My incoming e-mail of the week posed the question “How many zeroes are in a billion?” The authors claimed a billion is a difficult number to comprehend for most people but did a decent job of putting it into perspective.
For example, they claimed a billion seconds ago it was 1959. Having recently discovered the motto of the Royal Society, formed in 1660, is “nullius in verba”, which means don’t just take anybody’s word for it, I checked to see if they were accurate.
They weren't. A billion seconds ago it was 1979. But they were accurate with other claims which included a billion minutes ago Christ was still alive. One claim I couldn't check but could well believe is a billion pounds ago, at the rate of spend of this Government was only 13 hours 12 minutes.
1979 was very significant though. That year the Conservatives swept to power ousting the Labour Government. They then remained in power until 13 years ago when "New" Labour replaced them. In a couple of weeks it could be all change again.
When the Conservatives came in to power in 1979 they disbanded plans to compel employers and employees to contribute to a second private pension plan that would sit on top of State Pensions. They then went on some years later to bring in their "Freedom of Pensions" idea which led to swathes of people leaving membership of their Final Salary Schemes and going into private plans sold by smooth talking salesmen chasing high commissions.
Things couldn't get worse surely with an incoming Labour Government? How wrong could you be! They got much worse from 1997 when Gordon Brown as Chancellor started a multi year attack aimed at a wide variety of tax breaks enjoyed by pensions, especially Final Salary Schemes in the private sector.
The last 31 years of political interference of UK pensions has led to an increasing number of investors being forced into some type of private pension. Without sufficient knowledge they are put in charge of their own investment strategies, building funds which have to produce income when they retire. Last year industry statistics show almost £12 billion of annuities were bought at retirement. That number is expected to rise as Baby Boomers retire.
Final Salary Pension Schemes were crucially important to most retirees. Having advised thousands of people since 1973, in my experience the majority of investors do not understand money, never mind pensions, and they do not have any perspective relating to how much funds or income they require in retirement. In a Final Salary Scheme they didn't need that!
The end result is the typical pension fund has few zeroes. Last year the average private fund buying an annuity was £25,000. 98% of annuities purchased were not inflation proofed. 65% of people buying annuities don't bother to check with other insurance companies to see if they can improve their income. If they had bothered, estimates suggest up to a 17% uplift in income.
Most people don't even bother to check if they can have better annuities because of their ill health. And it seems 80% don't even bother buying a partner's pension to protect them if they die before their partner. Frightening!
Evidence shows the average benefits of those still lucky enough to be in Final Salary Schemes are 7 times higher than those of the self employed, and 13 times higher than those people chucked out of Final Salary Schemes into poorer alternatives.
And here's another frightening thought. If you've £500,000 of pension fund buying an annuity, you're 60 years old and want an increasing pension with two-thirds pension to your partner in the event of your death, the best income you're going to get currently is £15,000 gross. The fifth best rate is £2,000 a year less - for life!
So if you want to have a decent retirement income, it doesn't really matter who wins the next election, you're on your own. So go and get the best independent advice you can get, make it sooner rather than later for obvious reasons, but also because in a couple of weeks valuable current rates of tax relief could be the next benefit to disappear.
An edited verion of this article was published in The Scotsman
Saturday 24 April 2010.
