charges, usually drawdown rate  is 6%. The big advantage is you still have the money and control it, decide on investments and pass it on in the event of early death. If you have other income, you can draw down what you need up to the limit, giving a safety net and possibly less tax liability. You lose the group mortality advantage.
Annuity – this is the general option, but becoming less cost effective. In exchange for your Pension Fund you are given a guaranteed income for life at an agreed rate, however because of large fluctuations, often in weeks, the outcome is uncertain after a lifetime of saving and when it is too late to correct it.
Like all insurance products e.g car and home it pays to shop around, particularly as it is a one off deal with no chance to change your mind. Your current provider will probably not give the best offer initially so it is important to check comparison web sites and get various quotes and don’t be afraid to ask for all options. These are:-
5 year Guarantee – payment is guaranteed for the first five years and usually reduces annuity by very little
Single or joint life – allows payment to continue for partner, usually at a reduced rate was 2/3rds now 50%
Level or increasing – rises to meet inflation was 5% now 3% although 2.5% is norm and average over recent years.
 Male or Female – life expectancy for female is some two years longer, hence the difference.
Joint life is based on female life expectancy, normally worthwhile but check cost, particularly if both have good pensions. The difference between level and inflation proofed is quite large, at 2.5% £1 now is worth 62p in 20 years time,  a single life pension at £5,800 would be worth some £3,600 in real terms, almost the inflation proofed value plus the extra money for 20 years, also the amount needed to live on at 85 is much less than the more active 65, so you could manage on the decreasing real term value, so check the quotation figures.
To be continued.

Friday 9 November 2012

John’s Blog No. 101 – Pensions - Living Wage

This week the main political parties have been talking about a living wage, which appears to be a cynical move to reduce welfare costs by passing them onto the business community, but like everything else, it has not been thought  through to its logical conclusion.
Once set as the amount needed to live on, it should apply to all areas, particularly pensioners, who have been hardest hit by inflation rises not being applied in the past to the State pension, resulting in the erosion of this contributory pension to the poverty level or below.
In spite of all the information and statistics on living costs, no one has come out with or published tables on what is the basic income needed to survive for a single person, couple or children. It was once taken care of in tax allowances, which was overridden by welfare concern for equality.
A figure of £7.45 per hour is being suggested, which represents £149 per week for the average part timer on twenty hours and some £280 for a full time worker, giving £7,750 and £15,000 per year. Of course at the full time level, tax, NI and new pension payments will be due totalling £3,100, bringing nett wage down to £12,000 and the Employer would be liable for £1,750.
At the present minimum wage full time would give just under £10,000 income with some £900 deducted, so the biggest winner is the State with less benefit and more tax/NI income. If the living wage is at this level then logically it should be free of all deductions, resulting in a massive loss of State revenue, if tax and NI thresholds are set there.
Where would pensioners stand, are they not entitled to a living wage, which is being set at twice the new proposed single tier pension level, the whole thing is a nonsense, without thought, of course we need change to welfare, but it needs a sensible approach.
Statisticians divide the nation into five parts, fifth’s or quintiles, the upper highest level are immune to budget economics and taxation effects, if paid due to their high income, as are the lowest level, living on welfare. It is the three middle levels who carry the main burden; they are industrious and ambitious who meet their responsibilities and pay their dues to Society; the backbone taken for granted and exploited.
This needs recognition and a change in attitude; if they pay in, they are entitle to draw out in some form of relative proportion, whether it be in pensions, child allowance or any other form. The State apparently takes no account of this earned debt/ investment benefit; in fact it confuses welfare and earned benefit, all being classed as benefit without discrimination.
This has led to the current state of affairs where one is better off not working or meeting any responsibility to Society; there is a need for welfare but it has to be kept in perspective and be affordable; wealth redistribution has to be kept within limits.
One needs to separate out earned from welfare; if you have worked hard and fall on hard times you deserve better treatment than those who have not, we have lost those ways and ideals. There could be some form of paid National Social Service with job training for those who have no work but are able, which could ensure full employment.
There are some who will be unable or incapable of work, the full time carers, students, home makers and disabled who need support; this is the real welfare, not the indolent itinerants who have no intention of supporting themselves and feel we all owe them a living, This should include immigrants, foreign nationals and non residents.
The time for change is well overdue, we are not even scratching the surface; restricting benefit to the gross average wage is a good example, it should be at least half or less to make work worthwhile. We cannot afford idealistic principles, which are mainly one sided.
We need to get back a sense of fairness in Society and a return to the basics of Society and Social gathering itself; if you are in and contribute  you should benefit; if you put yourself outside by any anti-social behaviour including failure to work, you need to re-apply and earn the position. It is quite simple and logical and overrides human or any other individual rights, we have lost sight of the fundamentals.

