As many of the readers of young Deadbeat move into their 50's there's a bit of contrarian thinking to throw out to you. Many of you will have heard about mis-selling of stuff and will have long since had rebates. Regulators like to fine people after the event, not warn us or release good advice. As I'm not a prophet, and will not profit, any words I use are merely thoughts of a deranged Vinny Bee.
As background I argued against endowment mortgages as I wanted a repayment one in the 80's and I was refused in a few places before finally getting what I was after. When advised in the 90's to put all your pensions into one pot I thought 'not'.
And now its 2016, I think differently. I think from a personal point of view I'm getting my cash out as its a great bargain, I reckon 55%-65% better than leaving it. I also think that death is an issue better handled out of a SIPP and after the life I've led, it cant be far away. Finally I think the rush for the exit created by pension reform could bring down some pension funds and although I think my two are fine, I wouldn't like to see all the lifeboats gone before arguing my case.
I'll touch on the latter later, but for now why the change in value?
If I had transferred my pension in the 90's from a 'final salary scheme' I'd have been given a chunk of money deemed enough to buy a pension in 2022 (when I'm 60). Quite simply they'd have looked at the likely return over the next whatever years. Interest rates were higher so all the projections would suggest a decent return if you just put the cash in the bank and got interest on it every year. To buy a pension of £5000 a year would probably have cost about £60,000-£80,000. So that's the size of the pot of cash I'd have got transferred out.
The pot size can be confusing. While a member of a scheme, you dont own a pot, you own a final salary pension and the pension fund has the responsibility to pay whatever price it is for your pension. That price goes up and down and only when you transfer out does it become your pot. That transfer value is the amount required to buy you a pension at the date of transfer. Its a bit like leaving a casino just after a winner or 4 spins later, or worse still 2 spins before your winner. The amount required to buy a pension will vary, largely with interest rates which impact on annuity costs. 0% interest is the best time to transfer.
Today interest have been at a low for a long time, a very long time and all projections from the Bank of England suggest this may not last for ever, but probably a wee bit longer. In other words the window might just be closing. To buy a similar pension would cost a lot more - roughly 30 times £5000 = £150,000 probably. I'm no actuary, I just add up. So if you had transferred out that mis selling mob deserve all the abuse they get. I dont care about the past - its the here and now, and all of you who still have a final salary pension should ask the question. Trustees no longer send out benefit statements as they dont want people leaving when the values are so high. They have a pot to protect on behalf of all the members of the scheme.
Where anyone has a 'final salary scheme' even one they've been told closed two years ago or whatever, they should ask for a transfer value figure. Asking doesn't mean you'll have to transfer out it just means you know what its worth. You ask for a transfer value and also a statement of benefit and a what if I retired at 55 or 60, just choose your favourite number between 55-60.
Governments seriously mess retrospectively with legislation and while I had thought I was hoping to retire at 50, Tory Blair changed the rules and I was fecked. At 55, I plan to get out and with 18 months left it seems a grand time to shuffle the eggs into a row. The deal is you can take 25% tax free so if that transfer pot is so large you might find your tax free, 'in yer mit' cash is huge. Before anyone starts spending it, remember this is to last you a lifetime and the reason why pensions are protected is so that we dont go out and party like its 1999. A wee splurge is good though and looking at the figures above, if I get £150,000, I get £37,500 tax free, that's £5000 a year for 5 years after my retirement party and in the meantime the £112,500 left can still go up in value. So here's how it plays in my head. I splurge £12,500 in year one and have £5000 a year until I'm 60. Then I take £5000 a year every year until 84. If I have got any kind of interest then I'll have something left, if not I jump off a cliff. The alternative is to leave it where it is and get £5000 a year, no splurge and hope I get past 84...
In all seriousness, the £112,500 left in the pot needs to be managed and you should get a minimum of 2-3% from very safe investments. If you go for higher risks then you're just gambling and that's what we did with the £12,500 at the retirement party. If you get 2-3% every year then your pot at 84 will still have £60,000 in it, which is £6000 a year for 10 years which will see you to 94. If you get to 94 your pot will be pretty decimated but at 2-3% you will probably have about £10,000 left to get you some fags and beer on your way to a 100, when I'll push you off that cliff!
The alternative I've been offered was £20,000 lump sum and £3,500 at 55, or £5000 at 55. As you can see from the figures above I'm getting a larger lump sum and still taking £5000 a year. A wise financial manager will point out that an annuity bought will be for life so what you have is a gamble on how much money you need when you're 100. Some of us also are looking at the other side of the equation and what happens when I die before I'm 80. Well the good news about the SIPP is that the cash just gets handed on to the beneficiaries at their marginal rate of tax. Obviously if you go down the route of transferring the financial advisor you appoint, has had to do an exam and will know all that shit, and inform you. The bottom line is you get more but please remember to use the pot over 30 years, some arseholes are cashing in the full whack and paying tax on it. You dont need to be a financial guru to work out how foolish that is, although it does mean the tax man has the cash to pay for the bail outs and then will be a few.
Most pension funds have been underfunded for a while. The nature of the fund is usually that during lower rates it will appear under funded but over the life cycle and because of the age demographic of the fund it will even itself out. Not now and all bets are.
Nothing is more guaranteed than a massive financial collapse of pension funds housing final salary schemes. Every company that operates one will be under serious pressure as people like me tell everyone to get their cash off the table. We are talking Chicago Speakeasy 1930's prohibition, please finish your drinks, its a raid. This will be as bad if not worse than the house selling frenzy that preceded the 2007/2008 crisis.
