Dispatches: How to Blow Your Pension

Last night Channel 4 showed a 30 minute programme called “How to Blow Your Pension”. The premise being that the new pension rules might result in thousands of “pensioners” cashing in their pension pots, blowing the lot only to run out of money. You can see the show on the 4OD website should you wish to. The intention was good, but the execution rather miserable and once again missing the opportunity to educate people and whilst Michael Buerk had a good reputation as a BBC newsreader, clearly he doesn’t appreciate that a document from a pension provider is not actually advice – but information about options. Frankly it isn’t that much of a jungle out there, but you will need proper advice, this is not the time to become a DIY internet “expert” it has to work and last. Just because someone has teeth that they care for, doesn’t mean that they should do their own dentistry. Just because you earn, handle and spend money does not make you best placed to do a proper job of planning and generating income for the rest of your life… So I thought I’d have a go at explaining the issues.

New Pension Rules – Simple

Pension rules are changing, from April 6th 2015 anyone aged 55 will be able to access their entire investment based pension pot should they wish to. There will be no compulsion to buy an annuity (an income for life). The principles have not changed – in that 25% of the pot is treated as tax free and the remainder is treated as income when you take it, however you take it – and so subject to income tax at your relevant rate of tax. You can still buy annuities should you want to. That’s it.

Running out of Money

The difficulty is that for most people their pension needs to last as long as they do…. ideally a bit longer if they have a spouse that outlives them too. So in practice you need to be careful about how much you take, its got to last and once its gone, its gone. So you have to guess how long you and your spouse might live (clue – actuaries do this for a living and designed annuities).

Make a Plan

So you will also need to reflect on how much income you need, what plans you have and it would be sensible to allow for some unexpected costs. You may need to pay for your own care or medical treatment – if you wish to choose how this is provided to you. You will also need to reflect on the impact of inflation, which at the moment is at record lows – but do the things you pay for really have such a low rate of inflation? and making a guess now for the next 20, 30 or perhpas 40 years of retirement needs some proper thought. If you don’t buy an annuity (which for many will be a very sensible option) the fund will need to grow (just to stand still and keep pace with inflation at the very least) – so how much investment risk is appropriate? what returns do you really need? what happens if these aren’t achieved? how will the portfolio be looked after? … and so on.

Review the Plan

As a result of these new “freedoms” (which some already enjoy anyway) you have a plethora of choices and the truth is that these need to be reviewed – in fact thats the beauty of it all, you get to alter your decisions (unlike simply buying an annuity and having to live with the consequences for the remainder of your life). The ability to access the money means that the crooks are on the scent… be it “pension liberation” or rubbishy investments that aren’t regulated and promise more than they could ever deliver. An independent financial adviser can sort the wheat from the chaff, but a financial planner, will do that and also help you plan your income requirements to suit your unique requirements.

Was that really so hard?

Dominic Thomas

Dispatches: How to Blow Your PensionDominic2023-12-01T12:39:51+00:00

What’s your pension really worth? Dispatches on Channel 4 last night

What’s your pension really worth?

Michael Buerk, still working at 67 fronted the Channel 4 Dispatches programme asks what pensions are really worth. The programme which was shown last night can be viewed online. Sadly it was fairly predictable, with headline statements and little helpful information.

The Lifestyle You Want

The programme began asking what three people expect from their pensions – in terms of the income that they need to have the lifestyle that they want, speaking to an “expert” they come up with some rather all-too simplistic “numbers” in terms of how much they need to pay in. This is what I might generously describe as an impoverished discussion. The only message that was conveyed really was that you need to figure out how much you need and start saving early.

Options and Choices

The question was posed about annuities and the appalling number of people that do not shop around for the best deal. I have every sympathy, but also wonder what it takes for people to realise that that they always have a choice. There was a sorry tale of a man that had a small pension pot (£29,000) and he bought a single life annuity from Scottish life, he then died and the annuity stopped. The family were surprised. I have to say that Scottish Life were incredibly generous in offering to alter the annuity to a joint-life annuity retrospectively. Brownie points to them. However some couples really need to think a lot more carefully about decisions that effect them both and not simply leave it to the other to “sort it out”. Which is why I do not see couples separately.

