“My dad says pensions are rubbish!”
However some people are impressed by things that their parents say to them and we came across this statement recently from a young person.
To be fair her dad may have had a negative experience that somewhat prejudiced his opinion of pensions but in our view there is far too much generalist comments made on the subject.
Negative comments about pensions tend to revolve around three key criteria;
-Pension charges are too expensive (the media likes the expression “rip-off charges”);
-When converting into income by buying an annuity you never get all your money back;
-Pensions perform badly.
It is true that some, typically older model pension plans, are expensive. But modern plans are generally pretty good value for money.
The expensive nature of old style pension plans though is irrelevant to the young person who has not started saving yet. They won’t be getting an old style expensive plan they will be getting a lower cost modern model.
If some one tells you it will be cheaper to save in say a Stocks and Shares ISA it could be true, but actually there should be no real difference between the two products.
Talk to a decent independent financial adviser (IFA) and they will explain.
Annuity rates (the instrument typically used to convert a pension fund into income) are at a pretty low level looking at them from an historical point of view.
But what is the point of comparing the annuity available today against the one that was available 15 years ago?
That’s just a daft thing to do because if you are thinking of buying an annuity today its pretty likely that you were not eligible to buy one 15 years ago. 15 years ago most things were cheaper!!
Annuity rates are made up of a number of factors.
Expected mortality rates, a direct linkage to Gilt yields (low at the moment) and the annuity provider’s expenses. Each of these factors change over time.
Life expectancy has generally been improving- no surprise then that annuity rates have tended to reduce. Gilt yields are lower, no surprise then that annuity rates have fallen.
Annuity providers are required to set aside more capital to cover the guarantees they offer so guess what? Yes, annuity rates will tend to be lower than they have been historically.
But people tend to vastly underestimate their life expectancy and tend to think that they won’t live long enough to get their money back (interestingly when faced with the decision about buying life assurance they tend to think they are going to live forever! – people are strange!!)
Pensions per se don’t perform badly.
Some of the investment funds that people choose for their pension fund however can and do perform badly. Badly that is by comparison to other investment funds, inflation and sometimes even cash.
But not all of them of course; some perform very well indeed so the challenge is to invest in funds that are suitable for you and your risk profile. You may want some good impartial advice to help you do that.
Interestingly in decades of helping people with their financial planning I cant think of too many times when people who have saved and invested through pensions have complained too much.
Perhaps dad has a point but then again a good question to ask him might be “What have you done about saving for your retirement dad?”