Sunday 4 November 2012

John’s Blog No.100 – Pensions – Simple Arithmetic

A diversion this week; we are all scared of mathematics and as a result avoid using it wherever possible, even though it is an essential part of everyday living. This arises from the pedantic and rigorous way they are taught which is part of the mind training aspects of the subject.
There is however a lighter and simpler side to the subject of arithmetic in the world of estimates, approximations, rounding up and down, percentages and fractions and a certain quirkiness of the figures which make them easy to use and remember.
For example the ten percent rule for unit conversion; a metre is one yard or 36” + 10%; a kilogram is 2lbs +10%; 4 pints are 2 litres + 10%, all of which makes conversion simpler and mentally possible. So if something is priced in lbs, double it add 10% to get the kilogram price; 500ml less 10% is a pint; all one needs to remember is the 10% rule and whether you need to double or halve it.
Many items are sold by length, add 10% to the yard price to get the cost per metre, or take off 10% for cost per yard; the number 454 also crops up; 1lb is 454 grams; 1 gallon is 4.54 litres; a square metre is 10 sq feet, a cubic metre is 33 cu ft; 1” is roughly 2.5cm, so a foot is 30cm etc.
A 25kgm bag of potatoes weighs 55lbs, roughly a cwt; 1ml (cubic centimetre) weighs 1 gm, a litre of water weighs 1kgm or 1cubic metre weighs 1 tonne and many things have a similar density and can be assessed in the same way, e.g. potting compost and even sand and gravel, useful when lifting things.
Rough estimating is another example, particularly in mortgage and HP payments; a loan for so many years at an given interest is on average half the interest over the full term, so a loan of £80,000 for 20 years at 6% would have interest of £80,000 x 20 x 3/100 = £48,000 giving a total of £128,000 divided by 20 = £6,400 per year or £533 pm.
Rounding up and down is another good estimating tool and it is surprising how all the odd amount balance out; one only worries about the whole numbers (or 1,000’s/ millions) and can quickly total up a column of numbers, even mentally or check a bill. Don’t worry to be precise.
Stores tend to knock off the odd penny to make it look cheaper, round it up and you can keep a rough check of the total; £2.99 + £4.99 + £7.49 is 3+5+8 - 53p giving £14.47. In these hard pressed days it is useful to check your shopping bill as you go round, to decide whether you can afford the odd item.
Percentages and fractions are another area not to be afraid of; everyone gives discounts these days in sales, special offers or total amount spent; 50% off is half the price, a further discount comes off this reduced price i.e. 10% is only 5% off the original price. For percentages divide by 100 or convert to a rough fraction if you prefer.
Of course in this computer age we all tend to become lazy and rely on someone else; however I always check. Mistakes occur, in stores the computer price often changes before shelf end price or offers finish or even ignore them altogether. Insurance renewals often go up by large amounts, after they have persuaded you in; to avoid moving every year check and query and it is often reduced.
Increasingly it is buyers beware and it is useful to be able to estimate on the spot to check whether it is a good or fair deal, prices are often increased to be discounted; pack quantities are reduced for special offers and it pays to be able to check even roughly. I have often seen reduced items dearer than standard shelf ones!
Arithmetic can be simplified and figures are not something to be afraid of, they can be a challenge or a even a game and improve and lighten a shopping expedition, you just need to grasp the nettle.