Alan Steel says, "Please be assured we are already prepared to maximise opportunities for our clients before 6 April and after."
The biggest ever shake-up of UK pensions legislation will be upon us on 6 April. Since 1961 there have been 285 major pension changes announced by successive Governments. Only 13 occurred by 1986. In the next 12 years there were 130 changes. In the 8 years since, a staggering 142 have taken place, including the changes due for A-day. (6 April)
The pensions industry is in turmoil. Pension investors are giving up the ghost. Final Salary Schemes are collapsing. With Profit bonuses have all but disappeared. The average With Profit pension average returns in the last 5 years are only 1.9% pa. Some returns are negative.
Meanwhile life expectancy continues to increase. A 60 year old woman today has a 50/50 chance of living beyond 85. There's never been a more important time to review pensions, seek opportunities, and get into the right investments discarding the wrong ones that are outdated and frankly discredited.
I was invited to speak at a pensions seminar for the members of the Law Society of Scotland. The seminar was to take place on 1 March which funnily enough is the 33rd anniversary of when I became an independent financial adviser. But would you believe it was cancelled due to lack of interest! Can you believe that?
Maybe it's because too many people, professionals included, just don't understand pensions. You can see from above why that would be the case. And perhaps they believe all the headlines telling us all the bad news!
30 years ago surveys showed only 1 in every 25 people managed to get to retirement feeling they'd achieved financial independence. A survey not that long ago reached a similar conclusion. There's been no progress in the last 30 years. In fact, if anything, fewer today achieve the results achieved by those few 30 years ago.
Notwithstanding what I think of Government interference and bad mistakes in the world of pensions, much of this financial mismanagement is down to a lack of perspective and basics. Which brings us back to broccoli and chocolate.
We all know broccoli is good for us. It's the sort of thing we should be eating regularly if we want a long and healthy life. But chocolate is tastier today. We'll get round to the broccoli later.
When it comes to money it's easy to spend and it's difficult to save. It's especially difficult to save if we're convinced there's nothing worth investing in. If pension plans apparently are rubbish what's the point? Well that's where the magic number of 72 comes in handy. If you're looking for perspective here's a good start.
Take any return on your money after tax, divide that into 72, and that'll tell you how many years it takes to double that money. So if you're getting 3% in deposit after tax it will take you 24 years to double the money. If you can increase that to a 10% return it doubles in 7 years, get it to 14% or above and you're doubling the money every 5 years.
But where can you get returns like that especially when economists tell us low interest rates and inflation lead to low returns on asset or equity investment. Look at Standard Life. They increased the With Profit Fund return by 16.7% and reduced their bonuses. Why? Well apparently because you can't get decent returns if you've got low interest rates. What nonsense!
This yarn has been spun for too long. Recently they've been spinning it again since 2003. But actually over the last 3 years anybody in a decent equity fund, especially for their pensions, have seen growth of over 14% pa, and in some cases over 20% pa.
Let's get back to basics. Pensions are exempt from Capital Gains Tax. Contributions going in are tax relieved against the highest rate of tax. So for a 40% tax payer that's a 67% uplift in your investment from day one. I appreciate there's some tax paid on reinvested dividends within the pension fund, but that's not that bad. Plus you don't have to buy annuities any more. And there's still Inheritance Tax savings.
So if you link the rule of 72 with these tax benefits you get a double whammy of good news. Actually UK Equity Income Funds are ideal investments for pensions and they're not a flash in the pan. They've actually been better Investments for Pensions than With Profits over the last 25 years.
A-day is dangerous for these chocolate addicts who are members of any form of Money Purchase Scheme, Section 32 Plans or EPPs, where service and contribution level has created a higher tax free cash level right now than the 25% of the fund that comes from personal pensions. A recent survey found 86% of members of such schemes will lose out in their tax free cash entitlement after A-day if they sit doing nothing.
Please be assured we are already prepared to maximise opportunities for our clients before 6 April and after. However, you may have policies we are unaware of. Or you may have friends oblivious to these dangers. So please give us a call if you think we can help.
This letter is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.