Pensions – James Brokenshire

Made me laugh today, James Brokenshire has suggested that we be allowed to draw money from invested pension funds in order to help purchase a main home. Immediately the pension industry ‘kicked off’ with screams of no, not acceptable with plain dismay that any member of Parliament would dare suggest it.

Fact is from a financial standpoint it makes perfect sense. Your main residence enjoys tax free growth and a good deal of tax breaks on sale – it’s also a sound investment in relation to Inheritance Tax.  But for first time buyers there is a need to get hold of around £30k in order to purchase a first home – and if people are paying rent – this is of course paid from after tax income which is effectively double taxed by Government  – as landlords declare the income received – another reason why the system favoured Buy to Let – until of course it got out of control.

Here are some of the reasons why the idea of James Brokenshire is a good one, but they are not new. My book “The Great British Pension Swindle” covers things in a lot more detail (Amazon)

Renting your own home.

If you earn £26,500 per year your take home pay (April 2019) will be £21.555 basically means that  in order to get £800 per month rent after tax you need to earn around £1000 before tax in order to pay that.

Of course the same applies to a mortgage – but if you are paying a mortgage at some point the costs will cease. It therefore makes sense to buy instead of renting. Please note that renting also brings a good deal of flexibility so buying now may not be the best idea.

If we consider average mortgage interest rates, you’ll note that they have not always been low and the long term average is considerably more than the rate your lender offers you now. In fact somewhere around 4% is the norm, but of course have been a lot higher in the past.  As interest rates increase (which they will) you’ll need to use up more of your tax paid income to support it – but the same applies to rent.

Graph supplied by www.staratista.com

Pension Fund Performance

If you compare investment returns over the long term you’ll note something that doesn’t quite add up. Of the 14496  funds listed on Morningstar.com – Pensions (http://www.morningstar.co.uk/uk/lnpquickrank/default.aspx ) most don’t have any long term fund performance or the performance is well under par.

Of these fourteen thousand odd funds few show performance over the longer term, they change names, consolidate with other funds or just disappear. The cynic in me thinks there may be a reason for this.

Back to the problem.

The Aviva fund, this is the fund that’s returned about 1% per year before charges, an above average fund – they is one of many thousands that are just not delivering for you the pension consumer.

It has returned 10% over ten years – 1% per year before product charges – which will be at least 1% if you compare historical charges, there are many pension products charging more than that making it a lot worse for you. Do you know how much your provider is charging you – average fund charges and an average pension fund mean the charges are likely to be more than your council tax.

Even with a well above average fund performance you would have actually lost money – but of course still paid charges.

The winner here is the pension provider. Investing in pensions means you will probable lose money investing in pensions over a ten year period – unless you chose a low cost provider who can offer good future returns – let me know when you find it – got a ton of people who’d love to have one of them. The other winner is the Inland Revenue – the tax relief they give is returned when you draw on the funds.

Importantly, if you borrowed less on your mortgage I can guarantee you’d be better off by at least the interest charged by your lender  – pensions ain’t looking so great now are they.

The entire industry is doing it’s utmost to convince you the figures are wrong, yet as James Brokenshire has admitted – you may of course be a lot better off not having any funds in the pension – and it’s the industry that’s not telling the truth.

Invest in pensions, but sleep with one eye open – they are not what they seem.

Links

Watt Financial Solutions – old but damning evidence of a lot ten years.

http://wattfinancialsolutions.co.uk/documents/The_Lost_Decade.pdf

https://www.statista.com/statistics/386301/uk-average-mortgage-interest-rates/

https://www.thesalarycalculator.co.uk/salary.php