Wednesday 17 March 2010

New Government Pensions to rip off low earners

Really you could not make this up. The Government, concerend that medium and low earners are not saving enough, decided that what was needed was a mega project to make people save. The idea of perhaps tax cuts to provide people with more income was not even considered.

Now however, the system is all set to go; and guess what? It is really expensive, becuase the payments in are small there is little scalable savings. As such the administrator is putting a 2% fee on all joiners to help cover costs. So if you are joining say 5 years before retirement this will be quite a chunk of your money.

The Times has a good article with an excellent quote from pensions expert Ros Altman:
“The idea of taking away 2 per cent of people’s money before they even start saving strikes me as high, but of course the costs of administering tiny pots of money for decades is also high. Call me cynical, but this scheme has disaster written all over it.”
My bet is that this whole thing is wound up within 5 years and a huge write-down is taken by the Government to refund everyones money.

Labour Minister Angela Eagle's view is funny too:
“Market failure for low and moderate earners means they have not had access to a suitable low-cost pension scheme and have not been able to save for their retirement. Nest will put this right.”
For market failure  read lack of saving by the people, plus no economic way of creating a return plus Government State pension being the direct, free competition. But now the Government are wading in to turn this around for the better....


Old BE said...

The best way to encourage people to save for their retirement would be for the government to butt out of pensions altogether. End the "NI" Ponzi scheme, tell people who are under 40 on 1st April that they will get no state pension at all and let the rest take care of itself.

Steven_L said...

I had a breeze at their website. Loads of consultation documents and talk about how they decided on their name.

Not a jot about how they invest your money! Who would want a quango to invest their life savings for them anyway? Bizarre.

My #1 pensions reform would be to enable anyone to take their employer contribution and put it in a SIPP.

Ratbag said...

Why bother? If you retire with any savings, you have to pay for everything. If you spend the lot on fast cars / loose women, the state will fully subsidise you in your old age.

Budgie said...

Low paid, self employed, some savings - that's me. I assume I should steer clear of this Labour wheeze? They certainly seem to have made a pig's ear of pensions so far.

AntiCitizenOne said...

> My #1 pensions reform would be to enable anyone to take their employer contribution and put it in a SIPP

You can transfer out of company schemes. Though it might cost you a fee.

Anon@9.30 said...

Perhaps this sector is special, or maybe it is because it is in my face, but I do not know any other area where there is such a collision of rapacity, greed, short-sightedness, unrealistic expectations and probably every other deadly sin.

The core of the idea is very good. People save money and when they retire they get a pension.
You get a tax privilege because you lose control of your money for a number of years, and you pay tax when you get a pension.

This principle is close to saying that you should be nice to small children and animals. Practically no-one disagrees.

Hell is not other people, but it is some of the things they willingly do just to make life easier for themselves.

In the late 80s and early 90s I was an Actuarial student.
We regularly went to smes and told them that they could fund a pension on the order of n/60ths for 10% of the pensionable salary. A lot of them signed up.
I thought it was a little odd that they were committing to something that they would not know the full liability of for decades, when the average employee stayed for about 4-7 years, and the average owner stayed in control for about 10.
The calculations and numbers were interesting and covered up the sense that the entire thing was a little ridiculous for a few years.

A small number of employers noticed that you could shelter profits and make tax-efficient payouts to employees by routing money through their pension fund, and indeed, could loan the money to the parent company (dodgy at the best of times).
I experienced secondhand some of the fear pensioners have when a cooker company did something unwise and there was a chance there was no money to pay pensions.

Accountants saw enormous piles of money and wanted to make use of that to flatter balance sheets.

This brought an increase in the rate of new regs and also woke the government of the time (conservative) and they removed the ACT exemption on dividends for pension funds (iirc). It did not gain them much, but did open the door.

As time went by, we had the Equitable tragedy, some of my ex-colleagues and my father were affected. Basically losses due to events (interest rates) were hidden using accounting tricks and the company then tried to get out of paying out to policy holders. Perhaps this pattern sounds familiar, but the Equitable was not bailed out. The government just waited/ is waiting until the members die.

