Saving in a pension? You are as well off on benefits

Neil Faulkner
by Lovemoney Staff Neil Faulkner on 27 August 2012  |  Comments 50 comments

Saving for years to build up a £40,000 pension pot will leave you just £5 per week better off than if you lived on benefits. What's the point?

Saving in a pension? You are as well off on benefits

Saving for a pension is seen as a sensible thing to do. But is it really not a giant waste of money?

Take a typical renter who retires at 61 after becoming, for all intents and purposes, unemployable.

If he has little savings, he might get over £300 from the taxpayer each week in the form of pension credits, housing benefit to cover his rent in full, and council tax benefit.

The exact amount will depend on his circumstances, such as whether working-age adults live with him, whether he has disabilities, and how much his rent is.

Now take a 61-year-old renter who has saved a £100,000 pension pot, who could take a private income from it of around £100 per week.

According to the Pension Service and the Government's online calculator, Benefits Adviser, his benefits are going to be reduced by precisely the amount he could receive in private pension income. His local council says that the pension pot will also be taken into account when calculating other benefits.

His total potential weekly income, including private pension and benefits, will also then be just over £300. In other words, until he's 65, his £100,000 savings have amounted to nothing.

The insanity continues post 65

Many younger people will face a higher state retirement age, but someone today in their early 60s will start receiving the state pension at 65.

At this point, the benefits situation changes.

A 65-year-old renter with no private pension might get a total income in benefits of around £330 per week from £310. (Remember, the actual amounts vary considerably depending on your situation.)

A 65-year-old who has saved a £100,000 pension pot will get a total income from state benefits and the private pension of perhaps £355 per week – or just £25 more per week than someone relying wholly on benefits.

In other words, he's getting just £1,300 more per year, despite his large pot.

The tax situation will undoubtedly change again in following years but, at that rate, he's going to have to live until he's nearly one-and-a-half centuries old before he has got his money's worth from his pot, compared to if he just relied on benefits.

By this point, inflation might have made his private savings worthless.

Smaller and larger retirement pots

Most people save much less than £100,000 in pensions.

A 65-year-old who has saved £40,000 might typically take £10,000 as a lump sum, to pay off debts and go on holiday.

That's the 25% of his pension pot that he's allowed to take up front, tax free – which is a fantastic benefit of pensions.

With the remaining £30,000 he might get around £35 per week in private income to top up his benefits.

However, his benefits are reduced by about £30 per week precisely because he's getting that private income. So he'll only really be £5 per week better off compared to someone who didn't bother saving for retirement at all.

Such a retiree might have to live close to two centuries before he'll have been able to get back his £30,000 retirement pot.

The person on benefits, on the other hand, has already spent the money in his youth that he should have saved in a pension, and therefore got full use out of it.

Someone who has managed to build up a £1 million pension pot might take “just” 29 years to get his money back, but this could be 11 years longer than he should expect to live.

Is property the way out?

On the surface, using property as your pension appears to offer a good way out of the conundrum. Your home is not taken into account when calculating the amount of pension credits you receive.

You can also turn it into cash whenever you need to by downsizing or through equity release plans.

However, as shown above, the taxpayer pays the rent of many retirees. One of the big benefits of being a homeowner is that you escape paying rent after a few decades; our renter on state benefits has managed that without the high cost of buying a home. He also has very few home maintenance costs compared to a homeowner.

Before retiring onto state benefits, he could potentially have paid less in rent and related costs than some people buying did in mortgage and maintenance costs.

Retired homeowner benefits

In my tests using Benefits adviser, anyone who owns their home outright will receive exactly the same benefits, minus housing benefit, putting them in the same situation.

The benefits system makes a mockery of my recent article that tries to estimate at what price buying a house is worth it compared to renting. (Read when When should you stop renting and buy?)

You pay the high cost of buying so that you can eventually get out of paying rent, only to find that someone who didn't pay that high price gets out of paying rent at retirement anyway.

Consider morals and political risk, too

I'm sure most people agree that it's right that we take responsibility for ourselves if we can afford to. It's also reckless and ill-advised to just rely on the Government to pay us similar benefits in future.

Auto-enrolment will certainly help, although the system would surely work better and more fairly if most people were forced to save for their own futures.

But these are questions for voters and the Government, not us here.

What we have to do is decide how to save.

Shift away from pensions

If you rely on benefits supporting you, you're taking a big risk. But the same can be said of relying too much on private pensions.

Pensions are so inflexible. When you put your money in, you can't take it out until you retire, and you can only do that in the way the Government of the day says you can.

But there are no wonder cures.

Share ISAs and other savings currently have the advantage that you can spend your money whenever you like and for whatever reason you like. However, those savings will impact your benefits in pretty much the same way as having a private pension.

