The madness of pensions maths

Great article here by Royal London, posing as a news article in the Evening Standard.

I guess the pension company PR think they are pushing a great line here about how we all need to save more and give more money to them so they can get more fees.

To me (this is a ‘rant alert’ phrase), the result just goes to show how completely crazy the pension system has become. Let’s take them at face value, you need £260,000 as an average person to have a decent retirement. I have a great job in the city and am very lucky. I have worked for twenty years, if I work for another twenty I am still unlikely to get to that level of pension saving.

Indeed, over the past 10 years on a cash invested basis, my pension savings are negative – i.e. it would have made more sense to put money in the mattress than into work pension funds. As far as I can ever work out this is because the multiple fees they take out at the beginning of a years and other management fees consistently are higher than any returns I might make on their products.

However, I digress, if only to show that I am less than convinced saving into pensions is such as good idea for the savers. Moreover, to save £260,000 in today’s money over 40 years requires saving £6,000 a year, or around 1/3rd of the average salary post-tax. This already includes the state pension and benefits top ups and assumes you have paid your mortgage, if you rent then it is a mere £440,000 needed – or just over half your salary for every year you work (assuming the average wage of £26,000 a year).

It would of course help if the pensions funds offered some compound growth on your investments with them but they try very hard indeed to avoid this outcome – for them, every penny kept is pure profit. The same with the crazy annuity rates which, thankfully, the Government has moved away from enforcing.

Logically, none of this is any good. The best way to save will remain taking out the largest mortgage you can afford at any time, paying the interest and relying in the capital growth. Alternatively, paying off the mortgage too if you feel that is less risky (I happen to think that long-term the risk is with the Bank not the borrower, but each to their own). Then upon retirement, sell your property and move to Greece, Thailand or wherever you can get some value for your hard work. On no account try to live in the UK on pension saving sin the future, this will not work out for you even slightly. All the media today is hued by the many millions of people on final salary pensions which today would require literally millions of pounds in pension savings, of which there will be near zero in the next few years as those schemes were closed long ago.

So in summary, Royal London are mad to think this strategy of reminding people how impossible it is to save will be a long-term benefit for their company – they should stick to lobbying the Government to make pensions compulsory which they have done successfully and then go for making higher contributions compulsory – but don’t tell their victims this!