Capitalism has gone rogue and is at the vagaries of clueless greedy bastards. Quite simply if I got offered the same figures as before I would not run for the hills. As a clueless greedy bastard, I'm not stuck between a rock and a hard place, I just need to jump. I dont want to be filling in forms claiming I was part of a scheme that is now skint. Pension fund trustees cant borrow money to pay your back. They are controlled ponzy schemes where people will get their money back if they just wait and form and orderly queue. Guess who was at the centre of this, clueless greedy bastards running banks.
Pension funds are pots of cash that go up and down. During the 1980's there was so much cash in the pension funds that they were raided by firms and governments.
Many of the banks gave early retirement to members of staff with augmented terms, paid for from the riches in these over funded pension funds. Redundancies would be paid partially by the firm but the real cost was in the pension fund. Enhanced terms meant that people left on full pension at age 50. Their package was as if they had gone at 55 or 60, it was fully paid up for them, but not to the pension fund. Quite simply this was one of the worst abuses of pension funds.
The banks argued that the Pension fund was free, it wasnt. It was part of the terms of employment that a non contributory pension existed. All employees essentially paid in as their salary was lower than it might have been. When they signed up as 20 year olds to a job in the bank or insurance company, this job for life would see them progress through grades and salary bands until they received their final salary as a pension. This was their rights in 1980 or 1990 or 2000. Then word hit the street. We cant fund this anymore. ER? YES YOU FECKIN CAN! This money stolen out of the pension fund by greedy custodians of businesses who gave themselves bonues for making 50 year olds redundant and promising them unlimited cash.
What were the UNIONS doing? Nothing. They looked after the members who exited. They got the members who retired at 50 and outstanding deal, they also helped sign the death warrant for their other members, the ones who now find they've lost their final salary scheme. This explains why the UNIONS never pursued it. They were as culpable as the greedy management. It absolutely makes my calm exterior go purple with rage.
These funds were so over funded during the 80's that post MAXWELL, the only thing our idiotic legislators could do was pass laws that gave management carte blanche to raid the funds. If they ever looked under funded they had to put a plan in place. When Brown became Chancellor that was the tin lid. If you can all raid them then the government will too. Our tax raising powers became the envy of the world when the pension funds lost their dividend tax credits.
The problem is all pension funds were hit and this meant over funded and generally balanced schemes. Over funded schemes had been created from good prudence which used to be a great Scottish trait. Money for a rainy day in your back pocket, down your sock and in that secret compartment in the heel of your shoe. Weak management and boards would allow baby bruisers to turn the prudent over even finding the stash in the shoes. Worse still, these arseholes got promoted. Did we learn nothing from Nick Leeson? Yes we did, its that greed works, you just need to keep greasing the palms. Our senior politicians now view their book tour with avarice. Their agents cant wait to get them off the political stage fast enough, to get them earning. Lets face it once you've served some time as an MP your lifetime allowance is assured - your final salary scheme does not rely on number of years completed and so why waste any more time at the sauce, aka HP.
I like how the source of the Thames gets bastardised into a cultured "I'm off to the sauce" by the cheery fat MP of a monday morning.
I digress, back to the funds. I still find it abominable that changes to employees terms and conditions can see the removal of the final salary pension scheme and have no legal challenge. When people suggest the unions are in management's pocket, its hard to disagree. Board room chats and chocolate biscuits, never mind the selection of wine at lunch, or networking as I believe its called.
So if all transfer values are inflated by 55% then all pensions will most definitely be underfunded. If pensions are definitely underfunded and people start transferring out because its a good deal, there is a collapse.
It cant be any simpler. If the pension fund has £50m or £50bn, if it is 55% short, its more than the parent of the pension fund.
Another clarification here. Pension funds act independently from the parent, but they rely on the parent as the only source of new funds. Back in the 1980's and 90's when all these deals were being cut the independence of trustees was not so assured. Trustees frequently had dual roles as masterminds of the main business, hence the goofy idea that we've got loads in the pension this week so offer them enhanced terms.
The funniest, or most comedic for me of these pay offs at 50 was that actuarially you life expectancy was 80-82 in those days. HEY! Elastica, not if you stop working at 50 with a pension of £30,000 guaranteed to go up ever year. Your life expectancy has just had 10 years added to it. Cheek by jowl in Glasgow are Partick, Possil, Bearsden, Yoker, Drumchapel and Milngavie. If you've retired at 50 after 10 years as a bank manager you live in the area that dies on average at 95. If you got emptied as the cleaner of that branch when it shut you live in the area that dies at 58. Its called the post code lottery. In Edinburgh the same 78 year old branch manager retired at 50 and lives in Davidson's Mains 400 yards down the road from the Muirhouse flat his 59 year old cleaner died in last week.
The pension funds are bust and will only get more broken with time. The pensioners who are locked in and receiving their money will feel brilliant while it gets paid and I suggest they may even be the ones who are protected more when push comes to shove. They will be in their 80's and 90's when their pensions suddenly dont get paid by the pension fund. The government will step in on a first come first served basis but it will be too little too late. Figures out recently on a high street store suggest the first disaster is even closer than I expected.
What could they do now? Well raise interest rates for starters. It would stop munchkins like me suggesting you transfer out. The transfer value would drop and my rush for the exit with it. Even if I did leave I'd not be taking so much out of the pot. Policy makers have so many instruments but as I've said Capitalism is a busted flush as there's so much money to be made from spotting the need to raise interest rates. Corruption has always existed but in my humble opinion it is now as big a lever as many other economic instruments and yet there is not as much written on the subject. Laws are being written retrospectively so even if you get your money out of a scheme some bright spark might levy a tax on anyone who was once part of a scheme thats now gone bust.
Hey! Elastica dont care, their hit was in the 80's and not long after that Dad got his retirement from the bank. 33 years he's been away from that place and he's looking better every day.
"Its funny how the bank managers are living longer these days" he laughs. "In my day you got the manager's chair when the previous one had a heart attack and died slumped on his desk."
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