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Penny drops on Pensions?


CliveH

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Interesting article re a survey for the Dept of Work & Pensions

 

One point not covered here but it is mentioned in the comments is that most people see Gordon Browns Tax raid on pensions as a further reason not to use them. The complexity of the rules and the how the numpties dictate how you can access YOUR OWN SAVINGS! is very much the most common reason why pensions are no longer attractive.

 

One can only hope that the results of this survey are noted by the powers that be. My recommendation tho, is that we do not hold our breath.

…………………………………..

 

“DWP: complex pensions put public off planning for retirement

 

New Model Adviser Alex Steger on Nov 27, 2012 at 08:03

 

Pensions are too complex with the majority of the public unconfident about saving for retirement, the Department for Work and Pensions (DWP) has found.

 

The DWP’s Attitudes to Pension survey 2012, which canvassed the views of 1,949 adults in the UK, showed knowledge of pensions and understanding of state pension rules had reduced since the last survey in 2009.

 

The research found that 60% of the public did not feel they knew enough about pensions to confidently decide how to save for retirement.

 

There was confusion over the state pension and particularly the state pension age with 60% of women expecting to reach the state retirement age sooner than they will, 38% of men also thought they would receive their state pension sooner than they will.

 

One in four men also thought they would not receive their state pension until they were 70 or 75.

The government acknowledged that rapid reform of pension rules was to blame for the public’s declining understanding.

 

It said: ‘Collectively self-assessed knowledge of pensions as a whole and state pension issues had reduced, which may be related to the ongoing and relatively rapid changes in pension policy.’

 

Pensions minister Steve Webb told the Daily Telegraph: ‘Too many people are put off saving for their old age by a pensions system which is too complex and too few know clearly what they will get when they retire.’ “

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What does that tell you about today's society engineered by successive governments?

 

Unless it's on Facebook youngsters will never see it and unless it comes as a text message they will like as not never read it!

 

I thought the harsh financial realities of life were starting to be taught in schools - maybe not - but I bet same sex partnerships are discussed!

 

Cynical old me!!

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CliveH - 2012-11-28 11:37 AM

 

 

Pensions are too complex with the majority of the public unconfident about saving for retirement, the Department for Work and Pensions (DWP) has found.

 

 

............................................

 

 

After further in depth ( and expensive ) investigations the DWP has also found that the Earth is not flat, and the surface of the Sun is very hot.

 

 

:-|

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malc d - 2012-11-28 11:57 AM

After further in depth ( and expensive ) investigations the DWP has also found that the Earth is not flat, and the surface of the Sun is very hot.

 

Which directly opposes the many surveys carried out by the previous government who convinced themselves that the saviour of mankind was residing in 10 Downing St.!

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I still remember whilst looking around for pension investments talking to a Lloyds bank pension advisor, went something like this.

Him "Yes sir you pay in a sum of money each month and this is used to buy units"

Me "How much does each unit cost?"

Him "We can't tell you, it could vary"

Me "Well how much is each unit expected to pay out?"

Him "We can't tell you"

Me "And you expect me to invest in a pension under those terms?"

 

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God knows I know the bank advisers are a total waste of space - but that explanation is poor by any standard.

 

The point about unit pricing is that you actually WANT volatility if you are investing regularly.

 

If the unit price is £1 in Jan

 

then falls to 50p a unit in Feb

 

then recovers to £1 in March

 

Look what happens if you invest £100 a month

 

Jan £100 buys 100 units

 

In Feb £100 buys 200 units

 

In March £100 buys 100 units.

 

Total outlay = £300 but number of units purchased = 400 and in March the Unit Price is £1 a unit so the value is £400.

 

This is called £ Cost Averaging and works with any regular contributions into a volatile fund.

 

The skill bit is a) knowing when to bail out or b) have a safety plan where when the price moves to a certain high point a structured move to safe haven funds is triggered.

 

This is not rocket science - but believe me - the average bank adviser would not have a clue.

 

:-S

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Which is why I always used to advise pension customers to have both a with profits and a unit linked pension as well as making sure their mortgage was cleared before retirement and if they still had disposable income as many forward thinking people did - buy another property as well for the belt and braces approach.

 

It worked well in the 70's and 80's until with profits became a dirty word that is when the bubble of ever increasing bonus rates which just had to burst did burst!

 

How else do you think I was able to semi - well actually it was more three quarters - retire at 55 years of age!

 

Clive would know what is the best bet is now for the belt and braces approach - me - I've been out of it too long now - and no regrets about that!!

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Very much along the sensible lines you state Richard. For regular savings chose a volatile fund to benefit from £ cost averaging.

 

And yes With Profits used to be the best choice for Lump Sums. And the funny thing is – if it were not for stupid interference by the FSA it still would be an option worth considering. A short while back a survey asked investors “would they be interested in……..” and then went on to describe a With Profits investment in all but name.

 

The result was that the vast majority stated that they would have one!!

 

How With Profits worked was to invest in Shares, Property and Fixed Interest (Gilts and Corporate Bonds) and each year the respective Dividend income, the Rental and the Interest (or Coupon as it is called) was calculated and applied to your policy as an Annual Bonus which once added was fixed and could not be removed.