Buying a home comes with high costs in the early years as well as ongoing maintenance, and a renter on benefits is likely to have his rent paid for him in retirement anyway.

However, while buying might fail to pay off for you as well as you might expect, it will for your heirs. Plus you have security in not relying on handouts, and no landlord to kick you out with three months' notice.

What do you think? Are pensions fatally flawed? How are you saving for your retirement? Let us know your thoughts in the comment box below.

More on pensions and retirement:

Cut the cost of passing on your pension

Why young people MUST opt in to auto enrolment

Annuity meltdown will eventually end

The next pensions scandal

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Comments (50)

  • electricblue
    Love rating 769
    electricblue said

    Unemployable at 61? Your best pension is to continually improve your skills set so that you can work self-employed in something to suit your physical abilities. At 61 you might not get a job at the steel works, but there should be thousands of things you can do to earn money. With the standards of numeracy and literacy possessed by so many of the 'Mickey Mouse' degree generation, there are always opportunities for those who can string a few sentences together, even if they do not have technical skills.

    My father worked for me part-time into his seventies, happily turning out vehicle accessories from his garden shed. My uncle was making very detailed railway models and selling them for hundreds of pounds each until his early eighties, when his eyesight deteriorated. With increased longevity and health into old age, attitudes to retirement really have to change.

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  • plc69
    Love rating 6
    plc69 said

    You've certainly made me think twice about my pension. I reckon I'll cancel my direct debit, stop paying in and take my chances that the government will look after me.

    I didn't realise that people's rent is paid once they're in retirement. I reckon I'll sell my house when I'm 64, spend the lot on a cruise and a couple of fast cars and enjoy myself at the taxpayer's expense.

    Wonderful.

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  • BobbyW
    Love rating 10
    BobbyW said

    For the first time I 100% agree with the Pornstar (private joke lol)

    You are spot on EB, I read somewhere that anyone born in 2012 can expect to live to mid 70's before qualifying for state pension so my daughter has quite a long working life ahead of her!!!

    So becoming unemployable at age 61 without adequate financial provisions is just not an option unless it is through ill health.

    Really enjoyed the article though Neil, very thought provoking and eye opening.

    Thanks and keep up the good work.

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  • unsworthsteve
    Love rating 23
    unsworthsteve said

    If you want to live a basic life free on the state in the UK then it seems like its possible. why should it be a surprise that you can continue that on into retirement? For those who want to live a life that is above basic then working is the answer and so is saving for a pension.

    Typical blog journalism to set up a falacious generic argument based on a false premise (the article implies that most people with a private pension are saving for a 40 grand pension pot) and then paint a dramatic headline around it to stimulate comment. Oops - I just fell for it.

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  • vinasdevera
    Love rating 2
    vinasdevera said

    People have been discussing the 'Pensions Timebomb' for many years now, so I think that anyone who does not make some provision for themselves and relies wholly on the state has to be barking mad. That timebomb will go off in a slow and painful way, for our children probably. The concept of expecting the state to fork out for you on 'retirement' when you have sponged off it all your life makes me nauseous and the more we can do to discourage welfare culture now, the better for our kids. We need strong govt to achieve this - sadly lacking at the moment.

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  • LandOfConfusion
    Love rating 67
    LandOfConfusion said

    What you really need is to collect an asset class which doesn't fall in value, which is easily stored and easy to sell (highly liquid).

    Of course buying gold and not telling the government about it when applying for benefits is illegal.

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  • AlanThomas
    Love rating 35
    AlanThomas said

    Total agree Neil,

    Many years ago if you could not generate £60K in your pension pot you would simply rob yourself of benefits in the future, I wounder what that figure is today

    150K...200K...I'm into my 26th year of paying into 3 personal pension plans, retire at 61...I wish!!!

    Alan

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  • russbiker
    Love rating 70
    russbiker said

    The article highlights perfectly the absurdity of our benefits culture.

    What it doesn't make clear is that anyone living on state benefits is living in near penury. True you need a lot more than 100K to live above that, as Neil has outlined perfectly, but to me, that just indicates that you need to save a lot more if you want any sort of an old age.

    It might be nice to think of everyone working into their seventies, but the ill health frequently concomitant with old age very often precludes this option - you just won't know until you get there.

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  • elcadobes
    Love rating 10
    elcadobes said

    If it weren't for the tax relief no one in their right mind would invest in a private pension. I was always told that it was very important to have a pension and so chose Equitable Life when I started working for myself. Nat West also recommended that I move my final salary scheme to a private pension provider in the 1990s. When I complained during the 1990s pension crisis they pooh poohed me. In the end I got compensation because the government told them to pay me and several million others.