Employers noticed that 'proper' Defined Benefit pensions are both expensive and expensive to run, and so offered Money Purchase pensions.
One thing they chose not to talk about much is that the average employer contribution drops by about 5% of salary in the transition.

There is not really a lot of difference between a DB pension and a MP pension, except that the investment risk is transferred to the employee and this is just not appropriate for most people.
The transfer of investment risk means that to be 90% (say) sure of getting the pension you want, you have to pay more in than if you were happy with being 50% sure of getting the pension you want.

In a DB pension scheme, you have a lot of people of various ages and you pay in at about the 50% sure level, on the understanding that if investments do not perform well for you, the strain is taken up by the earlier/later members who managed better than average.

It comes down to

- Pay lots in and possibly have some money left over on death because you paid more in instead of going on holiday for 30 years.

- Pay less in and trust other people if you are unlucky.

I will not talk about the IFA pension mis-selling scandals because there will doubtless be another one on the way soon.

Most people don't know this in detail but gain a sense and choose to

- Do nothing. Spend their money.

Which is where we are.

Anon@9.30 said...

If you are working for the government, you probably have a DB pension and that pension is woefully underfunded and the deficit is woefully under reported, but you will get your pension because it is the government, and your children will pay for it.

If you don't work for the government, there are lots of nice means-tested benefits and you may well say that the 'stamp' you paid over the years funds this, but it did not and does not, but you will get your pension because it is the government, and your children will pay for it.

Someone in government noticed this, did not have the nerve to tackle the public sector immediately, and invented NEST.

NEST effectively cuts the cost of means tested benefits.
It does not provide a real benefit to a good proportion of the potential members (people who do not have a pension already, generally the lower paid).

There is a cost of starting a pension.
If you are paid 15,000 pa, the total cont is likely to be about 8% of band earnings - say 800 pa.
The administrator can take 2.3% of that - 18 quid. That is not much.

They had a chance to exempt these savings from the means test calculation and the Labor government stopped that amendment.

A chance to re-introduce a sensible self-reliant savings culture back into Britain was lost.

This is what is very depressing, not the charges, but that people will think the problem has been solved and they are properly paying for a pension - and how they will feel when they realise that is not the case.

What is also not being discussed is that even if the pension is not absorbed by means testing, 800 pa for 20 years does not buy much of a pension at all.
You might think you are securing your future, no, you are securing your sky sports subscription.

Sorry about the rant

CityUnslicker said...

ACO - but you can't take your company part with you.

Ratbag nails the core issue.

BE - We need to end the ponzi scheme as it will all fall apart within our lifetimes.

CityUnslicker said...

Anon - A fine rant. The 2% is quite a lot though when we can be certain the 'investment' will be long-dated gilts to help the Gov out its mess. these pay little interest above inflation.

Making your later points even more worrying.

Joanna Cake said...

The ex had an Equitable Life pension which we paid into for two decades or more(I don't know if there's a connection but we also had a Betamax video, an endowment mortgage and a pension-linked mortgage - to the Equitable Life naturally).

We did manage to get most of the pension money back and now it languishes in another pension account - the name of which escapes me (sorry, senior moment) - and we dont put anything more into it because it all seems so pointless.

Sometimes I think my Gran sticking her cash in a box in the wardrobe to pay for her old age wasn't such a bad idea after all. Because she hadn't paid in enough contributions to get the full pension, everything was subsidised and she got free carers when she needed them. If she wanted to treat herself or the grandchildren, she just took a few quid out of the box.

My father has a good pension. His view is that we should use it all up now because, if he becomes infirm and he has any savings, he doesn't want the Government taking all of it and making him sell his house to care for him, leaving no inheritance to cover me and my siblings in our old age.

It's really scary reading Anon because I have children.

hatfield girl said...

I read all this and get the same reaction as reading about opinion and political polls and statistics and stuff.

Then a red mist, piazzale Loreto moment overwhelms me.

'£800 pa for 20 years does not buy much of a pension at all.' But £16 a week is still quite a difference in the quality of food you and your children eat for 20 years.

Laban said...

12 or 13 years back I was working on restitution for pensions transfer mis-selling, and deaths and retirement cases were priority.

