Wednesday 17 March 2010

Yeah, but I never said that...

KMcC left a comment on Please sir, may we take the piss?:

... your antipathy to pension saving is well-known to regulars here - but I do worry for your old age. What are you doing to provide for your golden years? (Any tips we happen to pick up in passing would be simply a bonus.)

As the world's most frugal man, I am all in favour of people saving up for rainy days, old-age etc. My antipathy is towards the propaganda that the only way of saving for your old-age is via "pension funds" (as defined). The best forms of saving are ...

1. Don't run up debts in the first place.

2. To the extent that you do (student debts, mortgage etc) then pay them off as quickly as possible, and pay off the one with the highest interest rate first. It is madness to have anything more than emergency money in the bank earning two or three per cent less interest than what you are paying on your mortgage. Ditto shares. The long run rate of return on shares is rather less than the average interest rate on a mortgage (unless you are a talented stock picker, which I am not ).

3. When, and only when, you are completely debt-free, do you start saving properly. Whether that's cash in the bank, currencies, shares or property is up to you - there's no right or wrong answer to this and you have to be prepared to shift from one to the other from time to time. This gives you the ultimate flexibility - you don't need to worry about retirement age, annuity rates, changes to the tax system, compulsory annuity age and the like. You are free to leave the UK taking everything with you, unlike a UK pension which will always be subject to UK tax at source, wherever you live

4. The value of any tax-breaks is largely illusory - to a large extent it is merely a timing difference/deferral, and most of the supposed tax saving is swallowed up by the pensions industry. And the value of this modest tax saving pales into insignificance compared to the loss of flexibility (see 3).

That's my plan, and I'm sticking to it. Don't worry about my old age, worry about your own :-)

24 comments:

Dave H said...

Sorry to be the slowest member of the class, and it's not relevant at all but I wonder if KMcC could be who I think she might be.

(probably not. After all, what sort of commenter would be so unimaginatively idiotic as to make up a pseudonym clearly derived from their real name?)

Mark Wadsworth said...

DH, nice one. If she has any topless photos of herself, she can email them to me using the widget in the sidebar.

Anonymous said...

I completely agree - and what's more, there are other tax breaks available for saving e.g. ISAs.

There is one thing though: if you are not very self-disciplined, the lack of flexibility of a pension could work in your favour...

Mark Wadsworth said...

AC, ISA tax breaks are a load of rubbish as well. In practice, a bsic rate taxpayer doesn't pay income tax or CGT on shares anyway, and the interest rate on cash ISAs is so low as to wipe out the value of the tax-break, so you're still better off paying off debts first.

Lola said...

And as the worlds most honest (least dishonest?) 'financial adviser' (yuk - I hate that description) I'd second all of that. With a bit of qualification.

Essentially pensions are capital. If you won the lottery would you buy a pension? Thought not. It serves both the gummint and the FS industry not at all to explain clearly to you about the nature of capital and your right to take yours where you like. Hence the emphasis on pensions. Plus of course the massive distortion caused by all those people that turn up for the State being on mad unaffordable generally unfunded defined benefit schemes.

The mortgage debt bit is not quite the same as the other debts. Mortgage payments are largely money rent. So you either pay the money to rent the house or to rent the money to buy the house. And if you own the house outright you lose the rent on that money. The trick is to make sure you never think of your house as an 'investment'. It's a cost of living.

If that's the case start acquiring capital immediately. Don't worry too much about paying off your mortgage first, but just get saving and investing as soon as possible.

As MW knows I am no homeownerist but I do understand that many people like to 'play' with their home. Make it all lovely and cosy and have cushions (I don't undertstand 'cushions', Mrs lola has tried to explain it, and even though she used some manual gestures, it still escapes me. No matter.) So there is no chance of convincing anybody not to rent it/rent money and not save. You just have to make sure that you have a surplus quid or two each week to put by.

Lola said...

MW 13.36. Yep. Our client's are gobsmaked when we bang on about this. But after a bit they get it and become evangalists for us.

Mark Wadsworth said...

L, I still say most people would struggle to get a better return on investments than paying off their debts/mortgage.

PS, Mrs W does cushions as well. Heck knows why. I had a friend who was forced to sit on the floor because the sofa was neck deep in Hallowed Cushions. He wasn't allowed to chuck them on the floor because they might have got dirty.

Mark Wadsworth said...

AC, PS, alas your second point does not hold up to scrutiny either.

Let's imagine a feckless fellow has signed up for some sort of pension thing. If he's feeling spendthrift he can still borrow money or underpay his mortgage on the blithe assumption that his pension will pay off debts/mortgage. See also 'endowment mortgages'. It's all just teeming and lading.

Lola said...

MW 13.42. They would NOT get a better return than the cost of their mortgage debt, agreed. I was making a more 'social' point, justified by the comparison to renting and the need for people to create 'nests' (joke reference to your earlier post intended).

J said...

