Lower TVs and less DC saving…

…is perhaps an unlikely reaction to today’s budget consultation response. However, this could be the result of 2 of the measures announced today.

Locked away for too long

My first reaction following the budget this year was that DC might finally be something I have a real interest in saving money into. I am absolutely in favour of the reforms to give people more freedom with their pension savings. However, the reforms didn’t go far enough in my view. There was still the inflexibility of the money being tied up until 55, over 20 years away in my case. This is too long to tie my money up, there are so many scenarios I can think of in which I might need that money sooner whether it means I’m penniless in retirement or not.

Yet today it got worse still. Today it was determined that my money will be locked up until at least 58! That’s at least another 3 years before I can get at it and so another 3 years later before I START putting money into a DC pension. NISAs seem a much nicer way of doing things.

As an aside, the consultation response put “fairness” at it’s heart. It’s difficult to see why increasing the age at which you can access your own money is fair. Especially to the many people who don’t make it to retirement.

If all transfers are rational…

…then there’s some serious selection risk.

The area of most controversy in the consultation was on whether to ban transfers from DB schemes. Unsurprisingly following the reaction to this suggestion such a ban has not been implemented for all but unfunded public sector schemes. However, “safeguards” have been added such that independent advice must be obtained.

Given this, it perhaps reasonable to assume the majority of transfers will be rational decisions. But if this is the case then they must be better than average risks as far as the scheme is concerned. Should transfer values be reduced to take this into account?

Who’s also (mis)taking my pension?

So after the horrendous programme on pensions last year Who took your pension? shown on Dispatches on channel 4, the BBC decided they liked the title and sensationalist reporting so much that they’d do their own present tense version Who’s Taking Money from My Pension? (albeit it now seems to have various other names depending on where you look). Well I thought I’d follow the trend and use a similar blog title to my colleague Henry Tapper.

I attended a wonderful lunch yesterday where we discussed the issue and, as much as Henry tried to keep us focused, many others. His post linked to above shows much of what was concluded.

What angers me, and even the people in the programme, is that yet again it was a missed opportunity to educate the public on how pensions work, what they should look out for and what they should do. Instead we had more sensationalism with experts being cut off in mid sentence. The only thing this will achieve is more suspicion of pensions and less pension saving.

One of the things we discussed yesterday is the white knight status of ISAs. How many people will, following last night’s disgrace, stop paying into their pension and use an ISA instead. Yet ISAs are essentially just a different tax wrapper for the same product having access to much the same investment choices and charges. It was even raised yesterday that the charges on ISAs might be higher.

There is a real lack of financial understanding in the area of investment. ISAs are seen as good because they don’t go down in value like pensions. But this is just because they are Cash ISAs with generally poor interest rates attached. A stocks & shares ISA would perform exactly like a pension and aims for a higher return at the expense of additional risk. If you have a pension fund and don’t want to see it fall then talk to an IFA and get your fund moved into Cash. But do so in the knowledge that if you still have a while to go to retirement then its probably not the most suitable investment to have as the returns expected will be lower than from other investments.

On to some numbers.

The headline grabbing 80% of money paid taken in charges is a terrible number. If there is to be any analysis done then you need to compare apples with apples rather than pears or oranges.

Oranges with Pears

To get to the 80% number I have to use an annual management charge (amc) of around 1.75% pa. This is unquestionably a high charge and would not be considered normal but probably reflects a special type of policy. If that policy is right for you then that’s ok. For the majority though you should be looking for policies charging less than 1% pa amc so I will also do some figures with an amc of 0.75% pa.

Paying £250 a month for 40 years is £120,000.
The charges over the period equate to £93,500 (1.75% amc) and £48,238 (0.75% amc)

So it’s reduced the amount you’ve paid in by 80% (1.75% amc) or 40% (0.75% amc) – this was the calculation done in Panorama.

Apples with Pears

But the above is a ridiculous comparison as the charges are taken out at a totally different time so have a completely different value to the £120,000. We should really compare with the fund value at retirement.

The fund values at retirement equate to £385,000 (1.75% amc) or £505,000 (0.75% amc)

So the charges would represent a reduction of 20% (1.75% amc) or 9% (0.75% amc) – doesn’t seem so bad now.

Apples with Apples

We’ve now gone too far the other way as the charges are worth more than this since they’ve been taken out of the fund earlier. If we are truly comparing apples with apples then we should compare the fund value at retirement with and without charges.

Without charges the fund would grow to £621,000!

So the effect of charges is a reduction in value of 40% (1.75% amc) or 19% (0.75% amc)

So there really was no need to be sensationalist as the true figures are still significant.

Who is to blame for high charges?

There are 2 key groups to blame in my opinion:

Some poor IFAs who are still selling inappropriate policies (the blame to some extent also falling with product providers for incentivising certain products by high commissions).

But, most importantly, the public for not taking enough interest in their pensions, trying to understand them and reviewing them regularly.