It was depressing to see the number of people whose private 'pot' was ten or twenty thousand and who (because of the benefit system/minimum income guarantee) would be no better off than if they'd spent the money on cars or holidays then let the state stump up.

The benefit system in this country = moral hazard on a scale which (almost) matches the MH of bailing out the banks.

Anon@9.30 said...

The thing is that Pensions and the issues around them are one of hte thing that summarise/ makes clear what it is to be British, and our values.

In the US, if you don't save enough and get old, you pretty much live on the streets and die (possibly a bit over-eggy) but the point is that out there you are free to make a bad decision and then suffer the consequences.

In Europe, if you don't save enough and get old, the state supports you.

What sort of country do we really want?

I do not want to live in a country where old people die because they cannot afford to heat their houses or eat properly.


I do not want to live in a country where I subsidise all the people who went on holiday rather than saved for a pension.

I hate to say it, but yes, I am advocating compulsory pension contributions (a bit like Australia) at a realistic level.

We have nothing like that in the NEST.

Anonymous said...

The government is totally out of touch as are the conservatives over this matter because if someone is layed off they will not be able to claim benefits after 6 months used to be 12 months, therefore are penalised because they have saved up more than the threshold on capital, the likely hood of being layed off is increasing (double dip and that sort of thing) that is why the apparent drop in jobless numbers occurs because they are non -claimers, that one was instigated by Maggie and the 6 months by B'liar/Brown, manipulate the stats. Little Jimmy Brown is losing the plot if he has not already lost it.

Demetrius said...

My impression from low income earners I know is that it is not a question of "won't save" but that of "can't save" because of the pressure on incomes and the way certain costs affecting them are rising more rapidly than those for other groups.

CityUnslicker said...

fine comments here today all. One furter point:

We need a real pensions system. Set to start at a realistic age from 2015 onwards - 70.

If the pensionable age was set higher then the annuities would be better for all, but this would impact lower savers even more.

We will need to modify age discrimination law to help handle the changeover.

Sounds horrible, but the other option is national bankruptcy in the 2020's even if we make it through this current crisis.

AntiCitizenOne said...

Just get rid of the concept of retirement altogether and have a citizens dividend instead.

Anon@9.30 said...

The apocryphal story is that the pension age was originally set at 65 by the german chancellor bismark.

The reason he chose 65 was that the average age at death amongst working class males was about 64 (women did not get pensions).

factoringcompany said...

Trying to get people to save now is definitely harder as there are so many more things people want to spenmd their money one, we live in a consumerist society!

I don't think state pension and benefits should be dropped though.


Anonymous said...

As someone who is set to retire this September I can remember men who at 64 were slowing down (you know the silly old dodderers) the younger ones among the readers here 30 somethings have known the good times, especially south of Watford, they are now feeling the effects of jobs vanishing to India, China they can do the jobs done by the city workers in London at many multiples less than what they get, gambling is the same everywhere. In the 80's the jobs advertised in the local newspapers always quoted "not over 35 years" the very same people that about to retire were hit by that one, I was one. There seems to be a lot of the younger end that need jobs why not concentrate on them, Maggie did all those years ago, give them chance to build a pension pot but little likelyhood of the on basic minimum.

CityUnslicker said...

Not sure I get your point anon. I agree we need more jobs. China and india won't be threats for ever, China in particular is about to suffer large wage infaltion which will lessen the need for jobs to go there, plus its population is ageing rapidly. We can grow jobs in the UK, we just need the right market environement as Thatcher did create in the 1980's. We start from a better place now becuase we are not burdened with legacy industries, just wasteful state generated non-jobs.

AntiCitizenOne said...

Want more jobs?

Lower the punishment for employing and working (Employee and Employer NI and Income Tax).

Want more of an economy?

Lower the punishment for spending and provisioning (VAT & Corporation Tax).

Budgie said...

factoringcompany said: "Trying to get people to save now is definitely harder as there are so many more things people want to spend their money on, we live in a consumerist society!"

No, it's not that. It is because we no longer trust pensions.

The monetary gain of a pension (favourable tax treatment), is not worth the loss of control of your own money given the poor performance of most funds, pensions robbed by employers, Equitable, and government incompetence/meddling.

R.Brown said...

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Transfer My Pension