Pension horror - as retirees get an eighth of what was predicted

pension & investment planning for retirement

Pension savers, who opened with-profits policies in the 1990s, could receive a fraction of the cash they were told they'd get when they started saving. A report has revealed that some people who would told they could expect around £29,000 a year in retirement could in fact get just £3,774.

Money Mail has published the figures, which have been caused by two crushing forces: with-profits disasters, and annuity pain.

The first issue is that with-profits investments have largely been disappointing. The aim of the funds was to hold some of the investment returns back in the good years, so they could make up for shortfalls in the bad years. Unfortunately, they failed to 'smooth' returns in the way they were intended, because they didn't predict just how bad the bad years would be.

In the late 1990s they paid high bonuses because they didn't predict that things would change - and they invested too much in shares. When the market crashed in 2000-2003, they lost enormous sums of cash, and investors are still paying the price. Instead of cutting bonuses dramatically overnight they smoothed the losses - so investors continued to pay in the good years.

At the same time, some of these funds were packed with opaque charges and rules, which made payouts even smaller.

To add insult to injury, the experts point out that the very idea of with-profits is pointless for regular investments anyway. The idea is to smooth out performance, but by investing every month for decades, you are effectively doing this anyway - because you are spreading out your investments - so you never buy too much at the top of the market.


The second force is that annuity rates have plummeted, so that turning the lump sum into an income for life has left people with much less than they were expecting. Annuity rates have been hit by a combination of low interest rates, and people living longer, so as a result they have halved since the 1990s.

Money Management magazine crunched the numbers, and discovered that it was perfectly possible to have been putting £200 a month into a with-profits pension for twenty years, and get an annual payment of just £3,774 at the end.

What should you do?

It's enough to make investors consider getting out of their pension, and shifting elsewhere. However, before you panic, it's worth pointing out that not all with-profits policies are equal. While some produce disappointment year after year, other providers have been stronger, and have produced returns that are far closer to expectations. Before you do anything, therefore, have a look at performance.

By the same token, not all annuity providers are equal, so don't assume you will be getting your annuity from your pension provider, and take a look at what is available on the wider market when you are calculating your pension income.
If your with-profits policy has fallen short, check what a move will cost you. Unfortunately, many of these policies come with exit penalties, so you need to check whether withdrawing your investments will leave you worse off.

In some cases, the policies also have guaranteed annuity rates written into their contracts, which offer protection from falls in annuity rates. It means that if you hold this kind of pension, you need to check the small print to see whether you should hang onto them. In many cases it's worth taking advice from an independent professional.

Regardless of the approach you end up taking, it's a useful reminder that we need to be on top of our personal pensions. If you have a pension plan, it's essential to check what it is invested in, how well it has performed compared to the predictions you had at the outset, and what it is predicted to be worth when you retire.

If your findings are disappointing, then the earlier you check, the more time you have to switch to another provider or another fund, to increase your monthly contributions, or even to rethink your retirement plans.

Most expensive money myths
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Most expensive money myths
Given the number of shocking headlines about pensions over the years, you'd be forgiven for thinking that pensions are a mug's game. For many people, the pensions mis-selling scandal is fresh enough in the memory to put them on their guard. If you add in the Equitable Life debacle, the scandal of high charges on some of the older pensions products, and Gordon Brown's 'tax raid' on pensions, you'd be forgiven for thinking the reputation of the pensions industry was tarnished beyond repair, and you'd be better off with a shoebox in the wardrobe. However, even despite all of these problems in the past, pensions still retain ample attractions. They are one of the most tax-efficient ways to save for your retirement, and should feature in everyone's broad plans for retirement.

This was a particular refrain prior to 2007, when pensions were suffering endless scandals and the price of property seemed to be on an endless upwards trajectory. The subsequent stuttering of the property market has made many people reconsider, but you will still find those who think that their property is going to keep them in retirement.

There are many ways it can help. If you have an investment property, the income from renting it out could help supplement your income in retirement. Alternatively some people may be able to release equity or downsize and use the excess to boost their income.

