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08/09/16Can’t touch this….

Cant touch this

I daresay, the title of my blog for some of you, has conjured an image of MC Hammer, sliding along the floor in pantaloons that, were affectionately known around my neck of the woods as..well…’Sh*t Catchers’ The middle seam, when legs were apart would be below the knee, yet around the ankle, there were elasticated cuffs..quite a sight!

For others, it’s a familiar rant by a parent or child, or even as I show above, a simple message on a case or on a folder basically saying ‘leave it’

So where am I going with this? an hour ago The Post Office announced a series of 24 hour strikes, as branch closures, job cuts and pensions come under attack.. The following is my own viewpoint and I’ve used my own ideas-So don’t take this as advice, just something that hopefully, gives you a bit of info and food for thought….

Earlier this year, Financial Times Journalists voted for a 24 hour strike over Pensions, so did Dorset Firefighters and two Belfast leisure centres closed for a day as a result of similar action. Tube workers did the same in May this year.

Yes, the message is clear-Don’t touch…my pension.

A pension? they strike for a pension? the same investment vehicle we hear Andy Haldane -Chief economist at The Bank of England- say is “Too complicated” and I’d “sooner invest in property”
The much maligned investment that most financial journalists pick holes in and the investment I hear being described as “Rubbish”, is causing strike action?

We need to look into this then….

Let’s be honest, any investment that starts off with “You can’t access this until you’re 55” isn’t going to win many friends is it? OK, the access age will lower, if you are in a profession/Job that has been given special terms; Armed Forces, Police, Professional Footballer, Jockey etc-I could go on, but you get my drift.

Once we get over the Duration, we start to see some goodies:

  • Tax relief on contributions at highest marginal rate of tax paid…So if you earn say £30k per annum, your highest income tax rate will be 20%, so with tax relief, an £80 per month from you, will be inflated to £100 overnight! 20% growth on your money!
  • Once invested, your money grows predominately free of tax-Now there is a small element of dividend tax that can’t be reclaimed, but in your hands, it grows tax free
  • If death occurs before you retire, the fund is payable to your selected beneficiary(ies)
    At age 55 (or earlier, when dealing with special recognised careers) you can take a quarter of the fund value as tax free cash-either as one lump, or a bit at a time.
  • The rest of the pot can be invested to provide you with an income for life, which will be taxed in the same way your income is now or;
  • You can opt for a flexible access pension and draw off what income you want when you want and ultimately when you die, it can be left to whoever you want to.

Oh, and we haven’t spoken about the 2,500 + investment funds available.

What about costs, I hear you say? well yes, no one does “‘owt for owt” If you are putting your money into a series of investment funds, there will be a charge which the fund manager will deduct-typically anywhere between 0.5%-1.5% per year, dependent upon the complexity of the investment recommended, so lets say you have £30,000 in your pension pot, £150-£450 per annum will be deducted. But remember, you’re getting 20% PER MONTH tax relief, every time you pay in. Ultimately, you have no idea what your final value will be, but reviewing it regularly will help you and when the day eventually comes for you to start taking benefits, there won’t be any surprises.

Now, when we consider the strike action being taken, we are talking about schemes that have similar mechanics, but the structure is very different. They are based on a percentage of Salary and so long as that individual stays employed, the pension value per annum, is a known figure to the individual and in fairness an unknown cost to the employer.

Lets take an example. A boy of 18 starts stacking shelves at a supermarket, earning £5k per annum. 35yrs later, he is chief executive of that supermarket, earning £450k per annum. His percentage payment into that scheme is set at 8% of salary from when he joins and doesn’t change. His potential pension could be worth £262,500 per annum, yet at his peak earnings, he paid just £36,000 per annum.

The supermarket would have had no idea how far this persons’ career would have gone and no idea what the future cost of his pension would be (there’s a good chance some £50-60k per annum would have to have been paid in by the supermarket, when our man was paying in £36k).

Now, lets say this supermarket faces competition, it starts losing market share and enters into a price war-its profits reduce, there isn’t enough capital to fund pensions and they need to create breathing space-what can they do? push out retirement age? increase contributions from members? penalise anyone who wants to retire at the original retirement age? change the definition of ‘pensionable pay’?

When I worked for a big Corporate company, all of the above were implemented and its my perception, that along with other measures, it’s what’s being put forward to members of the aforementioned companies who are going on strike.

Mr Haldane and others got it so wrong….A pension is a valuable asset. It doesn’t have to be complex…and Isn’t complex when someone takes time out to explain it.
By the way, if you understand a bit more about pensions now, that you did 15 minutes ago…tweet, text, or email me.

Have a great rest of week,

Victor

I'm on a mission to de-mystify financial services

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