Many years ago I persuaded myself that, as I had become self-employed, it was important to take care of my aged self. Or at least, think about it. I don’t recall now whether this was from a call or a suggestion or I came to the conclusion without prompting. I had a pension from my previous employer that was generous but based only on the 20 odd years with that employer so it was nowhere near what we like to think of as a ‘full’ pension.
After some thought, and not a little discussion with a financial advisor, I signed up to pay a regular amount into a pension plan. I was at the time earning fairly well from my consultancy and thought that I could afford a regular £500 a month to build a substantial pension fund – I got tax allowance for this saving. This was some time in 1995 or 6 – I forget exactly when. The policy was with Standard Life.
By 1999 it became clear that my earnings had not gone into orbit and it was in fact getting a bit difficult to afford the regular payments. It had also become obvious that a pension fund was really not a good way to grow money if your income is so irregular. As the money paid into the fund had been paid before tax, it couldn’t be taken it out – I was too young to take it as a pension and even if I could, the payments would be very low indeed. It was just another entry in the spread sheet of my net worth.
Making such agreements forms a trap from which you cannot escape – the money is distinctly not liquid! In effect I was throwing dead money into a bottomless pit with no prospect of getting it out for a very long tome and then only bit by bit. All I could do was to reduce the payments to a minimum of about £30 a month to keep the account open, which I did.
Wind forward now to 2010 when we found ourselves in substantial consumer debt. The value of the pension fund by then was actually less than the total payments I had made! And although I was old enough to be able to take it as a pension, that would still be 2/5ths of nothing so was pointless. I could take 25% of it free of tax – this is a standard UK arrangement – but the rest was locked away in Standard Life. Goody for them but not for me.
After consulting another financial advisor, the solution was to move the fund to another provider which he found – Winterthur. This of course cost something but that provider did claim to have the appropriate facility to be able to withdraw the fund when certain conditions were met. These included being able to show that I had an alternative pension above a certain limit – not earnings but pension. How silly.
So now that, later this October, I will be able to meet these requirements, I approached Winterthur (now part of the Axa group) earlier this month to start the process of withdrawing the money. I sent them an email outlining my current and expected pension after my birthday and asked them to process the request.
A terse message came back:
“You would not be able to withdraw all [of] your pension fund as a lump sum as you do not meet the criteria triviality.”
WTF! That’s not what I understood but what on earth is (or are) ‘criteria triviality’? I asked for an explanation and got the following:
“Your policy in is [sic] full drawdown so there is no more tax free cash avaliable [sic] for you to take”.
WTF squared! I wasn’t asking for tax free money as I knew I had already had it. So I asked again. And heard nothing. Nada. Silence.
I suspect the individual concerned had not bothered to read my original email, nor looked in the file. If they had, they would have known that I had already taken the tax free sum before the fund was transferred and would have seen that I was indeed within my rights to ask for the remainder.
I prefer to email because there is a trail – in this case of silly statements – but eventually I gave up and spent some time today bouncing round the Axa telephone system.
Fortunately I found someone who did appear to understand the problem and said that a new system had just been set up to handle cases such as mine. She was most helpful and went off to consult her superior because it was new to her.
It transpired that I need to make the request via a financial advisor but otherwise I was right and some time shortly after my birthday in October I hope to be able to get my hands on the (taxed) fund. I immediately fired off an email.
But – excuse me. This promise was clearly known about when I transferred the fund three years ago. Two questions:
- Why did it take three years to put into effect a clear government directive?
- Why do people not read emails and letters?
And a conclusion:
- Particularly if you have irregular income, do not lock your funds away in a pension fund. You don’t need a pension – you need income.
There may be tax attractions (which of course you should not ignore) but you depend completely on the fund management which in my case did not manage to maintain the value of the fund during the (admittedly bad) financial crisis. The newer Self Investment Pension Plans can help but most people don’t have the time or inclination to manage their own funds so depend on fund managers to do it. They swallow the government’s propaganda yet the hidden fees in pensions can be enormous.
But the most important thing to remember is that it is crucial that any fund is liquid – you should be able to get the money out:
- if you desperately need it and
- at a suitable time of your choosing to maximise the value.
If you doubt this, remember that pension companies are some of the richest institutions around yet, unlike banks, they don’t make money by lending. They make money by investing – and taking a substantial chunk, thank you very much.
Pensions are a trap in two ways –
- you think in terms of giving up, putting your feet up, taking a rest. Now that may be all very well for a short while but it is easy to become a habit. And all the evidence is that once people stop doing things, whether it is physical or mental, they really do switch off and wait to pass on. People don’t get old so can’t do things – they stop doing things and therefore get old.
- by building a pension which disappears when you (or your spouse) pass on, you are stopping your survivors from building on your wealth.
Pensions are for people who are waiting to die.
If you want to live for ever, even if you know you can’t, build income. It is never too late.
In the U.S. it is similar to a 401k. A company sponsored pension is different. I am in favor of both and other forms of income for retirement. The more income streams you have, the better off you are.
Certainly there is strength in diversity. Company pensions are probably the best form available in the UK as long as it is a properly funded final salary scheme. Some years ago there was the Maxwell scandal where the then owner of Mirror Group Newspapers extracted a substantial amount of the company pension scheme, leaving pensioners penniless. Since then all companies have had to report their scheme valuations annually but this is also rather silly as the fund is about gradual future drawdown, not valuation today. But as a result companies have used it as an excuse to withdraw from final salary schemes in favour of individual funds.
