Wednesday 16 May 2018

The madness of pensions maths

Great article here by Royal London, posing as a news article in the Evening Standard.

I guess the pension company PR think they are pushing a great line here about how we all need to save more and give more money to them so they can get more fees.

To me (this is a 'rant alert' phrase), the result just goes to show how completely crazy the pension system has become. Let's take them at face value, you need £260,000 as an average person to have a decent retirement. I have a great job in the city and am very lucky. I have worked for twenty years, if I work for another twenty I am still unlikely to get to that level of pension saving.

Indeed, over the past 10 years on a cash invested basis, my pension savings are negative - i.e. it would have made more sense to put money in the mattress than into work pension funds. As far as I can ever work out this is because the multiple fees they take out at the beginning of a years and other management fees consistently are higher than any returns I might make on their products.

However, I digress, if only to show that I am less than convinced saving into pensions is such as good idea for the savers. Moreover, to save £260,000 in today's money over 40 years requires saving £6,000 a year, or around 1/3rd of the average salary post-tax. This already includes the state pension and benefits top ups and assumes you have paid your mortgage, if you rent then it is a mere £440,000 needed - or just over half your salary for every year you work (assuming the average wage of £26,000 a year).

It would of course help if the pensions funds offered some compound growth on your investments with them but they try very hard indeed to avoid this outcome - for them, every penny kept is pure profit. The same with the crazy annuity rates which, thankfully, the Government has moved away from enforcing.

Logically, none of this is any good. The best way to save will remain taking out the largest mortgage you can afford at any time, paying the interest and relying in the capital growth. Alternatively, paying off the mortgage too if you feel that is less risky (I happen to think that long-term the risk is with the Bank not the borrower, but each to their own). Then upon retirement, sell your property and move to Greece, Thailand or wherever you can get some value for your hard work. On no account try to live in the UK on pension saving sin the future, this will not work out for you even slightly. All the media today is hued by the many millions of people on final salary pensions which today would require literally millions of pounds in pension savings, of which there will be near zero in the next few years as those schemes were closed long ago.

So in summary, Royal London are mad to think this strategy of reminding people how impossible it is to save will be a long-term benefit for their company - they should stick to lobbying the Government to make pensions compulsory which they have done successfully and then go for making higher contributions compulsory - but don't tell their victims this!


Anonymous said...

You're right of course. I had the (good?) fortune to be involved in the pension review within a well-known insurance company in the late 90s. The pensions we were reviewing had all been set up with projected returns of above 10% per annum. At these high levels of return the fees were reasonable. Unfortunately this environment didn't last and at present it couldn't be much worse.

I remember one or two policies with less than £1K in them which had been set up and then not paid into after a few months. Over the course of the intervening years the fund value had reduced to zero owing to the effect of the fees! I can't remember if the customers got any compensation or not.

Charlie said...

Serial contractor here - SIPP mostly in global equity funds. Yields on property are pathetic considering the hassle and illiquidity.

If anyone has any brighter ideas, I'm all ears.

Of course, terrible savings ratios and poor pension fund performance are yet another Bad Thing caused by a decade of ZIRP, but still, can't let the zombies fail.

In a parallel universe is a world that allowed everything to go pop after the GFC and is currently enjoying their seventh straight year of economic growth, with a generally happy population who find it easy to gain a stake in society, house their families etc and have never even considered voting for a Marxist PM.

Demetrius said...

Of course the government may he hoping for a major reduction in the average expectation of life to do the trick.

CityUnslicker said...

Demetrius - hoping for Trump to press the Red button is a bit much! All the migrants are young too, for a long while now life expectancy will start to increase again...

dearieme said...

"Yields on property are pathetic considering the hassle and illiquidity." It's owner-occupied property that's the recommended investment. The tax deal is fantastic. No income tax on the imputed rent (Conservative government). No capital gains tax (Labour government). Favoured treatment for inheritance tax (Coalition government). Property tax levels much lower than in (for example) many parts of the US (all governments).

Plus no new building at a rate that could threaten your property values (all governments).

Mark Wadsworth said...

Agreed. Also, there simply aren't enough stocks and shares to go round, if we all invested equal amounts and took the same pension, it would level out at about £5,000 a year. If people invest more than that, it just inflates share prices without increasing today's savers future pension income.

K said...


Life expectancy is already dropping in the US due to drugs and obesity. The UK is probably not far behind.

A lot of the obese teenagers you see these days are probably going to die before they're 50.

DJK said...

Today's 90 year olds are people who spent their twenties running around with a rifle in their hands. I've long thought that life expectancy would go down.

Of course, today's oldies have to be supported by the current working generation. This is either directly through taxes or through investment, where the oldies hold property/shares on which the youngsters generate a return. I happen to think that direct taxation is the more efficient way. But in either case, retiring aged 65 on 2/3 salary was not sustainable, with people living to 80+, and not having enough children.

