The BBC rehash a bit of Scottish Widows propaganda...
The survey, conducted for Scottish Widows which is itself a pensions provider, suggested that on average people would like £24,300 a year to live comfortably at the age of 70.
Pensions experts say it would require a large pension pot to be saved by each individual to achieve this level of retirement income, and the report suggested that people were falling some way short.
Figures compiled by Hargreaves Lansdown found that people would need to build up a pot of £425,000 in order to gain that level of retirement income, allowing for inflation.
OK, ignoring compound returns and inflation, which more or less cancel out, if we sheepishly followed their advice, then some adults would be saving up for a pension, and on average their pot would be worth half that £425,000 figure; others would be in retirement, and the average value of their entitlement would also be half that figure; there are about 45 million adults in the UK, 45 million x 1/2 x £425,000 = £9,562 billion.
The total value of all assets in the UK is only about £9,000 billion (there is no need to add on corporate-owned assets to privately owned assets, as privately owned assets includes the value of shares in businesses, which is in excess of the value of corporate-owned assets).
So Scottish Widows are really saying is that they (and other pensions/insurance companies) would like to control slightly more than the total wealth of the UK.
Tuesday 7 June 2011
Scottish Widows Tomfoolery
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21 comments:
I would like to see the figures for whether the pensions/insurance companies are any better at making investment decisions than individuals, or whether the only reason for choosing a structured pension is to benefit from the lower tax rates.
BE: "The only reason for choosing a structured pension is to benefit from the lower tax rates."
How we laughed! As it happens, the total value of the tax reliefs is approx. equal to the total fee and commission income of pensions/insurance companies. So really, the only reason that these companies exist is because of the tax breaks.
People would like an average income of £24k - isn't that roughly equal to the median earnings anyway?
D, yes.
£24,300 a year to live comfortably at the age of 70? Seems high to me, but I live in an ex-mining town where it isn't expensive to live.
AKH, the figure is plucked out of the air, they say people would "like" that level of pension income. My point is that it is mathematically impossible for everybody to have that level, even if everybody saved up enough to have £8,000 a year pension income, that would mean pensions companies controlling a third of all UK assets.
The other effect of "structured" pensions is to cause another bubble in UK stock markets...
"they say people would "like" that level of pension income"
Well, I'm sure we'd all like to be on £24,300 a year and not have to work for it. Doesn't mean to say that any of us are able or willing to do the necessary to achieve it.
After writing my comment above I did a very simple division. I reckon the "average" person would have to put their whole salary into their pension fund in order for it to build up to £425k over thirty years, although I would hope there would be at least a small amount of capital growth...
BE, for the second time today: "DAMN! I wish I'd said that"
You are quite right, assuming income/gains on invested money is enough to cover fees/commissions and inflation, to save up £425,000 over thirty years, you need to put away £14,167 a year, which is well most of an average salary net of tax and very basic living costs.
* To get £14,167 into your pot, you only have to pay in £11,333 and the rest is tax relief etc.
There's an assumption implicit in there that all pensions (a) are personal pensions and (b) that all contributions come from an employee - missing the often generous employers contribution (my local authority - ok, I know, I know, the taxpayer - is currently contributing 23% on top of the paltry 6% employee contribution). For this purpose we don't need to get all clever about whether employers contributions are actually just money the employee hasn't been paid.
A good many public employees retire on that £25000-ish sort of level of income anyway, from their perhaps-partly-funded pension schemes, more often than not topped up by the taxpayer.
OK, I'm being a bit selective, comparing "many" and "median", but a senior-ish teacher with 40 years would get significantly more income than £25,000, plus a six-figure sum in tax-free cash. Yer average senior-ish copper would get better than that after 30 years.
If we say, then, that there's an invisible fund of £400-£500,000 behind them it's another interesting contrast with those of us who've had to make their own provision; the median pension fund for private sector employees who've saved for a pension is about £25,000. (In the case of the copper retiring at 50 after 30 years, the fund would need to be more like £1,000,000. Worth remembering next time they moan about how poorly they're rewarded).
I realise it doesn't change much as regards the general thrust of the comments above, but they're points worth making. If only because it bleeds off a bit of a sens of injustice.
FT, that's maybe not as important as all that - the average public sector final salary pension is only about £8,000 a year, and the value of the accrued pension asset/liablility is broadly agreed to be about £1,000 billion.
Which ties in neatly with my original guesstimate of £9,000 billion. About a sixth of adults are in PS schemes, so if all adults got three times as much as £8,000, the accrued value is £1,000 x 6 x 3 x 1/2 = £9,000 bn.
I would be happy to even have a pension when I retire but a certain one eyed Fifeshire financial dimwit queered that aspiration for me!
As for pension companies they're only in it for one thing - to fleece as much as they can out of us before we retire.
As we sure won't have the income to keep them in the lifestyle they are accustomed too when we stop earning.
BB, "Gordon Brown's pensions raid" is in fact a complete and utter myth - see John Band in my "Words of wisdom" widget.
Having done the sums, saving somewhere about 12% and 15% of gross income every year of a notional 44 year working life will buy you a pension of about 50% of your final salary. And MW is right. The investment growth really just keeps the real value of your savings. In fact a recent report has demonstrated that pretty well all the capital return on equities is down to 'inflation' - i.e. the Austrian version, that inflation is a function of money, not prices. But, with equities if the dividends are re-invested over that working life the return will be much higher. For example in the period 1946 to 2001 £100 of equities ex dividend grew to £6535 whereas with income reinvested it grew to £84,225 (rather amusingly data ex Scot Wids! - but checked!).
Given that the problem with the UK banks and economy is not a lack of credit(!) it is a lack of real savings to fund credit, encouraging long term saving is a Good Thing.
Plus MW is also right about the tax relief and charges.
Plus I reckon that the problem with public sector pensions is that they breed an 'entitlement' culture and if state employees had to access only money purchase schemes they'd be a damn sight more keen on the overall wealth creating ability of UK plc.
MW I know the 'pension raid' was a yth, but the point is GB did not know it was. It also demnstrated that he did not know the difference between capital and income.
L, interesting stat's.
So nominal, ignoring income tax and with dividends reinvested, your return was compound 13%. GDP went up from £10 bn to (say) £1,000 bn over the same period, a compound return of 9%. Yer pension company swallows up to 2% a year in fees and commissions, so you'd end up 2% ahead. Ho hum.
MW, yes, that's about it.
The trick I try to pull off is to tilt asseet allocations to small and value companies and some other things to achieve a return above the broad market return that pays for our costs but importantly without adding unduly to the risk. At the same time we can now drive down the costs of running money a lot. So I ask myself, just what is Scottish Widows for?
Something else I should point out - mortality drag / bonus.
If you get to 65 say and decide to buy a pension you will likely buy an annuity. If you do that you will get a lsightly higher interest rate on your money than you would expect as you will get some of the money from the early diers in your annuity providers annuity fund. (of course you may an early dier...).
This means that you calculate the fund required not on sustainable income withdawals from an invested fund (max about 4%) but another rate entirely, possibly 6%.
Mind you if you have your own 425,000 you can withdraw at whatever rate you like assuming you can access the fund, which you cannot if it is in a pension.
Excellent post, although I suspect they really meant that pension per household and not per individual, which would change the maths (but not the point) a bit.
AC, fair point, that requires pension assets of (say) £4,700 bn, which is absolutely everything apart from housing. I'm not even sure how they arrive at £9,000 billion total wealth, I'd guess total UK wealth is rather less than that.
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