However, none of these things are guaranteed. House rental carries the risk of void periods and the cost of maintenance and management. Meanwhile there's no guarantee you will make the money you expect from downsizing (especially if house prices fall), or that you will be able to do it easily when the time comes. Finally, equity release is an option, but will erode the total value of your property during your lifetime, which needs to be properly communicated to your family.

Pensions are fantastically tax-efficient. If you are a basic rate taxpayer, then for every £80 you invest, the government tops up up with £20 in tax relief. For higher rate taxpayers for every £60 you invest, the government adds £40, and for top rate taxpayers, for every £55 you invest the government adds £45. Much of the growth inside a pension is also free of tax, which gives your pension pot the best possible chance of gaining in value. However, pensions are not tax free. When you take the money out at the other end, you will pay tax. If you buy an annuity you will pay income tax at your marginal rate on the income, and if you take it out as a lump sum (after the first 25% which is tax free), you will also pay tax on it at your marginal rate.

There gave been some horrible high-profile examples of businesses which have found themselves unable to make good on their pension promises. People who thought their retirement income was safeguarded have found their income dramatically reduced. In some instances this is where the company has gone to the wall with an underfunded pension. The Pension Protection Fund will kick in to help people in these schemes, but although those who have already reached retirement will get 100% of their benefits paid, for those still working, only up to 90% will be  paid, and in some cases much less.

The vast majority of people aged under 30 haven't spared a thought for their pension. They may have been auto-enrolled at work, but other than that they're far more likely to be focusing on paying off debts or saving for a property, rather than saving for something that they won't need until forty years down the track. However, the experts highlight that the earlier you start saving for retirement, the less you have to put aside each month, the more you will retire on, and the simpler and more painless the process will become. If you leave pension planning until your 40s you will face the unpleasant choice between putting an uncomfortable amount of money aside every month, staying on at work later than you had planned, or retiring on a lower income.
On one level this is true. In a bank account, as long as the bank remains strong, you cannot lose your cash. Even if it goes under, the first £85,000 you hold with each UK institution is covered by the Financial Services Compensation scheme. However, there are two factors you also need to consider when you decide to put long-term savings into a bank account. The first is that in some cases the interest you're being paid on your account, minus the tax you pay on interest, means the growth of your cash isn't keeping pace with inflation - so you're effectively watching the spending power of your cash erode. The second factor is the opportunity cost: by opting for cash you are missing out on the potential for extra growth in other types of vehicles such as share-based investments. These will not be suitable for everyone - particularly if they need the money in the short to medium term, or they are a particularly low risk individual. However, for everyone else it should be part of your considerations.
In some instances this is true. If, for example, you pay your utility bills by direct debit, you will usually get a significant discount for it. However, you shouldn't fall into the trap of believing this is always true. If, for example, you pay for your car insurance by monthly direct debit rather than in an up-front lump sum, in most cases you will pay interest on the outstanding amount. Meanwhile, if you push payments onto direct debit you have to make a commitment to review them every year - to ensure you're not still paying for things you don't want or need.
There are some good reasons for borrowing money. Most people have to borrow for major purchases such as a car or a house: saving up to buy one outright is not always practical. You may also need to spread the cost of a sudden and unexpected expense - and careful money management should enable you to do this while paying little or no interest. However, equally, there are terrible reasons to borrow. If you are regularly spending more than you earn, so going into debt earlier and earlier in the month for essentials, then you're building a major debt headache. Likewise, if you know you cannot really afford something, but credit gives you the option to have it anyway, you're going to pay for that decision later.

Widespread adverts for IVAs have made this myth fairly widespread, but they have significant consequences, so should only be considered in very serious circumstances.  If you have approached a debt charity to talk through the options, and you decide that an IVA really is the right solution, it will blight your credit record for the next six years, making it very difficult for you to do things like get a mortgage. Landlords and employers will also be able to check your credit record for IVAs and bankruptcies, so it could affect your housing and employment prospects too.

This is just an excuse - and usually one people make when they are admitting to having run out of cash, missed bill payments, or built up debts. Nobody is actually 'hopeless': they're confused, disengaged, or too busy thinking about other things, but all these things are curable. We all have a calculator and the ability to write down what we spend: so we all have the skills we need to budget. We just have to give up the lazy excuses and get stuck in.
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