Some great reading from around the web.
For a second time this month, I’m going to make a Motley Fool podcast my post of the week. I hope it doesn’t go to their heads!
This new home run is an interview with Dr Ros Altmann, director general of Saga, the old person’s youth club.
Altmann is an expert on pensions, and it shows in her deep knowledge of how the system is still broken, why NEST pensions may be counter-productive, and why working for longer as much as saving more is going to be inevitable for most people (but not you and me, unless we want to!)
Here’s a snippet:
The money used to pay pensions today is funded by the contributions being made today. There’s no fund. National insurance is a myth – there isn’t a fund that you pay money into out of which your pension then comes. So the national insurance system is not working in the way people would expect it to work.
The level of state pension that is paid out is determined politically, rather than being, if you like, a function of proper calculations of life expectancy, actuarial equivalents, and so on. That again goes back to some of the problems we’ve got, which is that over the years the government has known that there are more and more people coming up for state pension age.
The baby boom generation has been around [for years] now, the first one is going to hit 65 this year, or already has, but the government kept pretending that it had sorted out the problem of funding pensions for all these people by using forecasts of private pension income that were completely unrealistic, and that weren’t adjusted sufficiently over time.
The whole podcast (which is also available in transcript form) is vital listening for anyone who wants to see the shape of retirement in 30 years hence.
I strongly recommend a listen/read.
From the blogs
- Are you saving too much for retirement? – Gen X Finance
- Your personal rate of inflation – Oblivious Investor
- Instant noodle inflation – Shanghai Scrap
- Financial memory syndrome – The Psy-Fi blog
- I survived – but just barely – The Wisdom Journal
- Furtively rooting for the last incandescent light bulbs – A Grain of Salt
- House prices went up everywhere 2002-08 [chart] – Clusterstock
- Playing the field with your investments – Investing Caffeine
- Can a new kind of capitalism ever work? – Simple in Suffolk
- The Average American’s finances are a shambles – Digerati Life
- In praise of idleness – Sawbones Surio
Money Maven roundup
- Canadian Finance blog explains the P/E Ratio.
- MH4C explores various ways to send money.
- Wealth Pilgrim on how a mortgage works.
- Len Penzo is giving $100 to a passionate reader.
- The Military Wallet asks how long should you keep financial documents?
- Joe Taxpayer has written a post on Intuit’s TurboTax website.
Mainstream media stories
- The rich and the rest – The Economist
- Drop in UK consumer confidence ‘astonishing’ – BBC
- Britain: not booming anymore, as Martin Wolf discusses – FT
- Risky/structured products face FSA ban [at last!] – FT
- Portfolios seek inflation protection – FT
- China could price itself out of all sorts of markets – FT
- Going on past history, the bull market hasn’t run out of steam – FT
- New inflation-linked savings bond from Birmingham Midshires – Telegraph
- EU sex ruling could increase the cost of car insurance – Telegraph
- Big companies back in the stock market driving seat – Telegraph
- Are mortgage costs about to rocket? – The Independent
- Tapping into frontier markets – The Independent
- Does Internet group buying deliver bargains? – The Guardian
- National Trust to step in to save English woodlands – The Guardian
Subscribe to get reading at your leisure every weekend.
Comments on this entry are closed.
Very worthwhile podcast, as well as sound advice. For lower income and basic rate taxpayers pensions must seem like an epic scam, as they watch the terminally workshy taking pension credits equal to their rewards for a lifetime of effort. The present pensions system benefits the very wealthy (with their huge tax reliefs) and the very poor, whereas the majority in between get a poor deal. They would have been better spending the money on their house or personal possessions, which are disregarded in pension credits.
As Altmann observes, the whole culture of savings and investments needs to be reformed to make these activities more attractive to low and middle earners. The ISA is a step in the right direction, but as she points out much more needs to be done!
What heartened me most, was Ros’ ideas for redefining concepts of old age and retirement and how this could benefit society as a whole. I love the idea of extending my working life at a less onerous but still useful level, as she proposes, unencumbered by ageist prejudice. The whole discussion highlights how important it is to stop avoiding the issue and to kickstart a change in our habits through frank debate.
National Insurance (NI) contributions aren’t paid by pension or savings income. There is a massive gap and it’s going to get bigger.
This isn’t just a pension issue it’s also a National Health Service (NHS) issue.
National Insurance may on the face of it appear small beer compared to income tax, but it’s not, the employer pays NI as well as the employee – it’s actually a significant tax.
Retirees that don’t receive earned income simply aren’t making NI contributions for a large portion of their life. Some may say they’ve already paid in, but as Ros Altmann said, there is no fund it’s purely a pay-as-you-go system.
The “tab” is being paid up by someone else!
Not wanting to hijack the issue but pensions and state healthcare have many of the same issues.
I appreciate that NI contributions don’t fully cover the cost of the NHS however, it’s still significant.
“there isn’t a fund that you pay money into out of which your pension then comes”
Ros Altmann should know better than to say this, and it’s not really a helpful contribution to make this claim since it over-simplifies the situation. There is indeed such a fund, the National Insurance Fund, and it does have assets – liabilities of the government.
