Pension thoughts in the New Age
Talking to a Business Development Manager from a pension company, (a ‘representative’, if you do not understand financial services job titles), she was saying that she started her pension talks to employees, as part of setting up auto-enrolment schemes, by asking the audience what was wrong with pensions.
The usual answers from the floor are something like;-
- Too expensive
- Too complex
- Too inflexible
- Not value for money
- It will all disappear in charges
- Not for me as I will depend on benefits.
Changes in the way that pensions are operated mean that the first 5 answers are no longer true and changes in the benefits system will make the last assumption rather uncomfortable!
So taking these in order, let us slay a few pre-conceived dragons;
Too expensive; back when I first came into personal financial planning, charges including a 5% bid/offer spread and up to 6% as an annual charge were around. If you were really unlucky, the total annual charge could be as high as 11%, but around 4% was more common. These days, Stakeholder pension charges are capped by statutory guarantee at 1.5% and most Group Personal Pensions are 1% or less. Expense is no longer a good excuse for not looking at a pension.
Too complex; complexity is still there if you look for it, but taken in small bites there is not too much you need to know. If you are saving for your retirement, a pension is the cheapest, most tax efficient and most straightforward way of putting money away for later life. Choices at retirement can be a little daunting, but that should not put you off saving to start with. As a general rule of thumb, too much money is not really a problem!
Too inflexible; if you are being given a tax break of 20% or more, not being able to spend it under 55 years old is not unreasonable. Once past 55, how much flexibility do you want? Recent proposed changes in the law will allow people to withdraw as much or as little as they want from their pensions, without committing them to an annuity. As for paying money in, there are annual limits but these are higher than the majority of the population can afford; almost all pension contracts now allow for premium holidays, stopping and restarting premiums at will.
Not value for money; this is a hard one to show, but with charges at or less than 1.5%, I would have to ask you what you want! Not too long ago charges of double this figure were not unusual and considerably more were not unknown. Investment charges in an ISA or investment bond will be of the same magnitude, so do not let the pension label put you off.
It will all disappear in charges; not for a modern scheme. For any pension set up before 2002, I would suggest you ask for a pension review from an independent financial adviser, as an old scheme may be wasting your money in unnecessary charges, but conversely, some old schemes have guaranteed benefits that may outweigh any additional costs. Do not do anything hasty, but seek professional advice.
Not for me as I will depend on benefits; If you can live on about £140 per week now, then carry on, but recent benefit changes will mean the removal of most means tested benefits, leaving just the slightly enhanced State Pension. You will probably be able to get housing benefits or council tax relief as well, but that is likely to be it. If you have any ambitions over and above basic subsistence, no pension will equate to no chance!
In less than 3 years, everyone will have access to a modern occupational pension scheme. There will be no excuse for bare subsistence in retirement, but without additional payments the basic auto-enrolled pension will not be generous – premiums of 8% of annual salary will not be enough for half pay at 65 to 67 or more.
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