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  • ashdown
    Love rating 0
    ashdown said

    Just for the record if you have a large pension pot you can go into flexible drawdown and get all your own money out after setting up a guaranteed £20.000 income with some of it, so if you are going to slag off pensions you should give all the facts about them and not just the headlong grabing ones!

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  • catswin
    Love rating 5
    catswin said

    Having just reached my 60th, I have received the offer from my private pension fund! What a joke - only half what I was expecting and have been getting promises for in the statements over the last 30 + years!

    I have shelved taking it for now in the hope that things will improve slightly - or I may just pop my clogs waiting!

    This has to be just the worse time ever for anyone to buy an annuity - and worst of all, if things get better, you can't change a thing - you're stuck with the offer you accepted for the rest of your days - whatever the financial weather.

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  • Iamcoldsteve
    Love rating 329
    Iamcoldsteve said

    BUT, if you pay 5% into your pension fund, AND your employer pays 5%, AND the Gov't pay 2% (as tax relief at 40% of the 5%) then it is worth it

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  • Iamcoldsteve
    Love rating 329
    Iamcoldsteve said

    CATSWIN,

    Please consider all your options before 'shelving' it. Have you shopped around to see what your 'pot' is worth to other annuity providers? Please don't just consider what the fund has offered.

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  • Arblaster
    Love rating 43
    Arblaster said

    You will not get to receive any pension. The government are moving your retirement age until after you have died.

    Report on 28 August 2012  |  Love thisLove  8 loves
  • LastChip
    Love rating 92
    LastChip said

    Eureka!

    At last, a LoveMoney article and writer that recognises pensions for the lower paid are a waste of space under the present system. Something I've been bleating on about for at least the past five years.

    And it is precisely why, the proposed automatic opting in of the new scheme, will end up to be the next great miss-selling scandal.

    I've never said, don't save. Simply avoid pensions like the plague, unless you're a higher earner in the upper tax brackets. Then it may just still make sense. But even then, needs careful calculation to see if the tax benefits really do outweigh the loss of control of capital and the potential return.

    Pensions as they stand, are the biggest financial con for the lower paid of all time.

    Do yourselves a favour, recognise it and do something about it. Because all the scrimping throughout your lives thinking you saving for retirement, is an illusion. And rest assured, I'm talking from personal experience.

    Report on 28 August 2012  |  Love thisLove  7 loves
  • oldhenry
    Love rating 343
    oldhenry said

    Good article , but if course the flaw is quite obvious. No governmentwill be able to afford to keep these older people in retirement. Benefits will be progressively reduced to make them affordable and to deter claimants. You will find that the NHS becomes less free over time too. If you want treatment, whilst warm and upright ,you will have to pay. The wonderful welfare state was good whilst it lasted , for some, but it is unsustainable as the population grows and the economy shrinks. No doubt it will skake out some of the population who will scarper off to look for better billets. My son has already gone to the USA to work in computers and did so four years ago. The trouble with this is that theose who have skills, and paid plenty of tax, wil go leaving the dross behind that want to live off benefits. Well , I have a final salary scheme and plenty of savings so, no doubt ,the government will have a field day when I die as they rake in the last 40% in tax from my estate.

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  • Farab
    Love rating 24
    Farab said

    Don't forget that once the change for a flat-rate (estimated at £140/week) pension goes through, you will receive the flat-rate pension on top of whatever private pension provision you might have.

    Also, as already stated, if you're relatively young, then the chance that you'll be getting any decent pension or other benefits (if any) from the government when you retire is very slim. Whatever you decide to do with your money, be sure to look after yourself, because relying on someone/something else to look after you is probably the biggest mistake anyone can make.

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  • HappyHacker
    Love rating 18
    HappyHacker said

    I agree with most of the article, of course it was a bit OTT but still valid. The biggest issue to me is that you give your pensions savings (unless you have a SIPP) to a pensions company, they then spend it how they want over the next 40 years and if there is anything left you get an annuity which pays peanuts. That is assuming there are no more changes to the regulations that the Government of the day may need make to take even more money out of pension savings to pay for the public sector pensions.

    My advice to the young for many years has been get into a public sector job so you can get a final salary pension. Don't bother with the private sector unless you can get into the higher echelons of financial services. The biggest mistake I made was getting out of Local Governement 40 years ago because it was too boring. I worked for two years in the Civil Service (Fixed Term Appointment) I get more from those two years than I will from 10 years of high private pension payments.

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  • BobbyW
    Love rating 10
    BobbyW said

    @ Farab, and how long do you think it will be before they change that? There is no ways that it wont be moved to some sort of means tested manner to reduce the benefit levels to those who have provisions surely?

    The problem is no-one knows how and if the state will be able to keep the state pensions and at what level for how long its all guess work as a new government can change it at a drop of a hat?

