Monday, 13 February 2012

Workplace Pensions made easy

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My latest blogpost: Workplace Pensions made easyTweet this! Posted by Mark Wadsworth at 22:11

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19 comments:

Lola said...

Great minds...

14 February 2012 at 09:29
mombers said...

Mark, a quick question. If retirement saving is not made compulsory or even given preferential tax treatment, how would the average person accumulate any assets to fund their retirement? Surely a better solution is to regulate excessive pension fees?
At the moment, people have the choice whether to save for retirement, with a carrot of tax relief. Most people decline, and we now have a massive cohort of OAPs who will sponge off the state when they stop working. Under LVT, sure business owners would be able to supply capital under retained profits, but where does the seed money for new businesses come from, and how do non-business owners accumulate capital?

14 February 2012 at 09:52
Mark Wadsworth said...

L, think alike.

M:

1. I'm a great believer in some sort of taxpayer-funded old age pensions, preferably Citizen's Pension (we can argue about the optimum level in £).

2. Some people will always save up and others won't.

3. If we scrapped the tax breaks for pensions, we'd be able to reduce tax rates significantly, i.e. average worker's net income would be £1,500 a year higher. Don't forget that the tax breaks (i.e. subsidies to pensions companies) cost the taxpayer as much as the basic state pension!!

4. Those that were going to save anyway will continue to do so, those that weren't going to save won't, and there may be a few marginal people who would have saved but now won't because no tax breaks; but there will be others who will tuck that extra £1,500 away.

5. Compulsion is even worse. If you reduce people's current incomes, they can't pay off their mortgages as quickly (which is the best form of saving), so instead of retiring with no savings but no mortgage, they'll retire with £50,000 savings and a £100,000 mortgage. So people end up worse off.

14 February 2012 at 10:00
Mark Wadsworth said...

M: "where does the seed money for new businesses come from, and how do non-business owners accumulate capital?"

That is what Chef Dave refers to as the "Austrian savings myth", I'm drafting a separate post on that, to follow when I'm finished.

14 February 2012 at 10:01
Lola said...

Mombers

The excessive pension fees meme is now wrong.

It is entirely possible to access low cost pension funds. TER's of sub 0.5% for equity funds and sub 0.2% for FI funds. And these numbers are decreasing.

14 February 2012 at 10:06
mombers said...

@Lola - yes they are being reduced after various name and shame exercises but so much damage has been done to the general perception of pension savings. I'm in the pensions industry (IT geek) so it's worked very nicely for me in terms of extracting lots of money from the pension investing public :-) I only invest in very low fee funds - not a vote of confidence in my clients but I don't disclose this on my CV of course :-)

14 February 2012 at 11:23
Tim Almond said...

I'm convinced that one reason that Buy To Let took off was that people realised that the private pensions industry was very opaque and that the property market is far more transparent.

It would be interesting to do the sums: take a pension, take off the fees, take off the losses due to being forced to buy an annuity at the end and work out the percentage return.

For me, I haven't had anything going into a pension for a few years (because of ill health and lack of work) but I've got a few grand spare at the moment, and I'm far more tempted to make a lump sum payment off my mortgage than to stick it in a pension BECAUSE I CAN SEE EXACTLY WHAT IT'S DOING FOR ME.

14 February 2012 at 11:23
mombers said...

@MW - how is paying off your mortgage the best form of savings? The interest rate on a mortgage is higher than that on cash savings for sure, but, even under our various homeownerist governments, equities have out performed housing over just about every long term period. You can also diversify into the whole of the world, rather than just one asset class of the UK, which is highly correlated to your other asset, earning power (if demand for your labour goes down, chances are house prices will too). With tax relief, it's much better to sock away lots into your pension, get an interest only mortgage with a low LTV, then pay off the capital when you hit 55 and can get a tax free lump sum. Thoughts? Also, under LVT, mortgages will be much smaller, so the mortgage paydown facility will be much less.

14 February 2012 at 11:29
Michael Fowke said...

Pensions are a con. There's no future anyway.

14 February 2012 at 11:51
James Higham said...

At my age, that looks increasingly unfunny.

14 February 2012 at 11:57
Mark Wadsworth said...

L, you are always very bullish about TER's and so on, but we know that total contributions are about £50 billion a year, the tax relief is about £50 billion and private pensions paid out are about £50 billion. So where does the other £50 billion go?

TS, yes, that is quite true. And people then argue against LVT on the basis that "They f-ed up pensions, now they want to f- up BTL as well".

M, we can argue the respective merits of paying off your mortgage vs investing in shares, and muck about with spreadsheets until the cows come home, but I'm with The Stigler on this one. Neither a borrower nor a lender be.

"Also, under LVT, mortgages will be much smaller, so the mortgage paydown facility will be much less"

Yes, under LVT, people will be able to pay off their mortgages in about five years. Then they can start saving up properly for unemployment/old age etc.

MF, pensions are indeed a con, that's what I keep saying.

14 February 2012 at 11:59
Mark Wadsworth said...

JH, then opt out. You still get clobbered with the higher tax rates to fund everybody else's pensions tax breaks, but at least you are your own man.

14 February 2012 at 12:00
Lola said...

Mombers. Stigler et al.

BtL took off because it was subsidised by tax breaks better than pensions, a tidal wave of cheap debt thank to Browns (and others) bonkanomics and the English fascination with property and rent seeking in general. It's not 'better' or 'worse' than other forms of capital accummulation, it's just a segment of the asset class, property. In any event, ex the putative capital gains, most BtL lendlords have been subsidising their tenants if the rental yields are at about 4% as they are round here.

