A lesson in telling the truth whilst avoiding reality

Workplace Pensions – not a fan!

I have just read an article from the official government www.workplacepensions.gov.uk website titled “Workplace Pension Myth Busters”. I don’t know why I’ve taken so long to read it, but now I have I can’t help feeling “hang on a minute – this is right but…and it’s a big but!

Here is the article word for word written in red. I have added my comments in blue below each section.

Automatic Enrolment into a workplace pension will make it easier for people to start saving for their retirement. By 2018, all employers will have been required to enrol their eligible workers into a workplace pension scheme if they are not already in one.

There is a lot of confusion surrounding pensions and saving. These pension myths can make people feel confused about what they need to do to fund their retirement. We’ve explained some common pension myths below.

It’s not worth saving into a pension

FALSE! Most people can expect to get back more in retirement than they put in their pension. Most people saving into a workplace pension also benefit from contributions from their employer and the government in the form of tax relief*.

*Tax relief means some of your money that would have gone to the government as income tax, goes into your workplace pension instead.

You can’t argue with a statement that says you should expect to get back more from this type of investment than what you put in. But it is by no means guaranteed. The fact that there is currently tax relief and employer contributions are huge pluses. However, I think what most people want from their retirement planning is the reassurance that they can have at least a reasonable standard of living in retirement. The fact that you probably will get back more than will be paid in is a pretty bland statement without any reference to just how much it really is going to take to build up the kind of savings pot that will make a difference to your standard of living.

It’s going to be complicated

FALSE! You do not have to do anything to benefit from a workplace pension – over the coming years, all employees who meet the required criteria will in due course be automatically enrolled into a workplace pension.

Although you as an employee don’t have to do anything to benefit from this scheme, I would be cautious in thinking things are not going to be complicated. I still remember the government making a huge splash with a project called “Pension Simplification” some years ago. It wasn’t simple. It didn’t make things simple. In fact Government’s over many years have tinkered and meddled with pension legislation and we are still far from a system that anyone can have real confidence in. I, however, have every confidence that in a few years time this system will be replaced by the next “great idea” so I wouldn’t rely on this being anything but something you will have to monitor yourself in order to get the best from it.

My house will be my pension pot

BE CAREFUL! Property doesn’t allow you to spread your money across a range of different investments like a pension does, and doesn’t have the same tax advantages.

Your house may well be your pension pot, or it may not. The fact is we don’t know and depending on your circumstances it may be a great idea or the worst idea. A pension does indeed allow you to spread the risk across a range of investments, but if you are on a modest income and benefiting from the minimum contributions that you and your employer can make, then we are talking about spreading things so thinly that even if it was marmite you would still hardly taste it.

I can only pay in a small amount so it isn’t worth it

FALSE! Your contribution to your workplace pension will be a percentage of your salary. You’re also likely to benefit from a contribution from your employer and may get tax relief* from the government too.

*Tax relief means some of your money that would have gone to the government as income tax, goes into your workplace pension instead.

Cliche number one – You only get out of something what you can put in. Cliche number two – A pint of milk costs the same whether you earn £10k a year or £100k a year. If you are getting an employer contribution and tax relief, you might as well take it, but realistically, if you are saving minimums do not expect your standard of living to improve that much just from this scheme.

I’m too old to start saving

FALSE! It is better to start early, but unless your retirement is a few months away, there’s still time for you to build up some money.

You are never too old to start saving. Just understand the obvious fact that even if you are saving £2000 a year in total for the last 5 years of your working life, it still only makes £10,000. Don’t get me wrong, having £10,000 is so much better than not having £10,000 but it’s not enough to affect your lifestyle for the remainder of your life.

The State Pension will be enough

BE CAREFUL! The State Pension is a foundation, but for many people, relying on this alone could mean a fall in income upon retirement. Saving into a workplace pension means people will have more money to continue doing the things that they enjoy when they retire.

This one I agree with! It almost certainly won’t be enough. However, relying on a workplace pension to solve the problem on its own is even more of a risk!

Retirement seems like a long way off – it’s too early to start saving

Although retirement might seem like a long way off, it’s never too early to start saving! Saving through a workplace pension is easy and you don’t actually have to do anything as your employer will enrol you. The earlier you start to save, the more money you will have when you come to retire as your money has time to grow.

Again, I agree completely with this. It is never to early to start saving for retirement. The best way to do it is to save as much as you can afford in a variety of ways and review your savings and situation at least annually. 