You shouldn't pay off your debt if you can invest at a higher rate. So student loans costing 0.5% interest shouldn't be paid down if you can get (net) interest at 1%. Assuming of course that you do save the money and not spend it on something else no matter how tempting it is....

Mark Wadsworth said...

EKTWP, yeah, obviously. Git that I am, I took out the max low interest govt student loan back in the 1990s and stuck it straight into a TESSA. Then I paid it off in easily affordable £50 monthly instalments once I started working (it wasn't deducted via PAYE in those days).

J said...

Git that I am, I took the maximum and then later, when working, I rang up to ask why mine wasn't being taken out on PAYE only to be told that they had lost my details. So I proceeded to give them said details, so I'm now paying a slightly less affordable £100+ per month....

Anonymous said...

I agree you'll normally be better off paying off debts. Whether ISAs are valuable depends on your circumstances, obviously.

Also, good point on the spendthrift.

Don't underestimate the pension tax breaks though:

First, there's the tax-free lump sum - zero tax levied on the return on an investment made out of pretax income.

Second, people with children can easily have marginal tax rates of 70 or 80% (income tax + NI + tax credit withdrawal). But pensioners normally have a marginal tax rate of 20%. So you forgo income taxed at 70-80% in exchange for later income to be taxed at 20%.

caspermy said...

Hi Mark,

Paying off debt is *SUPPOSED* to be the best way. However, given how obvious it is that the fiat money system just keep inflating and stock market are going up like no tomorrow, I am not certain if paying off debt in this environment is a particularly rewarding things to do.

Further, some sort of debt/mortgage (like the US) renegotiation thing will come along if things go very bad.

Mark Wadsworth said...

AC, good point on the tax credits. Which is yet another reason for abolishing them. Aren't they supposed to 'help' people now rather than at some vague point in the future?

But the chances are though that the exit tax rate will be 100% as well because of means-testing of Pensions Credit etc.

EKTWP, bad move :-(

C, if you are good at spotting nascent share price bubbles, then by all means go for it. But you are still better doing this yourself that letting a pension fund make a profit and then lose it all again by not exiting in time.

Steven_L said...

Hmmm. I'm not so sure Mark, I'm going to start a pension when I go 30.

For a start, if I join the work one I get 13.5% of my salary paid in which I wouldn't get otherwise.

Secondly, if I save a bit more in a SIPP I get 20% tax relief on what goes in that more than makes up for fees etc.

I am debt free bar student loans, but I've never bought a house so that's probably why.

I'm going to make millions and millions through gambling anyway.

Reason said...

Steven_L 17 March 2010 17:39:

"...if I save a bit more in a SIPP I get 20% tax relief on what goes in that more than makes up for fees etc."

Yes, but you get taxed on the pension from a SIPP at your highest marginal rate, which could be a lot more than 20%.

Robin Smith said...

Too right!

BTW "Anyone" who makes anything decent on stocks is an insider trader. Surprised? GO take a beer with a trader. Its just another form of corruption that a few have access to and most do not.

bayard said...

Robin, It's been going on for decades - that's why all the houses in the "stockbroker belt" are all so luxurious.

Mark Wadsworth said...

S_L, is that public sector?

R, exactly.

RS, B, yup, insider trading is rampant, but you can still make good money as an outsider if you know what you're doing.

dearieme said...

"For a start, if I join the work one I get 13.5% of my salary paid in which I wouldn't get otherwise."
Hard to resist, I agree.

"Secondly, if I save a bit more in a SIPP I get 20% tax relief on what goes in ..": yeah, and if you wait a bit you'll probably get tax relief at a higher rate. I can't imagine that it usually makes sense for a comparative youngster to tie up his money for 30 years for a meagre 20% relief.

Brian, follower of Deornoth said...

There is no point in saving anything at all, unless it be in a foreign currency in an offshore account.

To put it bluntly, you can't save it as fast as Gordon Brown can steal it.

Mark Wadsworth said...

D, first let him tell us whether this is a public or private sector employer.

I cannot imagine for the life of me that a private sector employer offers such a contribution without an employee being able to waive it and haggle a corresponding pay rise. If it's public sector, then there ain't no employer contribution, it just goes on the never-never.

BFOD, that's as maybe. But you can't do that via a normal pension fund either.

Pogo said...

One thing worth remembering is that (at the moment) 75% of your pension fund isn't yours. You can take the 25% tax-free lump sum but the remainder "belongs" to the financial services industry - which generally does a pretty effective job of screwing you over. Initially with "management charges" during the build-up phase, then ten years of fees for administering "drawdown" (if you're allowed to do it and it's financially viable, then finally with the delights of the annuity.

Looking back at the growth made by my assorted pension funds (before I bunged them all into a SIPP and stopped further contributions) I reckon that I'd have done far better at the building society - and not much worse putting the cash under the mattress - and at least it would all have been mine to do with as I wished when I finally retired.