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Pensions |
There are plenty of salesmen out there who will tell you their version of the positive
benefits of saving in a pension plan. But the bottom line is that a pension plan is just
saving in a particular tax wrapper. All forms of saving are legitimate means of providing
a retirement income.
You can save in an ISA, in ordinary bank savings accounts, in unit trusts, directly in the
stock market, in property or you could just put money under the mattress. Note that I'm not
saying "don't save", my message is to consider all forms of saving as being legitimate means
of providing for retirement and which is the best for you.
If you put money into a pension plan it is true that you save tax. However it is rarely
mentioned that when you draw the money out as a pension you pay tax. So for a basic rate
taxpayer the pension plan is pretty much tax neutral. The income the pension fund earns is also
taxed because the tax credit on dividends is no longer refunded to the pension plan. In short
for a basic rate taxpayer the tax breaks aren't what they are cracked up to be and even for
a higher rate taxpayer I don't think they adequately compensate for the loss of control over your money.
The big problem with pension plans is that once you pay the money in you have lost control
of it. The pension company might cease trading, the fund manager might quit and who knows what
idiot might be running your fund in 5, 10 or 20 years time, or the pension
company might just decide it is no longer interested in marketing the type of plan you are in.
10 years ago if I had dared suggest Equitable might cease trading, or Royal & Sun Alliance
might close its life funds, I would have been laughed at. But both have happened and there
is no saying who might be next. Once this happens your money is trapped in a fund that nobody
is marketing. That means they no longer have any incentive to perform well. They don't care
where the fund is in the league tables and they don't care about keeping you happy because
they aren't taking any more of your money. Now this won't happen to all funds but when you
invest you are taking a chance that this won't happen at any time in possibly the next 40 years.
You can buy an annuity when you retire but, from 6 April 2006, you don't have to. While an annuity pays an income
for life if you die early the insurance company gets to keep the remaining money. If
you live a long time the insurance company must keep paying. Essentially an annuity is a
bet with an insurance company. If you live longer than expected you win the bet. If you
drop down dead after a few years they win the bet.
BUT, if you want to save outside of a pension fund you need to have the discipline not to blow
the money. It's got to potentially last decades.
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| Public Sector Workers |
| Did you know that
public sector workers make up 18% of the workforce but they are entitled to
36% of accumulated pension rights. Essentially private sector workers are financing
index linked public sector pensions whilst at the same time being told they are not saving
enough for themselves.
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| Gordon Brown |
| Gordon started the
rot with his pension raid when Labour first came to power. By denying pension funds
the right to recover the tax credit on dividend income he reduced pension fund income by 20% a year.
This costs our pension funds £5 billion a year
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| MP's pensions |
| At the same time as they
lecture us about not saving enough MP's have voted themselves one of the most generous
government pension schemes in the world.
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| Tony's pension |
| Tony Blair's pension is reckoned
to be worth £1.5 million. That is the amount required to buy an annuity equal to the monthly
pension he will be entitled to. Under laws to be introduced it won't be possible to save this
much in a private pension scheme so Tony gets a pension that will be impossible for the rest
of us. I don't begrudge him his pension but it should be possible for the rest of us as well.
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