Thursday, 19 May 2016

Andy Haldane Maybe the First Honest Bank of England Employee...

...for admitting that he has absolutely no clue as to what he is doing.

FWIW pensions are a dead simple concept. They are just deferred income.  What make them complicated is all the Kafkaesque rules written around them by the likes of Haldane and his cronies.

Dear God. What next! What next?


To save putting this in the comments thread.

The principle around the pensions tax relief is that you are deferring your pay.  You get tax relief on contributions and the fund grows free of CGT and CT/IT (Yes, MW I know I know  - but this is the principle).  But when you draw your benefits as an annuity you get taxed on the whole payment, not just the interest component as in a purchase life annuity.  This applies however you take the 'pension'.

The laws of compound interest and the expected return on a mixed fund of shares, bonds and property (the assets in a typical pension fund) mean that if you save between 12% and 15% per year of your gross income, you will, by about age 65 have accumulated a fund large enough to buy you a 'pension' which will be about 50% to 67% of your final wage.  This is just one of those 'laws' that works.

The problem is all the bloody rules around this simple concept.  They - the government and their bureaucrats - have, to put it in technical financial services language, so forgive me, fucked it all up. End of.

I have run a business in this area for nigh on 30 years now and I have seen these ratios work and I have witnessed the utter, utter failure of the likes of Haldane and his cronies to do anything sensible ever. Ever.

And just to make another key point we do our level best to keep charges low.  But when upwards of 70% of my revenue goes back out of the door in a combination of taxes and regulatory costs, we are not the cost problem.


Mark Wadsworth said...

L, to beat DBC to the punch, they will re-state the position that loans create deposits.

DBC Reed said...

@L "Pensions are deferred income" says the expert.You sure about this? In the examples given the victim is supposed to get £25,000 on retirement after putting away less than £2,000 pa in "deferred income" for an inadequate number of years.Obviously I don't understand the magic of interest or investment of the accumulated premiums or heaven forfend, cross subsidy. But neither does Andy Haldane.Not sure about you: you have made such a hash of explaining it . Perhaps the central concept needs more than five words.

Dinero said...

The interactive table at the bottom of the article, what is that based on.

Anyone got any comments on that interactive table at the bottom of the article.

Mark Wadsworth said...

The pensions regulation mess is not the BoE's fault.

It is the fault of successive chancellors* saying "One more tweak and we've fixed it" without being brave enough to chuck all the old rules in the bin.

* Whereby Brown and Osborne between them are responsible for about two-thirds of the complications, even ignoring the complications which they themselves introduced and then scrapped again.

Lola said...

MW. I agree the BoE isn't at fault for the pensions mess. But it has a contingent responsibility with its remit. And Haldane - who is just another bureaucrat like the FCA's bods - is just typical of the class.

Lola said...

DBCR. FYI. You have mentioned before that you were in education. The employee contributions to the TPS were about 6%. The employer contributions 9the last figures I have) were 8.03%. That is 14.03% which roughly confirm my rule of thumb above.

Dinero said...
This comment has been removed by the author.
Dinero said...

> Lola's update

You pay tax on the pension draw , however By deferring the pay to later life you are getting the benefit of the tax free income allowance £11K on the income once again. If that £11k income was taken in the working life it would be taxed 20,40% = £7K after tax.

Can anyone make any sense of what that look up table at the bottom of the article is getting at. 5 contributions of £15k = £75K to get a pension of £25K, etc.

Lola said...

Dinero. Make sense of that table? No.

Age 25 now.
Desired pension income at 65 - 25000 p.a.
Annuity rate - 5.7% (level with 50% survivors benefits)
Implied fund size 25000/5.7*100 = 438596 (!!)
Monthly gross payment assuming 6% investment return net of all costs, by spread-sheet - £434 p.c.m. That is £5213 p.a. or about 20% of current NAE.
But from my previous comment 25000 would be = 50% of final pay which implies gross pay now of £50,000. Therefore my rule of thumb of about 12% to 15% of gross earnings works. Note that this is for a level annuity. For an indexed annuity you can double the costs.

Anonymous said...

The scandal with pensions is more to do with the 'scams' operated by fund managers and the like. The whole industry is one big rip off.Generating hidden charges by churning the assets. Levying excessive exit fees [that scam is about to be curtailed]. The myth that actively managed funds which charge more deliver more. Most under-perform a simple FTSE tracker.

Mark Wadsworth said...

Pc, agreed. Ultimately it is all rent seeking nonsense.

Lola said...

P156 / MW. Not ALL of it is rent seeking nonsense. MOST of it might be. But as we all know all subsidies return to rents (as MW has proved with pensions). You can see this clearly in cash ISA's where the same one year fixed rate deal in an ISA does not reflect the full benefit of the tax relief compared to the same deal outside an ISA. But that's not the case with investment ISA's where the underlying costs are the same in or out of the ISA wrapper. Personally I'd scrap all the tax breaks. Anyway when we get into power and bring in LVT and scrap all the other crap taxes there will be no income tax to reclaim. Good.

P156. The exit fee thing is not as clear cut as people make out. A pretty high proportion are for with profit funds which smooth returns. If someone cashes in early it could be at the expense of other investors remaining in the funds. Property funds also have exit charges for similar reasons driven by the fact that property is illiquid and the pricing is opinion.

It is well known that active managers don't beat the market most of the time. But a simple tracker is often hobbled by its constraints on having to buy to adjust. You can now get VERY low cost smarter funds that aren't as constrained as simple trackers.

As to hidden charges, these went with us from pretty well our get go. In any event Fitzrovia pioneered TER's (now OCR / OCF?) which give the actual costs of funds.