It's not mostly 'naming and shaming' that's driven pension funding costs down, it's competition. All that the 'naming and shaming' has achieved is to destroy the confidence in the industry. This is a deliberate tactic by the regulatory industry to make its own jobs secure.

Pensions are not a con as long as they are viewed for what they are - long term investment savings contracts with ludicrous special rules, and you make very sure you pay as little as possible, especially in ongoing fees. If the average return on the FTSE all share has been 12% since 1955 (real return about 6%) then paying 0.5% is not a major cost. Yes, I know it compounds to big sums, but as you can now get index funds at TERs sub 0.25%, and that 100% of active fund managers fail to beat the index consistently, it's all you need pay for a fit and forget fund. If you want to you can tilt you fund to other asset classes like small companies to get a bit more return and still only pay about 0.4%.

I have actually seen this approach work satisfactorily for quite a few people.

Lastly annuities are a return of capital with interest. As long as interest rates are not bonkers - which they currently are - the annuity on average produces a reasonable result, especially if you are long liver, and assuming the idiot politicians don't go on an inflation binge.

I accept that what I do is maligned, but I have built a business on my approach of low cost to the end user and complete transparency, and it has worked for our customers, who really can't be arsed to/are too busy to/are too old and tired/are frightened by state and media financial pornography to/do it all themselves.

If we are not careful we all fall into the trap of utter cynism brought on by reading too much meeja and listening to lying politicians and their satraps in the quangocracy.

14 February 2012 at 12:14
mombers said...

@Lola - can you point me to the Stigler et al paper?

14 February 2012 at 12:40
Lola said...

MW - hey I can only speak for what I can see and do. I am not saying that others don't exploit the 'information assymetry' for their own ends. And yes, I agree, that a lot of 'tax relief' is sucked up by the industry. You only have to look at the rates of interest on fixed rate cash ISA's compared to Building Society Fixed Interest Bonds of the same duration to see that. The same is true of pension term assurance where premiums are unjustifiably higher purely to get extra profit.

I am bullish about TERs. I have done my level best to get these down for customers as they are the biggest cost over time. And the way to do this is to use passive funds that track asset classes, and then build simple asset class portfolios with these. You really can do this at modest cost. We have 6 model portfolios that include exposure to global equities and the average TER is 0.43%. There is a flat annual fee of about £100 for the pension wrapper. We run these through a platform service (but you can do it direct if you want there are outfits that will sell you a pension wrapper for modest money and the you can use a spreadsheet or MS Money to manage it) which provide all sorts of admin services and web access etc that charge another 0.5 max down to 0.1 ish. As most of our pension clients have reasonably sized portfolios >£200,000 they can get all this for about 0.7/0.8 p.a.

But the answer to the tax relief / costs problem is not for more price controls (e.g. NEST; Stakeholders) it's for more competiton and more information and more transparency.

The development in retail FS over the last few years has been pretty dynamic, all driven by the improvements in IT and competition and the demands from blokes like me.

Anyway, it looks like tax relief will be restricted to basic rate and capped soon. Good. Something I have been arguing for for a long time.

14 February 2012 at 12:42
mombers said...

@Lola - what tax breaks are given to BTL? It looks like a normal industry to me - very similar to commercial property. The key difference is that people who happen to own their own homes do not pay any tax, whereas people who rent have to pay their landlord's income tax and CGT bill to some extent. Not to mention having to pay market rent for public services that home owners do not have to.
I think the only tax break that BTL has is the one where you change your primary residence to one of your BTLs before you sell, thereby eliminating CGT. But then again, exempting primary residences from CGT is a massive tax break for home owners.
PS I'm not in BTL

14 February 2012 at 12:52
mombers said...

@MW, Australia has compulsory retirement savings, and as a result their Baby Boomer liability is much less than nations that have kicked the can down the road. They have however had a house price bubble even worse than here! So I'm not sure if compulsory savings feed through to less money to pay mortgages. There are a lot of messed up policies in Oz though - negative gearing, supply restrictions, etc.

My main concern is how do you solve the demographic problem without some sort of saving? Can the government be trusted to handle it, like Norway did, or do we need to give people more trust with a compulsory but personally segregated account?

14 February 2012 at 12:57
Mark Wadsworth said...

L: "But the answer to the tax relief / costs problem is not for more price controls (e.g. NEST; Stakeholders) it's for more competiton and more information and more transparency"

Agreed. Index tracker funds seem to have low TERs, so people could just chip £x00 a month into one of those (once they've paid off the mortgage), job done.

M, L. Although tax rates on BTL are low compared to other types of income (and all land ownership is inherently subsidised), BTL is still more heavily taxed that owner-occupation. There are no overt subsidies for BTL (apart from Housing Benefit).

14 February 2012 at 13:00
Mark Wadsworth said...

M: "My main concern is how do you solve the demographic problem without some sort of saving?"

Some people are careful with money and like to save for the future; others are spendthrifts or simply don't have any spare income. Some people are risk averse (would rather pay off mortgage) and others like gearing up to invest (interest only mortgage, put spare cash into shares).

It takes all sorts to make a world. I don't see why this is the government's concern; you cannot change human nature.

So let's give 'em a half way decent Citizen's Pension funded on a pay-as-you-go basis (out of current tax receipts, preferably out of LVT) and let people get on with making their own decisions.

14 February 2012 at 13:04

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