I dare say it will sort itself out eventually, and we'll reach a new, stable equilibrium.

James Higham said...

"and relying in the capital growth"

Wonder what Mark Wadsworth would think of that.

E-K said...

To retire and not expect a drop in living standards is a bit unrealistic.

dearieme said...

All the wealth won't vanish. People in their sixties - or their children - are going to inherit an avalanche of housing. Maybe not much in the way of cash or shares, but houses galore.

Electro-Kevin said...


There won't be an 'avalanche' of housing. The houses are already there. All that will happen is that their prices will drop.

We Generation X-ers had a jolly bad time of it until the housing market collapse enabled us to get on the ladder. Subsequent adjustments have been disallowed by government/BofE policy.

andrew said...

Taking out a big mortgage and pay int only is a good plan as long as prices rise.
Just because they have for just about every 20 year period since the last plague (no, I couldn't find a source) does not mean that will carry on like that.
I sincerely hope that house prices will gradually fall as that would be better for the UK as a whole.

Saving for yourself is problematic as people do tend to buy c**p stocks or speculate on high risk events etc.
Worse, they can save too much.

Personally I think equities are a good bet as, well, if they really are not over a long period of time, you will probably have bigger problems than a small pension.

At the moment, secured corporate debt seems to have outperformed equities over the last 20 years or so. Available from places like wisealpha.

The whole concept of retirement needs to be rethought.
If you have an intensely physical job (army, binman) chances are they you have had enough by 60.
For most of the population, you may die of boredom about that age, but not from the physical stresses of working.

We have a rich country. Personally I like the idea of a universal basic income - from age 18 on.
It is politically possible now you have controls over your own borders.
If you are 18, it will support you through college. If you are 70, it will keep your house warm.
In between it would keep you out of food banks.

On the downside, there will be about 85,000 dwp employees with not much to do anymore.

Charles said...

I agree, the commissions and fees add up to the next miss-selling scandal. My pot increased due to the payments made into it.

As a trustee for a defined benefit scheme I have to avert my eyes when I see what people who retired 15 years ago receive compared to what I might get, yes the scheme is closed, I am a trustee because I have a small pension due but the majority of my poverty ridden retirement to be is up to me.

Gordon Brown was a criminal with regard to pensions and Osbourne was his willing pupil. A lot of smug public service workers, teachers, police etc are going to get a shock if they have not protected their gold plated pensions. I hope so because the civil service and the public sector are well paid, have great pensions and never stop moaning about how hard done by they are.

Raedwald said...

When I decided to buy a house in London at the nadir of the early '90s slump, a 100% endowment mortgage was the way to go. Of course the company were crooks - I reckon the first 5 years payments went to paying the salesman's commission and the next 5 to the brokers' fees. It was worth so little I cashed it in, regretting I hadn't done so sooner. It was an 800% increase in house values that allowed me to pay off the interest-only mortgage with no tears and a big capital pot. All tax free. So I used the dodgy 'mis selling' and made money from it. A chance to get 10 years payments back from a new mis-selling compensation scheme would be nice - a new car, maybe.

Electro-Kevin said...

Nothing like an investment you can live in and love every day. Always think of it as a home first though.

There really will be a problem when property-invested pensioners come of age at the same time though.

What will they do ? Downsize and create a drop in values ?


Equity release and create ever more rounds of property based money printing.

There is no nice way out of this problem. I favour euthanasia - I know quite a few elderly people who regret being alive in their late 80s and 90s. Bleak loneliness and infirmity.

I expect generation X to outlive many millennials. The fifty-year-old guys where I live and work are generally in better shape than the podgy twenty-year-olds.

Lord T said...

You forget the impact by thieves like Gordo who tool a lump sum from my pension that was so big it took me over a year of normal payments to get it back to where it was never mind the growth that was lost.

Pensions are not a good investment atm. For many they may as well have drunk it and had good holidays.

dearieme said...

Do wake up, E-K. The 'avalanche' will be the inheriting.

Steven_L said...

Are you serious? Global equities are up three or fourfold and your pension fund has flatlined?

Do your bosses frequent the same lodge / drink in the same clubs as your fund managers or something?

I see we're at $80 oil today, one of my 2018 C@W predications that wasn't it? If only I'd bought more than 10% oil shares. On that topic a drunk guy in a beer garden told be Hurricane is the one to own.

Sebastian Weetabix said...

IMHO it probably isn't worth being invested in formal funds and schemes at all. What's the point of giving your money to some pin-striped braying hooray in the city who will only buy lousy government bonds and FTSE100 constituents, and then take 1% (or more!) of your fund every year?

