Pensions

What I've learned from researching pensions for my dad. [this is in no way investment advice]

So, my dad's turning 65 in April 2011 and I took a look at what his options are. Obviously, because we decided to provide jobs to many middle class workers (see previous post) we  had created hundreds of needless rules to ensure that only the rich can be tax efficient whilst the rest of us have to spend inordinate time and money for the same result.

 One thing I've found is that the insurance and investment industry create a whole new language to make themselves appear more knowledgeable than they really are! Terms like index-linked, annuity, income drawdown, ETF, fund platform ensure that you lose your hard earned money to someone who gives you all the risk and takes a big fat reward upfront. So after doing some significant research as a mere mortal there are a few things you should look out for.

1. If you have a pension, find out what its been invested in all these years, give your pension provider a call and then look up the prices over the last 2 years on Google finance and Trustnet (or similar) and see how they did. In all likelyhood you paid them over 2% of your fund every year to give you supposedly better than average returns.

2. Inflation is supposed to be the increase in the value of goods and services each year. These days its the increase in the amount of money in the country because the government keeps printing more. When the money supply goes up (i.e the goverment prints more) the value goes down. This often leads to misleading statistics about bread costing 3p when your grandfather was a youngster and 90p today etc etc.. The cost of bread hasn't increased, the value of your penny has actually decreased! Its just a "clever" way of controlling the middle and working classes to ensure the majority stay poor - after all everyone can't be rich that's not how capitalism works.

3.Thanks to the financial crisis, insurance companies have pretty much pulled back on good offers for annuities.  An annuity is simply a guaranteed income for the rest of your life. So you give a pension company your saved nest egg and in return they calculate when you will die (based on statistics) and agree to pay you a set amount for life. If the amount is linked to inflation i.e it goes up every year with the cost of living then they will start out paying you less. Remember they want to make sure they keep as much of your money as possible! That's how they make a profit.

4. Its definitely worth asking a few different insurance companies for quotes - they will 9 times out of 10 be higher than your own pension company. Additionally, this is the only time in your life where telling them all about your illnesses, previous health related issues and your chain smoking actually makes you money!


5. Income drawdown - In my opinion income drawdown (for pensions that are reasonable e.g over 100K) is now a better bet than annuity. You can take 25% of your fund as a tax free lump sum and use the rest to invest in some income funds which pay out rates more likely to be higher than inflation. If you think logically, solid companies which earn profits must be part of the inflation calculation. As their costs rise they pass them on to the consumer. If you are an owner of these companies (via a fund which owns shares in them) you become inflation protected. Obviously your capital (your cash invested) may rise and fall with the stock market but the return you make should be reflected by their continuing profits in a inflationary environment. For instance, a utility company will increase prices to maintain its profits when the price of oil and gas rise.


6. Invest yourself - why pay someone else to screw up your life?


Investment managers take up to 5% of your fund upfront simply to provide a "service" which has no guaranteed results. Its like buying an iron and after a year of not being able to iron your clothes you are told you can't return it and you've lost the money you paid for it.

In my opinion if you spent a 3 or 4 days in a year focused on your funds and move them if necessary - you would save that 5% fee and probably do as well if not better than these "advisors". Sometimes people feel they don't know enough to do this or feel that investment professionals know more about which investments are better. The reality is that most of these professionals don't really provide better returns so why pay them?

If you look at safe "income" funds which provide you the money from your investments each year, you can invest these in safer funds through an income drawdown pension investor and pay a yearly fee of around £500. Services like SIPPs provided by Alliance Trust. Take a look and have a read. Save yourself £000's of pounds. Look at what the funds invest in and think logically about what people will always need and purchase e.g food, light, heat, weapons, drugs.

Comments welcome.