    I have paid enough UK taxes in my working life (assuming I reach retiring age) to be able to rely on the UK government to provide for me... after all they have been stealing from me from the day I was born along with everyone else.

    VAT, Income Tax, Tax on Fuel, Alcohol (Dont Drink anymore), Smoking (Given up), Road Tax, Council Tax, Inheritence Tax, Capital Gains Tax.......

    IF I have paid 40% of my income to the goverment during my working life, I dam well expect to be kept in my retiring age without having to spend my own money to save for retirement, Any where else in the world this would be class a blatant robbery.

    GIVE A MAN A GUN HE CAN ROB A BANK, GIVE A MAN A GOVERNMENT HE CAN ROB THE WORLD.

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  • Farab
    Love rating 24
    Farab said

    @ BobbyW ... True, that's why I ended my comment with ... look after yourself, don't expect someone/something else to do it.

    That's why, while I totally agree with your comment "I have paid enough UK taxes in my working life (assuming I reach retiring age) to be able to rely on the UK government to provide for me", I definitely won't be counting on it. Like you said, the rules/amounts can change at any time.

    I have the means to save for myself, so I will be doing so. Otherwise I won't be able to forgive myself in 20 years time when I retire and all the government is providing me with is a two roomed apartment (not two bed-roomed, just a single living space, plus a bathroom) and just about enough money to put a small meal on the table.

    To advise people to not save, because apparently the government will be looking after you just as well as if you had saved, is dangerous.

    (if you should be saving into a pension though, is a different discussion all together)

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  • Perry525
    Love rating 26
    Perry525 said

    The situation is worse than you think, should you need care later in life, your home can be taken to pay the fees. Leaving you with nothing to show for all those years of saving.

    Someone who has been sensible and lived in a council house all their life and spent every penny.....will get free care until they die.

    How ill informed were we!

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  • muira
    Love rating 30
    muira said

    cannot understand the need to save for retirement,,

    it is when you are young,extortionate mortgage, dependant offsprings

    various other outgoings,when you need money..(my fathers quote)

    .

    my father did not know what to spend it on,when he started drawing it,,and he was too knackered to,having worked himself into poor health and death to earn it

    does not pay to be ambitious,hardworking,in this country

    go abroad and do it,where they reward and appreciate it

    no one needs to live on the streets here,only by their choice

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  • CuNNaXXa
    Love rating 410
    CuNNaXXa said

    Well, it is all swings and roundabouts to me. So, take the average wage, which is supposed to be around the £25,000 mark, then take off all the taxes that you would pay, such as income tax, council tax, fuel tax, premium tax, beer tax, fag tax, window tax, tyre tax, walking tax and talking tax, there isn't that much left.

    So, what do you do? Do you invest in a pension pot, or enjoy life a little and party?

    Well, obviously our governors want us to sleep, work, and stay at home doing nothing other than watching X Factor, while we would prefer to sleep, work, then spend an evening enjoying a pint or two with our mates.

    If you think about it, more than 50% of what we earn goes back to the government, increasing to even more as your earnings increase, unless your name is Jimmy Carr, or one of his rich mates, in which case less than 50% is taxed, but that is for another article.

    The long and the short of it is that if our governors want us to put money aside, we need money to put aside in the first place. They cannot argue that we should live a life of poverty to scrimp and save for a pension when all we get is one life to enjoy in the first place. This is not a computer game where we can reload a previous level and start again. If our lives are already humdrum, then who the hell is going to bother even thinking about tomorrow, when today is so boring.

    So, when VAT is at 25%, and we have a phone duty, and other forms of taxation to help the government spend more, are we really going to consider giving the little we have left to a pensions administrator, who probably drives around in an AMG? I doubt it.

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  • electricblue
    Love rating 769
    electricblue said

    @Oldhenry

    Yes of course we know everything is better in the USA - NOT! My company employs the owners and five others in the USA but cannot afford to provide medical cover to employees (probably end up paying the $2000 per employee Obama surcharge instead - boy is that guy really stupid). None of our employees choose to buy themselves any kind of medical cover so rely on the state, a situation which shows the NHS to be pretty damn brilliant for what it offers. The USA has a devil take the hindmost attitude to health and welfare and until there is serious reform I couldn't stand to live there. My USA business partrner visited the UK and preferred everything here (food, beer, women, history etc.) apart from his perception of our NHS, but for the $450 a month he pays in health cover he could get some pretty serious private plan in the UK. .

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  • mambach
    Love rating 37
    mambach said

    Quite so, Neil. If you're under about 40, don't bother. You aren't going to get to retire, so why bother saving money you haven't got to pay for other peoples luxuries - namely the pension fund managers.