Annuity rates vary so much, particularly now they have realised that we are living longer. So it is a case of pot luck when you retire. I’ve heard of people whose pensions are 25% less than someone with an almost identical fund but who retired a few months earlier. At least now some funds allow you to draw down as and when you want so you can take a bit of pension if you need it, less if you are still working and so on. Even so, when you eventually pass on, the fund disappears and this is one of my main complaints about pensions and why pension companies have become so rich.
I read your post in panic because I have done the very same thing, invested my pension in standard life. I still have many years to retire, but I’m eager to right my wrong if possible. What would you recommend?
Thank you.
@Sathya –
It depends on how old you are. If you are 55 or over then you can immediately take out 25% tax free – and perhaps put it in an ISA or some other wrapper or pay off some negative wealth with it.
Then ask Standard Life whether they offer flexible drawdown because transferring it costs money (one way or another). If they do so now, you need to check what conditions are placed – how big the fund has to be and what other pension you have or will have. As I understand it (and I am not an IFA) you need to be able to show at least £20k/year pension or be 65 to be able to extract the money.
My IFA found the Winterthur fund to which the remaining money was moved. I think you will need to use an IFA to do this – pension companies don’t like dealing with the policy holder unless they are paying money in :). My total pension will just roll over the £20k limit next month so I went about trying to extract the money. I will of course need to pay tax on this – after all it was invested before tax.
The trouble with taking money via an annuity is that it is really not a good return on investment these days and disappears completely when you die.
Check out our retirement calculator (follow the Tools link above) and see just how much you will need.
My employer has a pension, but I’ve never tried to do anything with it. It’s mandatory, and both the employee and employer contribute. I’m just happy to have extra retirement savings.
Mandatory pensions are OK in principle and ensure that people do have something to live on when they ‘retire’ but in practice some don’t give particularly good returns on investment.
While they pretend to be in your interests, they are really protecting the state from ending up with a large cohort of impoverished people in their old age.
And of course the pension funds just love them!
I used to contribute to an ISA instead. I don’t know what pensions will look like in 40 years and I don’t want to guess. I’d rather have the money now, and build my own wealth.
Completely with you there, Pauline.
An alternative to an ISA is a SIPP but this option would not be available to you in sunny Guatemala or even rainy Paris (as it was on Friday and Saturday) – it’s only for UK tax payers and you wouldn’t I think have to pay UK tax on investments now anyway as you no longer live in the UK.
Ah the perils of being a world citizen. 🙂
It seems like the type of pension you’re discussing is called annuity insurance where it pays you a guaranteed income. These tend to have high fees and are a great deal for the insurance company, not so much the investor.
Exactly, @Charles.
Annuity rates may have eased upwards a little recently but they are still pretty poor. People think in terms of pensions but a pension is just a passive income stream. There used to be the 40 year job plan – get born, go to school, work 40 years and retire for 10 then pop off the planet. The 10 is now closer to 30 so the pensions industry has been underfunding the pensions for years, taking high fees.
Now they cry foul and cut the annuity rates as an excuse. The government is of course complicit in this and even now is trying to force people into occupational pensions instead of educating them into building passive income.
So we say build passive income for ‘retirement’. Then you can choose when to stop working knowing that the income stream will support you and perhaps be available to your successors.
I think if your company matches your contributions it still makes sense to pay into a pension, their matching is basically free money and it’s taken out before tax so there’s an extra benefit there too, but it should only ever be a useful extra pot of money to be a backup once you can access it. I’m in my late 20s paying 3% of my salary into a pension fund arranged by my employer and getting another 3% of my salary from them for doing so, I think it’s worthwhile even though it’ll be nearly 30 years before I can get it, it should have accumulated well by then. Of course I’m making various other investments too with a much larger proportion of my income and it’s these that I’m hoping will enable me to retire (or at least cut back on work / do something more driven by enjoyment rather than wage) well before that 30-year timescale. When the time comes the pension will be a welcome bonus.
Setting up a pension is a great way to secure your future, especially a workplace pension, and as of January 1 2016, small businesses with 30 employees or less must start the auto-enrolment process and comply with regulations by their staging date.
it is by far the worse thing you can do and you may as well throw your money down the drain! another scam set up by the government in cahoots with big business!
im baffled why any one would want to invest in a pension they are the biggest scam going! one for those in power to use your hard earned money to do with as they please I have spoken to many(including my father) regarding how much they wished they had not bothered with a pension and saved and invested in other ways! I have had this argument with many people and they have unfortunately (mush like this latest made up pandemic) fell for all the BS that is lay in front of them! even looking at the standard life pension now your money is locked away you can not use it and in a lot of cases you loose money!
I have invested and saved. put money aside in many forms, cash, bank accounts, left money in my company account to build up (not taking it as a wage or dividend). bought property and hopefully buying more. all with the prospect that not only am I benefiting off it now (rent income and investment income) but also I am benefiting off it for when I retire!
That £500 a month could be used to clear your mortgage a hell of a lot quicker saving you tens if not hundreds of thousands in the long run (a lot more than you will get from any pension interest!). my main goal is to be completely mortgage free by the time I am 44 (it was going to be 40 but I lent my mother and father a lot of money) I am 41 now so to know that I will have no more payments means I can save a huge chunk of money every month.