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Is there a problem with Pensions?
Jul. 20th, 2015 12:17 pmAs many of you can attest, I can sometimes be very boring on this subject and probably sound smug. This comment might seem to confirm these opinions, but it really isn't meant to. Having done a little bit of thinking and some calculations, (from the position of an ill informed observer, of course) I often get irritated when I hear politicians and pension providers going on about how much more we all need to be saving and contributing. Do we? Really?
The background is the pension I took out with the Prudential. Way back in 1990, I was advised to move my BT pension into something that "will give you some growth". So, knowing no better, I did. BT released £22k representing 11 years of contributions. That £22k is now worth £135k. Although it is very comforting, I am not claiming any credit for this performance. As I said, I knew nothing better and just signed up for what I had been advised.
Since 1990 I have not put anything into the fund. Not a single penny. The value plateaued in the late 90s and even dipped post-2008. Yet, it still represents an average annual growth of around 8% (with profits). Now, I've no idea whether I have been incredibly lucky in having chosen a particularly healthy fund or whether - perhaps - other funds might have done even better. As far as I can tell, the Prudential management of the fund has been, well, prudent. They've retained profits in good years to boost the lean ones and still achieved 8%.
A few minutes with my spreadsheet tells me that a monthly contribution of £110 into this fund over an 11 year period would produce the requisite £22k. If that contribution had been continued throughout an average working life, the fund would grow to be £500,000. Half a million! ladies and gentlemen. More than enough to give a rosy pension, even with the current pitiful annuity rates.
I'm trying to remember how my BT pension worked and I think it required a 3% contribution from my salary and BT would top it up by 6%. With that split, £110 would require £36.66 from my gross salary which represents a gross annual salary of just £14,666. Well below the current median value. Even thinking about salaries back in the early 80s, this wasn't so unusual and most people expect an initial low salary to increase over the years.
Obviously, the magic of compound interest means it's the early years that give rise to the biggest gains and it's the early years when one is usually earning less and often have other calls on ones funds, such as mortgage, children etc. All that being said, however, I still find myself getting angry with financial advisors telling us we've got to put more and more money into our pensions. For whose benefit? If other pension funds cannot match Prudential's, is that because the Pru has been incredibly lucky or could it be that other fund managers have been incompetent? By getting policy holders to put yet more money into their pensions, are they protecting their future income or simply providing the fund managers with yet more yachts and luxury holidays?
The current "We're in!" advert for work place pensions is encouraging, but only if those pensions follow the Pru's example and really do invest and properly manage those contributions. I'm not sure what the government can do about their own pensions. Had they had the gumption to actually invest the NI contributions, instead of simply using them as a furtive tax, then perhaps they'd not be in the pickle they currently find themselves in.
The background is the pension I took out with the Prudential. Way back in 1990, I was advised to move my BT pension into something that "will give you some growth". So, knowing no better, I did. BT released £22k representing 11 years of contributions. That £22k is now worth £135k. Although it is very comforting, I am not claiming any credit for this performance. As I said, I knew nothing better and just signed up for what I had been advised.
Since 1990 I have not put anything into the fund. Not a single penny. The value plateaued in the late 90s and even dipped post-2008. Yet, it still represents an average annual growth of around 8% (with profits). Now, I've no idea whether I have been incredibly lucky in having chosen a particularly healthy fund or whether - perhaps - other funds might have done even better. As far as I can tell, the Prudential management of the fund has been, well, prudent. They've retained profits in good years to boost the lean ones and still achieved 8%.
A few minutes with my spreadsheet tells me that a monthly contribution of £110 into this fund over an 11 year period would produce the requisite £22k. If that contribution had been continued throughout an average working life, the fund would grow to be £500,000. Half a million! ladies and gentlemen. More than enough to give a rosy pension, even with the current pitiful annuity rates.
I'm trying to remember how my BT pension worked and I think it required a 3% contribution from my salary and BT would top it up by 6%. With that split, £110 would require £36.66 from my gross salary which represents a gross annual salary of just £14,666. Well below the current median value. Even thinking about salaries back in the early 80s, this wasn't so unusual and most people expect an initial low salary to increase over the years.
Obviously, the magic of compound interest means it's the early years that give rise to the biggest gains and it's the early years when one is usually earning less and often have other calls on ones funds, such as mortgage, children etc. All that being said, however, I still find myself getting angry with financial advisors telling us we've got to put more and more money into our pensions. For whose benefit? If other pension funds cannot match Prudential's, is that because the Pru has been incredibly lucky or could it be that other fund managers have been incompetent? By getting policy holders to put yet more money into their pensions, are they protecting their future income or simply providing the fund managers with yet more yachts and luxury holidays?
The current "We're in!" advert for work place pensions is encouraging, but only if those pensions follow the Pru's example and really do invest and properly manage those contributions. I'm not sure what the government can do about their own pensions. Had they had the gumption to actually invest the NI contributions, instead of simply using them as a furtive tax, then perhaps they'd not be in the pickle they currently find themselves in.