 

The underlying investments – of Shares and Property in particular would also benefit from long term growth – i.e. the Share price of the share would increase and the value of the Property would go up. This growth was estimated each year and put on your statement as an estimate of the Terminal Bonus that you would receive at maturity. Because this Terminal Bonus depended upon a value of something in the future, this Terminal Bonus could vary and could even be negative if the Share price fell or if the Property values declined.

 

When this happened what was called a Terminal Bonus when it was a positive value became a “Market Value Reduction” (MVR) when growth within the fund was negative.

 

Trouble was a lot of the mortgage lenders never told people or even mentioned that this MVR existed and so when it applied during the last Recession people complained and so With Profits Endowments got a dirty name. In my view this was a shame because as we came out of recession the policies that were left alone actually performed well. So well in fact that a huge market evolved for Traded second hand with profits policies. This was called the TEP market (Traded Endowment Policies)

 

I bought some and made a very nice profit.

 

Where the FSA screwed up (again) was their decision to try to increase the non volatile section within all With Profits policies. They did this by insisting that en-masse – all With Profits providers had to reduce the percentage in their WP funds of Shares and Property. Thus the Regulator forced a huge sell off of Equities and Property.

 

Now given that these WP funds were HUGE and together they made a truly enormous chunk of the UK investment market, can you imagine the effect on the market that their being forced to sell off a large proportion of their Shares and Property portfolio had?

 

Well again – it is not Rocket Science – the forced sell off had the effect of reducing the value of all Shares and Property because there was a glut forced on the market by the unbelievably stupid FSA (who were warned by all of us that this should be phased over time but the listening skills of FSA people is all but non-existent) and so a measure taken by the UK’s financial regulator to protect the intrinsic value of With Profits funds actually had the effect of throwing the markets into turmoil thereby reducing the value of With Profits funds dramatically across the board – AS WELL AS – throwing us all into a deeper recession because share prices and property prices fell dramatically per se regardless of their being held in a WP fund or not!

 

So even non-With Profits investors were poleaxed by this unbelievably stupid action by the FSA.

 

As for what to do now? – Whilst interest rates are low – a good Fixed Interest Sector fund (Gilts and Corporate Bonds) can act as a good safe haven for capital BUT when interest rates rise – the FI sector will fall. Sure as eggs is eggs – so please be careful.

 

Cash funds always used to be a good safe haven option when they gave a return greater than inflation but we have not had those sorts of rates for some time.

 

So the short answer is in my view that investors would like to have something that smooths the peaks and troughs of the various markets and whilst With Profits had its problems – it actually did this for the average man in the street quite well.

 

It’s problems were the banks selling it as a no risk guaranteed plan and not being honest about the potential for a Market Value Reduction. This problem was made all the larger by a knee jerk reaction by the FSA that they thought would increase the security of the retained value in a WP fund – but actually had exactly the opposite effect.

 

Worse than that – the ripples of the resulting crash is share and commercial property prices is still being felt today.

 

But again what to invest in is a secondary consideration for many because of affordability and the confusion that exists on things like pensions due to the constant ridiculous rule and legislation changes inflicted on us all.

 

My thoughts on pensions are well known I would think – I believe them to be a waste of space for all but Higher rate taxpayers and employees where the employer also contributes. As an IFA of many years – my advice to anyone not in those to groups to be VERY careful about anyone suggesting a pension plan is a good idea. The odds are that it is they that will benefit from your taking out such a plan – not you.

 

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Guest pelmetman
CliveH - 2012-11-29 5:27 AM

 

Trouble was a lot of the mortgage lenders never told people or even mentioned that this MVR existed and so when it applied during the last Recession people complained and so With Profits Endowments got a dirty name. In my view this was a shame because as we came out of recession the policies that were left alone actually performed well. So well in fact that a huge market evolved for Traded second hand with profits policies. This was called the TEP market (Traded Endowment Policies)

 

I left mine alone its just paid out.....................7k less than it should of done *-)..............one of the many reasons why I prefer the thrift approach to retirement ;-)...............It's surprisingly easy to have a comfortable life on a small income B-)

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It is a balancing act between what you feel "comfortable with". I have no issues at all putting a few grand a year away into Equity ISA's but think Pensions - for me are a waste of time.

 

I am not risk averse - so happily invest in emerging markets etc and have been rewarded with double digit returns over the last four years or so.

 

In contrast you can put money on deposit - get 3% interest but with inflation at 3.5% - you may think your capital is safe but it is losing buying power "safely".

 

And if you want to take an income - forget it.

 

In contrast - look a what a Fixed Interest Fund has achieved over the past 5 years – M&G again folks because I think they take some beating in this area:-

 

http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=MGGTI&univ=U

 

But it is all down to what you feel comfortable with.

 

I would lose sleep over having all my investment eggs on deposit if I needed income from it, the taxman took 20% of the interest and inflation was more than the gross return!

 

I do not lose sleep over having a fair wodge of my retirement fund invested in China India and other “emerging markets”.

 

If there were any left - I would also buy into Traded Endowment policies. That was a good plan - because people bailed out of them at the wrong time.

 

Horses for courses.

 

Timing is key.

 

 

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