What About Proper Planning?

Despite phoning around, Mr Buerk failed to really communicate the need for expert advice – from a financial planner who would engage with the income requirements into the future and all of the options. Simply phoning around for the best deal is not good enough, it is better, but still grossly inadequate. Ros Altmann’s appearance was all too short, someone that genuinely understood the issues was not given sufficient air-time. This was typical lip service to educational information and rather more to do with headline grabbers.

Pensions Liberation is a Scam

There were further partial truths thrown in for good measure, a brief bit about pensions liberation – which breaches HMRC rules, so I would describe as illegal and yes it is possible to find someone somewhere to arrange one for the right fee (as with anything else). Frankly in the time available it would have been better to have had a separate show for this topic. Pension liberation can lead to complete financial wipe-out. It is a scam.

Pensions v Property (yawn)

So the alternative to pensions? Well thankfully the report didn’t suggest property purchases were the solution (other than the property expert). Property prices are baseless and fuelled by unsustainable debt. There was no mention of taxes, running costs, insurance etc all of which need consideration for using property as an investment. Certainly there is a place for it for some clients, but as part of the solution not the entire solution. In an ideal world your income in retirement is derived from several sources.

Education, Thinking and Planning

The programme ends with the challenge for us all to think about what we need and to consider how we are going to get there. Sadly no mention of the real “experts” to help with this process – financial planners like me. Who are not paid to sell products but to build a financial plan around real lives and real values. I wonder if the Government, regulator and media will ever get it?

Dominic Thomas: Solomons IFA

What’s your pension really worth? Dispatches on Channel 4 last nightDominic2023-12-01T12:38:36+00:00

Compare your life

I wonder if you have seen any of the new series on Channel 4 called “Compare Your Life”. In essence its a show where a couple would like to change their lives and using a series of questions determine the options for a significant life change. I have only seen one episode, so my observation may be rather narrow. The adviser to each couple is Carlton Hood, who used to be head of Confused.com and now marketing himself as a guru of choice elimination.

The show is useful in that the subjects get to see “real-life” options. In other words, moving to France and setting up a small town business – means going to France, selecting a small town and considering the businesses for sale. The “clients” are asked to focus on what they say they value.

My main concern is that whilst this choice reduction exercise has a place, to run a business (which is effectively what is being offered) you need a broad skill set or an awareness of the skills required so that these can be outsourced and secured. Running a business is not easy, most fail within the first 3 years. It can offer a different lifestyle, but not necessarily a better one. I have reservations about precisely how the list of choices was reduced, which seemed rather random. To make a business work, a high degree of commitment and passion are required, picking an “off-the-shelf” option doesn’t really engender either.

The episode I watched (2) involved an employed couple in their mid-forties, seeking to spend more time with their children. The end solution selected from those proposed involved both of them quitting their jobs, moving location to a smaller house, running a post office/village shop whilst increasing their borrowing considerably. This may work out very well for them, but running a retail business requires staffing most days of the week, most hours of the week. The mere fact that the business is physically part of the home, can be helpful, but of course the reality is that they would technically always be at work. The smaller living space also posed problems for growing children and the yet to come teenage years.

So whilst the premise of considering what life options you have is very valid, the argument that emotion can be removed from choice is a peculiar one, given that most of the choices exercised were based upon emotion (time with children). I also found it odd that this was really a programme about choosing a new lifestyle, without really defining what the lifestyle was and how much it would really cost. To my mind, this was not a scientific approach at all, but a guestimated hope that the short list was indeed suitable. Yes choice can be overwhelming, but failing to properly identify the lifestyle you want is the biggest and most common mistake. This is precisely what good financial planning should achieve.

Dominic Thomas – Solomons IFA

Compare your lifeDominic2023-12-01T12:23:43+00:00