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  • yocoxy
    Love rating 152
    yocoxy said

    "you won't get a pension"? "you won't get to retire"? Some people seem to misunderstand the basics. There is no law against retiring, only that old age pension benefits are being paid at an increasingly late age. All the more reason to make your own provision and retire at an age that suits you.

    Of course it is possible to live on benefits and in rented accomodation for your whole life but I'd rather work, invest, take nice holidays and live above that basic minimum (although it does strike me as too nigh).

    I'm not an advocate of pensions only. The best advice is and always has been a spread of investments. Cash isa, stocks and shares isa, pension and a couple of properties.

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  • Python
    Love rating 1
    Python said

    Most of our savings are currently in ISAs, for various reasons. If some of them had been diverted to a pension plan instead we wouldn't have had the money available to pay school fees (2 children have won choristerships, one excellent scholarship but for the other we have to meet a fair proportion of boarding fees). It is quite possible that we would have qualified for bursary assistance had we not had accessible savings. Mildly frustrating, as I need those savings for the long term if we can manage to protect them.

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  • wiliamson
    Love rating 4
    wiliamson said

    I am a 59 year old woman. I have to wait until I am nearly 63 to get my state pension but the higher flat rate does not come in till the year after. I left my job in London as I could not afford the latest rent increase on my bedsit (converted to a one bed by putting a wall down the middle) to come up North where the cost of living is cheaper. But then I came down with rheumatoid arthritis so the chances of getting a job are about zero. I worked, saved and contributed to an employers pension for the last 20 years. Because I have savings I am only entitled to JSA for six months. With the lower pension (c£100) and my pension from work (c£50), I am just above the level where I would be entitled to Pension Credits, which I presume would include other perks like help with rent and rates. So it looks as if all that money that I and my employer put into a pension for twenty years, was just a free gift to the government. And I cant live a better life on my savings, as I need them to live on - in the same penury I would be in if I was completely on benefits. And I will still be living in poverty in retirement despite contributing to a pension for 20 years.

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  • Geoff Carse
    Love rating 7
    Geoff Carse said

    I think the lesson here is: If you're able to save, SAVE A LOT, or not at all. A little savings is a waste of time.

    A good way to get the feel for what it would be like living on Government handouts once you retire is to try living on that kind of money right now and see how you manage. Try it for a month then ask yourself if this is the way you want to live during your twilight years.

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  • OldJock
    Love rating 1
    OldJock said

    Interesting one.

    I expect many who have bumped along on unemployment benefits for years can't wait to hit the age when this lot kicks in!

    Perhaps people with limited pensions need to be in a drawdown situation, rather than annuity, and adjust their income down by drawing little and/or recycling some income back into a pension fund. They may ultimately leave some pension fund to their children less a tax take.

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  • CuNNaXXa
    Love rating 410
    CuNNaXXa said

    One question I would like to know is why does someone in retirement who needs care, rather than rest, have to hand over their assets to pay for that care?

    It seems that if you are pre-retirement, care is paid for from you NI contributions (NHS), yet when you reach retirement, your care is suddenly taxable from your assets.

    Remember that it is not always pensioners who need care. There are plenty of sub 65 year olds who need constant care, yet the government doesn't confiscate their assets to pay their hospital or care bills.

    So, why are those who have paid the most (the pensioners) treated differently from those who have paid less (those who still have working years ahead of them)?

    Obviously, the government realise that the elderly are easy targets.

    If you are of working age, and your partner was spending quite some time in a hospital, being cared for, how would you react if an NHS official knocked on your door and informed you that you and the kids would need to leave your home, because they needed it to pay for the care that your NI contributions cover you for?

    I still remember when Gordon Brown accidentally stepped in a pensioner, and complained bitterly about the stink left on his shoe. That is how our leaders see our elderly. Nothing but a burden on their tax bill.

    After all, how can you squander billions on hair brained schemes when you have to keep handing over cash to decomposing corpses that refuse to die!!!

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  • billyboy121
    Love rating 18
    billyboy121 said

    This is a article has a great premise - it's really unusual for someone to step out of the herd position on pensions and look at what they mean for people in reality. My own view is that the pensions industry is a racket that exists to prop up the FTSE and generate tax revenue for the government. It only continues because of the tax breaks on cash put in and the PR undertaken on behalf of the substantial amount of jobs it creates for those involved in running it.

    The reality is that everyone needs to think about how to get by when they can no longer work - the State is not going to be able to give you everything you want, unless you want very little, so there is a need to make provision for that time from existing income. Everyone has to find their own way to achieve this, but I agree that where a person has no real possibility of creating a fund large enough to significantly out do the position they'd be in if they had no savings at all, then it does seem rather pointless - the obvious issue there is that there is no guarantee that State benefits will continue at current levels - no one knows what the future will bring, to choose to rely on State handouts and spend rather than save is giving a hostage to Fortune.