As far as workplace pensions are concerned, I am fairly ambivalent. If they are being offered, you would be stupid not to accept what is on offer. What I think is dangerous is the spin that surrounds the scheme which seems to me as if it is giving false hope to millions of employees, especially on below average earnings, that it will provide an income that will be at a level that is completely at odds with reality.

Spending less than £500 on insurance through a Broker is a waste of money.

How I helped my Mother for the first time in 35 years!

My mother (yes, she is still around!) became an accidental landlord a few years ago and has always sorted her own insurance and finances. It’s not that we don’t get on, I just made a rule when I first started out that I would never advise close friends or family. I would always offer an opinion if asked, but I always put some distance between my personal and professional life. I had two reasons for this, firstly, with the best will in the world, things can go wrong; a lost form, a missed direct debit, an underwriting mistake, the list is endless and having to explain and put right things when it involves the nearest and dearest is just not worth the grief.

The second reason became obvious to me when a friend of mine started work years ago with one of those long gone and not missed companies like General Portfolio or Allied Dunbar. I honestly can’t remember which one, and there were others just as bad, but collectively they, shall we say, were very focused on “the sale”. One of their training techniques was to present to a group of new and naive salespeople with a scenario that demonstrated the perceived need for, for example, Life Insurance. It went something like this:

Trainer: “Did you know that 17 out of 18 people with children under the age of 12 do not have any Life Insurance?”

Class of simple salesmen: “Good grief, that’s terrible”

Trainer: Isn’t it just! How many of you here today have children under 12?

Class of simple salesmen: *many start counting on their fingers – some of the brighter one’s put their hand up*

Trainer: Ok, How many of your friends or family have children under 12?

Class of simple salesmen: *All confidently put their hand up and enthusiastically mutter positive mutterings*

Trainer: “How would you feel if one of your friends and family died leaving those children in financial dire straights”?

Class of simple salesmen: *Universal declarations of feeling devastated*

Trainer: OK, you have a pen and paper in front of you. Write down the names of ten people you know with children under 12. Put your name at the top.

Class of simple salesmen: *scribble scribble*

Trainer: All finished? OK, hand all those lists to me.

—Training session continues on a different theme until 5 minutes before home time—

Trainer: Thanks for all your work today, we will meet again this time next week. You remember those lists that you wrote earlier? Well, I’m handing copies back to you and your homework for this week is to make appointments with all of them and sell them some insurance. I will be giving copies to your managers.

Class of simple salesmen: *Collective looks of abject terror coupled with fear of losing a well paid job*

I should point out that this was the case about 25 years ago and was one of the reasons that regulators became necessary, the selling techniques used now are a lot more subtle! The lesson I learnt was that if you have to rely on friends and family to do business you are either no good at what you do, or, its a bad business.

Back to my Mother…

Anyway, back to my Mum’s landlord insurance. She has remained loyal to a local broker for this insurance since she has had the property and, in timely fashion, she was sent her renewal. This time though she gave me a call and said the premium had crept over the £200 mark and what did I think of the price?

Those of you that have read my posts before will know that I am a huge fan of brokers, but there is a but. I think that nowadays a broker should be qualified and preferably chartered. They should devote their time to helping people get the right insurance at the right price using their experience and knowledge. The current marketplace means that I do not see how they can compete with the direct and online offerings with regard to the simpler products that generally cost less than £500. (unless it is part of a larger portfolio of business). I do not see the point of going to a high street broker, speaking with an unqualified adviser who is following a script and will refer me to the insurance companies own customer service for any queries and, I think anyone who does is at best misguided or just mad.

Renewal £203, includes Admin Fee of £15 and commission of about £40. Good value?

The renewal was £203 including a £15 admin fee. I am familiar with the commission levels and a typical landlords policy will pay 20% – 25%, I have even seen up to 30%. A number of insurance companies provide brokers with online quote systems which offer the flexibility of letting the broker choose the level of commission they can take. This is why when you call about a renewal and say you are thinking of changing providers, the price can sometimes drop quite quickly.

I went online, put her details in and instantly got a quote for £156. The insurance company was a household name, the cover was the same and they offered 24/7 telephone claims support. I clicked “Buy” and the documents were with me instantly. Mum was happy. Very happy. And so should the broker be. Why they are spending time, money and effort chasing a market they really can’t compete in I just don’t know. I happen to know that they are mainly staffed, at customer facing level, by minimum wage and non qualified people who are not allowed to give advice. They are offering nothing that cannot be done online by the customer themselves. So…

Be good to your Mother – shop around!