From The Daily Mail:
The retirement plans of millions are being crippled by pension charges which wipe off up to 40 per cent of the fund’s value, a report warns today.
It sounds the alarm about one of the biggest and most lucrative parts of Britain’s pensions industry – the individual personal pension. Around £230billion of savers’ money is invested in this type of pension, popular with the self-employed and workers who do not have a company pension.
The campaign group Consumer Focus attacks the ‘excessively high costs and charges’ which must be paid by savers to pension firms and financial advisers. Its 60-page report, published today, says there is ‘a baffling array of terms’ for all the pension charges which an ordinary saver has little chance of understanding.
Consumer Focus reserves particular criticism for one of the most controversial charges, known as ‘trail commission’. This is a charge, typically 0.5 per cent of the total pension fund, paid every year by savers to an independent financial adviser until they retire. The adviser may [sic] not do anything after the first year but will receive commission for decades...
We see this all the time, it's called 'tax arbitrage'.
If a particular way of investing in something receives favourable up-front tax treatment (i.e. buying shares via a pension fund rather than buying them directly), then the net return to the 'pensions saver' will always be driven down to the same level as if he were a 'direct investor'. What the 'pensions saver' gains in tax relief/deferral, he loses in fees and charges (and inflexibility).
The whole notion of 'encouraging people to save by taxing them at higher rates' is an exercise in futility. Would people rather not just pay less in tax on their earnings in the first place and make their own decision on whether to spend or save? Those who would have saved will do so anyway*; those who wouldn't have saved end up slightly better off; and the notion that we have to hurl a £44 billion wall of taxpayers' or pensions savers' money at this every year in order to encourage a small percentage of waverers strikes me, as an outside observer, as completely insane.
There are plenty of other examples, in fact, it's difficult to think of anything to which this does not apply, the same applies to subsidies - they don't make things cheaper either, they make them more expensive etc.
-----------------------------------
UPDATE, I just spotted this at CityWire:
The Social Market Foundation is recommending a radical rethink of government policy to get those who don’t save interested in putting money away... The report, Saving on a Shoestring, looks at why some people find it hard to save, based on a new analysis of the government Wealth and Assets Survey and the Child Trust Fund administrative data. It found that turning people into habitual savers only works for the proportion of people who are inclined to save anyway...
Well, duh.
Wednesday, 20 July 2011
Tax breaks for pensions - who benefits?
Subscribe to:
Post Comments (Atom)
22 comments:
Consumer Focus are somewhat missing the point on trail commission. The vast majority of advisers have always taken their full whack of commission up front in a lump sum and foregone the trail commission. That means the value of the punter's investment may have taken a hit of thousands on Day 1.
Advisers taking trail commission have an incentive and a duty to manage investments for best performance - and to set up a biannual or at least annual review with the punter.
There are some honest people in the advice game, you know.
Commission will be a non-issue after 1/1/2013 anyway, when the FSA completes its plan to disenfranchise the less-than-wealthy from sensible financial advice. If Joe Soap has tens of thousands to invest each year, it's worth his paying a fee. If his brother wants to set up a long term savings plan at £100 a month, he won't be wanting to pay a fee.
So, he'll go to the banks for non-advised sale of expensive, poorly performing products.
Plus, anyone who knows the first thing about NEST will understand that only a Government could get away with offering crap like that. Poor fund selection, NEST funded by a loan (so guess where your investment earnings go), added employer admin costs (so watch out for your job)......
I don't disagree that the pensions industry has brought a lot of stuff on itself, but the way to sort it is less regulation, not more - as you've often observed, regulation stifles competition and hands everything on a plate to the big boys.
The other problem is that this forced investment in a set of state approved stocks lowers the yield on those stocks to the advantage of insiders and disadvantage of the economy.
FT, ta for anecdotal, I'm opting out of NEST the minute I have the opportunity.
AC1, yes, a wise investor told me years ago that shares were a one-way bet for the simple reason that the pension funds pour more money into them every year. So all that happens is that prices are pushed up and the fund managers and plc directors have a nice cosy relationship where the interests of the actual investors are largely irrelevant.
Surely far better for people to own shares directly and actually turn up at AGMs and kick up a bit of a stink?
"
Surely far better for people to own shares directly and actually turn up at AGMs and kick up a bit of a stink?"
Wouldn't that cost more in terms of commision etc?
The other thing about pensions is the liquidity premium. When investing in the stock market, you are paying for the luxury of instant liquidity. When looking long term one does not instant liquidity. I believe it is documented as one of the reason private equity firms perform so well. Less regulation to jump through in order to maintain liquidity.
On another point, I was shocked, shocked I tell you to read this in the FT yesterday calling for a global minimum wage. I will leave you to enjoy if you haven’t already.
http://blogs.ft.com/economistsforum/2011/07/a-global-minimum-wage-system/#axzz1Se6nx5dq
Surely far better for people to own shares directly and actually turn up at AGMs and kick up a bit of a stink?
One problem with that is risk. Ask shareholders in nice, safe, high-yielding shares like BP, RBoS, Lloyds, Northern Rock, Aviva, Marks & Spencer.
The other problem is dealing costs as Anon says.
Pooled funds have the great advantage of spreading risk across sectors, companies, and degrees of risk. Very few folk have the necessary cash - or the "Adventurous" risk-taking profile - to spread risk sensibly while investing in single company shares.
Footballers and accountants, maybe......... :-)
Anon, wot?
MN, in other words, pension savers are paying the liquidity premium, despite their investment is incredibly long term? Sod the minimum wage, that's a job for the welfare system to sort out.
FT, anybody can throw a dart into the prices pages of the FT and buy the resulting stock-pick.