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  • Mark1234
    Love rating 0
    Mark1234 said

    oldhenry - I would have thought anyone using this board would have well worked out how to reduce/remove the threat of a 40% charge after death on their assets. It isn't that difficult to utilise the various allowances to avoid this one...

    Good article, makes you think about pensions. I always think these arguments seem to be either/or though. I would think (and I do) that investing across several asset classes is the smart and sensible thing to do. Buy-to-Let, Fine Wine, Pensions, ISA's, Land, Woodland etc are all good in their own way. While you likely wouldn't want to be 100% in one category, spreading the investments around makes sense...

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  • richardja@mac.com
    Love rating 0
    richardja@mac.com said

    I agree with all of the above and am constantly amazed about what a 'Ponzi scheme' I think pensions are. Considering that a pension is your own money, they are incredibly inflexible. Why can't we use it for 'buy to let' for example, which in my opinion is a much better pension vehicle.

    I also found out this week, that if for example you have a pension of £500K and you use it to buy an annuity, which gives you say £25K per year, if you die after 2 years, the pension dies with you, so effectively you lose £450K.

    Also, if you were to buy an investment property for £500K now (that is SIPP allowable such as student accommodation) , then retire in 10 years you are still limited to only what the annuity would pay you. For example if the rental income by that stage was generating £50K per year, you could still only take £25K out!

    Please correct me if I'm wrong, but this is what a pension advisor told me yesterday!

    I am looking at ways to get my pension money out now, even if I have to pay a huge penalty. I still have 20 years before I retire, so I am acting now!

    Report on 30 August 2012  |  Love thisLove  0 loves
  • robby
    Love rating 3
    robby said

    You should never forget that when you own your house and discover that you cannot get any benefits, the state will snatch it off you to pay for your care home, whilst the other non saver will get free care!!

    The only thing is you can move to a nicer area if you become surrounded by non savers living the high life on the tax you are paying.

    Report on 30 August 2012  |  Love thisLove  1 love
  • subaruchick99
    Love rating 10
    subaruchick99 said

    Having recently received my Standard Life statement telling me I have 52k in a pension and can expect £1,000 a year when I retire I am weighing up whether it is realistic that I will live to nearly 120 or not and think this article succinctly highlights that the only people making any money out of pensions are pensions advisers. Luckily I also have a flat in Edinburgh which I rent out and despite the downturn in the property market I am surprised that there is little talk about how valuable property is a safety net. My mortgage is £600 per month and I get £500 in rent. Within a couple of years it will cross into profit. In 20yrs when it is paid off (having earned an income for me in the meantime also) I could imagine it will already pay me 10x what my pension will. And that is considering that I bought it even before the market crashed and could pick up another flat probably for the same or less. I even have a letting agent who does all the work for a very reasonable fee. And best still I could sell it, live in it, etc - it's much more in my control than any money I've ever put into a pension. I have no intention of getting the state to support me, but I damned if I am going to let pension companies be master of my destiny either.

    Report on 30 August 2012  |  Love thisLove  2 loves
  • Kent
    Love rating 10
    Kent said

    To Iamcoldsteve,

    I hope you take into account that the pension provider and administrator will cream off typically 1.5% of the amount in your pension pot EVERY YEAR. (You can see typical rates on pension provider websites; try Standard Life for instance, they make depressing reading!) So, if you save for 40 years, then the amount you put in each year will, on average, have 20 years of 1.5%pa being taken away, or an average of 30%, before it goes to provide your pension. If you leave for another employer, then the proportion they cream off rises of course.

    In addition, the government does not give you your tax back. It is only deferred, until you retire. If you have an income after retirement above the Age Allowance Ceiling of £25,400, then you will pay twice as much tax on some of it.

    Pensions are just one of life's little gambles. Some you will win, some you will lose.

    Report on 30 August 2012  |  Love thisLove  0 loves
  • Emendi
    Love rating 0
    Emendi said

    To richardja.

    Sorry to say that your pension provider is right. In drawdown you are now only allowed to take 100% of GAD, the Government Actuary Department figure for annuities. It was 120% up to March 2011 but the government obviously don't want to risk us pensioners running out of our own money by taking it! I managed to get a drawdown amount of £540 per month because I knew about the impending change (through the financial pages). I expect this will drop drastically when I am forced to review in 3.5 years because I'll have drawn down around £60k and I will have to accept the then GAD annuity rate. However, it means at least that I'm taking the maximum of MY own money.