The status quo is that the NI fund’s excess (contributions less payments) is loaned to the government and they supposedly reserve it for capital investment projects, and you could have an argument about whether that’s sensible or not but you can’t deny the thing exists. (Indeed, there exist private sector pension funds which are invested purely in index-linked gilts which is not a dissimilar situation to the NI fund.)
@Investor,
Cheers for the leg up, I appreciate it.
Listened to the podcast, and I got to be truthful, I came away with reealllly mixed feelings.
On one hand it made for very chilling listening because the Government pension which was working fine here has been replaced with all these private SIP schemes bleeding people dry in the present with various processing fees. A simple calculation of the various “fees”, suggests that it would be a minimum of three years before the fund is actually starting to work for the pensioner. And we’ve got hordes of lemmings flocking at these things, and engaging in “fanboyism” with anyone within a 10m radius! When some intelligent people raised enough rumble to uncover this “fees robbery”, the pension schemes’ “fees” were banned by the regulatory body. But so powerful was the private pensions lobby that they were able to reverse the ban and also managed to frame another part of their business instead. This was so juicy, even the UK covered it. There’s no end to the mess so far! Back to the podcast, then.
OTOH, I disagreed with pretty much everything else she advocates as a “solution”! It was on predictable grounds of “debt economy nonsense” and work-till-you-die-for-it-is-good-for-you or words-to-that-effect!
Her saving grace, as @faustus also alludes to is emphasis on bringing back a whole culture of savings and investments within the general public.
Historic nostaligia: The Fool was one of the many books I first read in the Oxford Borders to understand PF. 🙂
@Thomas Jones,
I was typing my reply when your reply went up.
> Not wanting to hijack the issue but pensions and state
> healthcare have many of the same issues.
Precisely my thought too. Which is why I deleted my comments on the overlapping of healthcare with pensions. But I am totally with you on that point. And it would be far more humane to simply round up and randomly shoot people than start a rational debate about , although having listened to her, I woudn’t put it past Ros to suggest both of those ideas!
Sorry for sounding catty, but she did raise my hackles and I was shouting at my screen scaring the poor missus!
shoot!
wanted to say:
than start a rational debate about “having a US based pay-for-your-healthcare model in the UK at this stage”
@Lemondy – I’m not an expert, but as I understand it, the NI ‘fund’ is basically just a holding account for hypothecated tax collected and earmarked for the purpose?
Also, I don’t think she does oversimplify the situation, she’s more tackling the real issue which is that people have been led to believe by decades of government rhetoric that the two shillings they paid in NI in 1969 or wherever has been ‘invested’ and growing away like a bank account or Unit Trust. I suppose you could say it’s been ‘invested’ in the UK (via the spending of the pensioners of 1969!) but it’s closer to say it doesn’t exist then to say there’s a pot of money with their name and 30 years of compound interest on it, surely?
Cheers for comments everyone! 🙂
@Accumulator – Yes, I agree. She had a real visionary perspective on how old age could be seen to change, led by her generation it has to be said.
For the average person who doesn’t set themselves the task of financial freedom, early retirement is going to look like a blip in the history books, I suspect, a 5-10 year period of good fortune, in the same way that others were unfortunate enough to come of age in 1939.
The points elsewhere about the uselessness of means-testing are well made. I can see a case for scrapping higher end tax relief if needs be to save money, but means testing pension benefits is utterly counterproductive. No wonder British people think the best thing to do is to buy the biggest house they can afford and cling-on to it tax-free for as long as they can!
I’d say the NI fund is more than simply hypothecated tax – it is treated as a separate fund in the government accounts:
http://www.hmrc.gov.uk/about/ni-fundaccount09-10.pdf
The fund does receive interest on the money it lends to the government, and hence benefits from compounding when its total income exceeds total payments. The US “Social Security Trust Fund” works in a similar way.
The points about worthless government promises are good but orthogonal to how the NI money is invested. What is the best way for the government to save money for the long term – buy shares in BP, or lower corporation tax for every company, or build some nice bridges? I don’t think this is clear-cut.
@Lemondy – I hesitate to debate such matters with you of all people! 😉 But I have consistently got the impression that there is no real fund. For instance, a quick Google finds this discussion here puts the ‘fund’ at holding six months worth of contributions.
Besides, if there really was a fund I think we’d hear a lot more about it being raided etc over the years!
Your secondary point is very well-taken though. It is indeed up for debate as to whether a fund would be better than taxed money invested in growing GDP (or whatever) for the 40 years of the ‘contributors’ life. My main beef is that it’s sold as a ‘fund’ though to the public. They think it’s a savings account they’ve paid into. It’s a bit sophisticated to say “well, it sort of is, in a certain narrow economics sense”. It’s no building society, and that’s what matters to Joe Public’s perception, I’d argue, and why they feel so cheated.
(Well, that and the fact that they have no idea (nor every tried to work out!) what contributions should have compounded up to what return).
The public sector are going to be hardest hit by reforms in pension aid, especially in terms of age rises which is talked about in this article:
http://www.steedman.co.uk/pension-reforms-to-affect-public-sector
The state pension will go up to 66 by 2020 which isn’t very long away in the grand scheme of things.