Experience tells us that once you have a random selection of shares in about thirty different companies, it moves more or less in line with the market - so if you invest every month, after two or three years you have minimised your risk as far as possible anyway.
Yup, I know. The weasel words there are "as far as possible", of course - meaning as far as is possible with holdings of single company shares.
One implosion, and your gains are toast...... BP, Lloyds, RBoS all stand testament to that.
BTW, how do you invest directly, monthly, in single company shares without getting whacked on dealing or nominee costs by a broker?
FT, sure, you do get whacked for dealing costs and Stamp Duty when you buy, one or two per cent all in, but that's then the end of the matter. Shares go up or down one or two per cent every single trading day - after several years, your overall gain or loss is hardly affected by acquisition costs, is it?
It's not like a pension fund which is 1% a year for ever.
"why some people find it hard to save"
From the Department of the Bleeding Obvious.
Ah, so the meat of the matter is "1% a year growth in a pension fund?"
Anyone settling for that - which would indicate a with profits fund - wants their head properly adjusted with a baseball bat.
Maybe public sector and Company schemes tend to go for low growth funds to protect the Trustees and keep compliance (there, see? Another example of over-regulation) but all that just adds force to my belief that all such schemes should be done away with and people handed the responsibility for their own long term savings. Preferably alongside a Citizens' Income scheme to provide a safety net for the stupid, irresponsible, greedy, feckless, and others who don't feel the need to save, or who don't earn enough to save.
BTW, if a broker's commission is 1.8% for share purchases (min say £25), plus Stamp Duty and sundry little bits like nominee fees and "compliance charges", those costs are going to add up rapidly if you're paying them every month.
VFTS, for the SMF that's a blinding insight.
FT, where's the 1% per annum figure from? The Daily Mail? Agreed on policy. BTW, I thought execution only brokers were much cheaper than that. T'internet says minimum charge higher of 1% or £7.50, so it might make more sense to invest a larger chunk every three months. Or something.
FT, where's the 1% per annum figure from?
Dunno, mate - it's your figure! And much better than some with-profits funds have managed of late.
You're probably right on execution only fees.
Good one from the Mail, apart from the description of Consumer Focus as a "campaigning organisation" - it's actually a quango.
The biggest rip-off of all in pensions is that there isn't really a tax break anyway.
People pay into pension funds out of gross income, BUT they then pay income tax on the pensions they get (including the capital element that they paid in). You could sort all this out by abolishing the tax relief - but you would also need to tax the pensions according to the rules that currently apply to annuities that are bought from post-tax income.
Good point adam c . Although both the gvmt and the pension saver both get the benfit of the capital growth. What is really bad is guaranteed income products that trickle investores capital back each year where the investor then pays income tax on there own capital.
MadNumismatist wrote:
On another point, I was shocked, shocked I tell you, to read this in the FT yesterday calling for a global minimum wage.
Sadly the proposal described in the FT falls into the "great idea, rotten implementation" category. The problem is that it proposes making it illegal to pay less than the global minimum wage. This is all very well and to be fair would have some effect but the trouble is that its effectiveness depends upon how much the local government is willing to spend on enforcement. The answer to that may well be "not much". Even worse, in the places where it is effectively enforced, it will, to some extent, cause unemployment.
However this is just a matter of a rotten implementation. The concept of a global minimum wage is certainly worth aiming at and using a different method of implementation (the Georgist method) it can be achieved without damaging economic performance or costing a fortune to police. The trick (as regular readers will already have guessed) is to implement a Citizens Income instead of Minimum Wage legislation. This has the effect of making it impossible for citizens to receive less than the Minimum Income, even if they choose to work for less than the Minimum Wage. And impossible is much better than illegal. It also acts as a subsidy to employers and thus lowers unemployment, rather than raising it as Minimum Wage Legislation does.
So definitely a better method of reducing poverty.
FT, no what I meant was if you buy shares outright, the commission is about 1% and that is the end of the matter, if you hold them via a pension fund the charge is about 1% every year. We'd all like to think that the value of the pension fund before charges grows rather faster than that.
AC, yes of course, that's always been in the MW manifesto (the UKIP one said reduce cap on tax relievable contributions from £215,000 per annum to £10,000 - the Lib Cons watered this down a bit and reduced it to £50,000). I did the workings, if we scrapped income tax and NIC breaks for pensions, we could:
1. Get rid of additional rate and higher rate income tax entirely.
2. Increase Citizen's Pension by £10 a week.
3. Reduce Employer's NIC from 13.8% to 10% AND
4. Increase the tax/NIC free personal allowance by £1,000.
Clearly, pensions already in payment would continue to be taxed as at present; people who have not yet drawn it would just repay average value of tax relief of (say) 20% of pot and the rest is theirs to do with what they will, and taxation of annuities would be on income element only (as at present).
Den, forget about capital growth, that's a side show, it's the dividends which matter.
Derek, agreed. CI is the way forward and we have to leave the rest to market forces.
What particularly sickens me is that the government says how great the NMW of about £6/hour is, but then takes back 95% in income tax, NIC and WTC withdrawal, with the other breath they say "WTC make work pay". Give people a flat-rate CI and if they are prepared to work for £2 an hour with no tax and no means tested benefit withdrawal, well great.
Oh well, sorry about the misunderstanding; you'll just have to write me off as one of your dimmer correspondents :-)
Sickening is the word, Mark. I could forgive the current system for being complicated if it was highly effective. I could forgive it for being mildly ineffective if it was simple. But to be complicated and ineffective when it could be simple and effective? That's just madness.
FT, not to worry.
D, not to mention massively expensive - DWP running costs are about ten per cent of the cash benefits they pay out, and HMRC do just as badly with Tax Credits.
Post a Comment