    It's an absolute disgrace that annuities require us to live into our 80s to be able to get our pensions out. It's rarely worth going for a lower escalating rate now for the same reason. I'd be interested in seeing more info on whether it's nearly always worth taking a flat rate annuity. I bet it is. I'm 62 and I bet my needs and desires are greater now than they will be in 20 years' time, with all due respect to those in their 80s so I'll be going for the best flat rate I can get in an attempt to leave a big fat zero to the pension provider.

    Report on 30 August 2012  |  Love thisLove  0 loves
  • wiliamson
    Love rating 4
    wiliamson said

    I would probably need a financial advisor to clarify whether putting money into my employers pension scheme was a waste of money for both of us (and my employer has a massive pension deficit as has everybody), and also saving. But the current advice is, if your employer offers a pension scheme, you would be a fool not to take it. In retrospect, my employer could have saved his money, and the money I put into a pension would have been better saved into an ISA. But my situation straddles two problem areas. Pensions on the one hand and the situation you put yourself into when you save, and disqualify yourself for benefits, so you end up no better off than if you hadnt saved. And underlying both these problems is the rapid devaluation of the worth of your money, which is only worth a fraction of what it was worth when you earned it decades previously. Saving isnt much use if your money is significantly devalued over time.

    Report on 31 August 2012  |  Love thisLove  0 loves
  • Iamcoldsteve
    Love rating 329
    Iamcoldsteve said

    Thanks Kent.

    Yes, I know the charges for running my pension and they are less than half what quoted. I think it is quite low when compared to others...

    The fact remains that while the company matches my payments, I am simply 'up' by 100% every month. The tax situation is also good, as I get 40% relief on my contribution.

    Yes, I fully expect to pay tax on my eventual pension, but not as much as the relief I received whilst contributing and paying higher rate tax.

    I would argue that without tax 'relief' and employer contributions, pension plans are not worth it.

    Report on 31 August 2012  |  Love thisLove  1 love
  • sippag
    Love rating 7
    sippag said

    From the above comments you can see that the loss in confidence mainly comes from very bad rules. These are designed to disadvantage you and make drawdown unattractive. Flat annuities get killed by inflation. The spouse or partners pension at 50% is decimated.

    A good Income/Dividend growth fund over a long period can wipe the floor of an annuity. The partner can continue on the same pension and funds can be left for nominated benediferies.

    Two vital rules have to be introduced to make drawdown fair.

    1) At point of retiral the 25% should be locked into the account. It should be that you

    can draw it as part of your annual drawdown from income, or in lumps as required

    2) Drawdown should be the current GAD Rate or to the value of last years income

    fund yield. This eliminates the problem of Capital fluctuation as the markets go up

    and down. N need for your pension to be reduced This is the main fear given to but

    you off drawdown.

    Of course these change are not allowed as they may be in your best interests.

    Cheers

    Report on 31 August 2012  |  Love thisLove  0 loves
  • g1ng3rcat
    Love rating 12
    g1ng3rcat said

    @Perry525, those who have been 'sensible' and lived in a council house are the lucky ones. Nowadays you should count yourself lucky to get one.

    I grew up in a council house but people like my hardworking parents would never get one now.

    I have been struggling in private rented accommodation for nearly 10 years now, on the waiting list for housing, but consider myself relatively fortunate - I have friends who are stuck in homeless hostels long-term, others are forced to bring their kids to live with their grandparents into a cramped family home and account to them for their comings-and-goings at the age of 30+ and even worse, those who live with abusive partners but are still waiting after 2 or 3 years to be considered a priority for council housing. Sadly there is still a prejudice that most single parents choose that situation in order to access subsidised housing etc.

    Report on 01 September 2012  |  Love thisLove  0 loves
  • matchmade
    Love rating 38
    matchmade said

    Neil's examples are of course hypothetical, because the "pure" example of someone on benefits versus someone who only has a private pension on top of a state pension and some savings does not reflect most people's circumstances. If, for example, you have been on a relatively low income but have a private employer pension or two floating around, and/or a small pension derived from a short period of employment in the public sector, then you will have extra income on top of the personal pension, and this will also prevent you from receiving state benefits. In which case, if you've no chance of living off the state anyway, you will actually appreciate your "pointless" private pension because of the extra income it gives you. Also, you may be married and your partner will have a range of income sources too, so you are unlikely to get benefits because of them.

    In other words, as other people have recommended, it pays to spread your savings around if you think you have a decent chance of escaping state benefits. If you are really low-paid however, I agree pension saving rarely makes sense when you could be using the money to improve your low-income middle-aged life - but that's what already happens: a huge proportion of the population, not just those on benefits, have no savings at all and live from week to week on their earnings. Benefits are designed to place a floor underneath people's incomes and standard of living, so we don't have pensioners living on the streets. For those who advocate cutting benefits to make work and pension-saving more attractive, I have to ask: at what point do you think retirement benefits would be low enough to provide a salutary lesson to those of working age who are "skiving off benefits"?