Let's say you put in £3k/yr every year increasing with inflation at 1% every year (we'll ignore tax for the purposes of my little illustration) and the annual return is 3%. Compounding over 40 years you'll get about £280k or so. Do the same sums with 2% return instead of 3% and you get approx £220k. Screw them. Get a SIPP, do it yourself, invest in boring things like alcohol/tobacco/oil and so on, reinvest the divvies and forget about it for 40 years.

Who was it wrote that book "Where are all the customers yachts?"

The internet should have dis-intermediated these fund managing parasites.

Electro-Kevin said...

"Do wake up, E-K. The 'avalanche' will be the inheriting."

I was being sarcastic.

The liquidation of housing will result in a slump in values - if, indeed, they all become vacant with the drama and speed of an avalanche.

Anonymous said...

CU: "Let's take them at face value, you need £260,000 as an average person to have a decent retirement. I have a great job in the city and am very lucky. I have worked for twenty years, if I work for another twenty I am still unlikely to get to that level of pension saving."

You should probably put more of your salary into your pension. I spent fourteen years with a US bank, and paid about 25% into my company plan for perhaps eight of those years. My pension fund is only a little more than the cited figure.

But even then, the projected pension figure makes me cringe each time I look at it. Varying between a lump sum and £950 per year, yes per year. Or £150K and £59,000 tax liability. Neither of those strikes me as a reasonable pension provision. Add to that the fact that £5 buys you absolutely fuck all of value these days, then project that down the road and pretty soon we'll be in Lira land.

Elecktro Kevin: "There won't be an 'avalanche' of housing. The houses are already there. All that will happen is that their prices will drop. "

Exactly, which probably knocks ten bells out of CU pension plan:- "The best way to save will remain taking out the largest mortgage you can afford at any time, paying the interest and relying in the capital growth."

Unless you are extremely good at picking the right time to sell.

MadNumsimatist said...

The only way I see out of this is a pension nationalisation. Our benevolent government says; “sorry you’re all screwed, but don’t worry; we’re here to help. We are going to help you by taking your failing private pension, combine it with your paltry state pension into an efficiently run government scheme. Of course, it will be separated from the public sector worker pensions, because, you know, we can’t touch them, because, well, you know, because. And oh, by the way, benefits will be paid in kind and will be means tested.
Here’s a voucher for your milk and cheeses, your buss pass and TV license are covered and here are another few coupons towards your gas and electric smart meters.”

Electro-Kevin said...

I see it this way.

If I'm fit in my '70s I'll still be working. If I'm not fit I'll be off to Dignitas.

Charlie said...

I think CU is right. The UK will be no place for a retiree who hasn't got a final salary pension. To cheaper and sunnier climes it will be.

As an aside, I received a letter from my next door neighbour's pension scheme. I *cough* accidentally opened it before I realised it wasn't for me. He's in his 70s and had an unremarkable career as an administrator at a small, privately-owned chemical production company. His wife didn't work at all, staying at home to raise their kids. They own their home outright, so no real housing costs to speak of. His pension? Over £3.5k a month. A MONTH! I have absolutely no idea how big a pot I'd need to draw that much - I suspect in the millions, which is more than my neighbour probably earned in total in his entire career.

andrew said...

Of course it all depends etc but around 1.3-1.5m

Thud said...

Kev... I'll do it for you at 50% off dignitas price....gotta think of the lads!

K said...

>I think CU is right. The UK will be no place for a retiree who hasn't got a final salary pension. To cheaper and sunnier climes it will be.

Our small house in Scotland cost 4x as much to heat as our 4x bigger house in England. Both are modern builds. If you have no rent or mortgage then electricity/heating will be your biggest expense so retiring somewhere warm is a good idea by default.

Lord T said...

There are millions of people who have not saved a bean in a pension scheme living to the same level of comfort they have for some time. So you don't need a £250K pot. If you are working you do however have to accept a drop in resources. Hopefully your mortgage and your big expenses, kids, will be less of an issue then.

formertory said...

One thing no-one's mentioned here is that transfer values from DB schemes are excellent (from the individual's standpoint) because of low annuity rates. One definite course to consider is to get your money out of the moribund investment clutches of the pensions managers and stick it in a SIPP. And then invest in a basket of ETFs (low cost) to provide micro- and macro-diversity across the globe.

Yes, you'd need to pay a fee for financial advice but the tax and family benefits of being in a SIPP are huge (inheritable pension pots, potential tax-free transfer). And not all advisers are rogues - it takes a huge amount of hard work to qualify as a G60 adviser.

So if your pension plan is flatlined because regulators have mandated over-caution you can improve your pension prospects hugely AND avoid "investing" in a single asset class. This is not advice, just comment, and I'm not an adviser.