    Report on 03 September 2012  |  Love thisLove  1 love
  • wiliamson
    Love rating 4
    wiliamson said

    matchmade - like this. The financial nub of this discussion is the working poor. At what income is a working person effectively "poor" in that their savings/pension contributions would be best spent when earnt? I have a husband so I would not be entitled to benefits anyway. But my main concern is the future. My husband has been diagnosed with terminal cancer, so in 6 months time I can expect to be single. Our total accommodation costs (rent, rates, utility bills) are not exorbitant c£700per month - and I can afford to pay half. But when his income goes I will have c£350 to pay for a roof etc. What standard of life, if any, can I get on this? In 3 years I retire, but still on the lower rate pension. With the current cost of living my savings will be a buffer for a year or two, if they even last till retirement age - but I will still be dangerously poor in retirement even though I have worked most of my life, saved and saved into a pension. Where did I go wrong?

    Report on 03 September 2012  |  Love thisLove  0 loves
  • Mike10613
    Love rating 626
    Mike10613 said

    When many people retire they have a house worth a fortune, that they can't sell because they will have no where to live! They will have a pension worth a fortune, but by the time they need it, quantitative easing will have made it virtually worthless. Then the government will print more money to pay out benefits to retired people so they can live 'comfortably'. The system is a little crazy, but when we have executives on councils earning 140K year and wanting more and the same in every area of government, things get expensive to run. They do get much better pensions, ask any judge! Then there are the super-rich, while they fiddle their taxes, the government has little choice than to 'expand the money supply'. Maybe the answer is people power? What do they call that? Democracy? It would be worth trying, we have tried elitism and that is a miserable failure.

    Report on 11 September 2012  |  Love thisLove  1 love
  • wiliamson
    Love rating 4
    wiliamson said

    To Mike10613 - agreed. But in the meantime people have to find out how to live decently in the system we have. The gov says it wants everyone to pay into a pension and to do so from a very early age. Ignoring that a large number of young people are barely managing on the wages they have and have nothing spare to put into a pension - I dont see that saving can work if the money is losing value at a rapid rate. To give a few examples - when I was 23, a Mars bar cost 6pence. Now it is 65pence. Rent was £6 a week. Now it is £120 a week. When I was 32 rates were £50 a year. Now they are £120 a month. In other words, £1 saved, 40 years ago, and 30 years ago, - difficult to save at the time, would be worthless today - unless interest was high enough to counteract the devaluation of the currency. This devaluation, as you pointed out with QE, will probably only accelerate. Saving seems pointless in the current situation.

    Report on 15 September 2012  |  Love thisLove  0 loves
  • novictor
    Love rating 1
    novictor said

    Why not create a sinking pension pot by the government, by everyone contributing a little extra, then eventually no more contributions are needed by anybody, the pot pays out the pension, a bit like the nobel prizes paid out of the interest, or just create one, whats the point in collecting national insurance with one hand and giving it straight out with the other.

    By the way those who dont save for a pension spend it and pay taxes on that extra money, aswell as creating employment for those recieving this extra money not the bankers

    Report on 01 October 2012  |  Love thisLove  0 loves
  • novictor
    Love rating 1
    novictor said

    Emigrate with your money to venezuala 7pence a litre of petrol, rent a house for £8 week.other places like that india, phillipines

    Report on 01 October 2012  |  Love thisLove  0 loves
  • novictor
    Love rating 1
    novictor said

    save £100,000, spend it over 10 years at £10,000 per year, might last a bit longer whats left after each year,15 years?, my dad died 2 weeks before retirement what was his point in saving for a pension? he never got one, so working into your seventies you also might not get one due to being deceased

    Report on 01 October 2012  |  Love thisLove  1 love
  • John Crawford
    Love rating 1
    John Crawford said

    I agree with everything that in the above Savings in a Pension, as well off on beneifts. I have been saving through a pension for 30 years. I became a pensioner 6 weeks ago, so private pension kicked in, then the letter came from Pension Credit saying that the will be calling to check if my circumstances had changed. After the call the goverment has taken most of my pension off me, but i am now a total of £8.00 better off per week than a person who has called all the benifits he can get his hands on and still claiming, the only benefit that I have gotten from my private pension is the 25% lump sum you are allowed. So my advice to anyone out there...... don,t take employment never get involedled in a pension, never get a mortgage, just enjoy life while you can, because it can only get worse, unless you can get a job as a banker, or amember of parliment. ROLL ON DEATH....

    Report on 13 November 2012  |  Love thisLove  1 love

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