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Nic Cicutti: The pensions boycott is well founded

Nic Cicutti

Two friends and their kids came to stay with us this bank holiday weekend. Amid the laughter, good food and even better wine, my friends let drop that they have several tens of thousands of pounds’ worth of modern art lying under their bed.

Why under the bed, I asked? Is art not something that you want to have on show, something to be enjoyed? Not really, came the reply, this art is an investment, it is part of our long-term pension planning.

My friends are not rich: Andy is a personal trainer, while Maya works as an assistant in a special school. They live in a shared ownership property and their housing association still owns 75 per cent of the equity in their home, although they recently paid off their 25 per cent share of the mortgage and are considering taking on another 10 per cent.

Both believe in retirement planning and providing the best education for their two young daughters. They simply do not see the UK pensions system as meeting that planning need.

In one sense, they are lucky: over the years Andy has picked up a lot of knowledge and insight into the emerging art market. He has shrewdly identified a number of up-and-coming young artists, buying their works at bargain-basement prices and selling them on for much larger sums.

He has enough experience to be able to cut through the hype and select works that, he hopes, will stand the test of time. So far, things seem to be working: in the past five years his portfolio has bettered both the FTSE All Share and, if he is to be believed, several highly-regarded fund managers I compared his performance against for the purpose of this column.

When it comes to selling up, he and his wife have already discussed reducing their potential capital gains tax bill as much as possible by disposing of their work in annual slices and making use of their combined allowances.

Andy and Maya are unusual in the precise nature of their investment strategy. But in another sense their approach tells us something about the state of the UK pensions market and the growing sense of among many consumers that saving into a personal pension is more and more a waste of time.

Figures from HM Revenue & Customs at the end of February showed while the numbers of individuals contributing to a personal pension reached a high point of 7.6 million in 2007/08, it dropped to 5.3 million by 2011/12.

In 2013/14, the number of individuals contributing to personal pensions increased again by almost one million. But this reflected the initial effects of automatic enrolment rather than conscious decisions to save more: the share of individual contributions by self-employed individuals rather than employees continues to fall.

Andy and Maya’s behaviour reflects, in its own way, the comments recently quoted by Money Marketing editor Natalie Holt in an article about research by Citizens Advice in respect of pensions freedom and the process of accessing a pension.

Natalie quotes one interview in which savers who had just taken a slice of equity out of their pensions had decided to hold off making further decisions in relation to staying fully invested in relation to their rest of their money: “I’m not going to look at anything for a year. I’m sick of pensions now and I don’t want to start worrying about every change in the market.”

There are a variety of reasons why pensions no longer feel like havens for savers’ money. One of them is the sheer hassle of trying to deal with providers: the comments above came after policyholders had spent weeks, sometimes months trying to liberate a chunk of their pension funds, as they had been told they could by the Government.

The second is the ridiculously low annuity levels we have seen in the past few years: one of pensions campaigner Ros Altmann’s most powerful interventions has been over the effect of the Bank of England’s long-term policy of quantitative easing, which lowered gilt yields and helped force down annuity levels. Post-Brexit cuts in interest rates have made matters worse.

In such circumstances, even cars can seem a better bet than stocks: the FT reported that according to the latest price index compiled by Historic Automobile Group International (HAGI), vintage Mercedes-Benz cars increased in value by just over 85 per cent over the past three years. Classic Ferraris rose 65 per cent, while Porsche grew almost 60 per cent in value.

By comparison, the FTSE 100 fell by just under 3 per cent over the period.

Then there is the well-documented problem of actually trying to understand personal pensions. Bank of England chief economist Andy Haldane recently told a dinner audience that he was unable to understand how pensions worked. And only last week, he told the Sunday Times that he feels property is a better investment for many than a pension.

What he, my friends Andy and Maya, and many tens of thousands of others are doing is investing in something they understand and feel they have some control over, regardless of the risks.

Until advisers and providers start to offer safer, easy-to-understand products with low charges, the consumer boycott of personal pensions will continue.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 24 comments at the moment, we would love to hear your opinion too.

  1. So what you are suggesting is that people place their retirement hopes on highly illiquid investments whose value fluctuates based on who or what is in fashion?

    By the way the average Joe in the street will hardly be able to invest in classic cars, property or art at the levels they make contributions into pensions.

    Pensions are relatively simple things that have been made complicated by the Government so get off with blaming providers and advisers for the malaise caused by the negative press that you and your ilk are responsible for.

    You no doubt will wipe your hands, like all those in popular press, of all responsibility when people actually start investing the next big thing only to find it blows up in their faces and they are left destitute in retirement.

  2. I would also surmise that the decreasing LTA and Annual Allowance changes have had a huge effect with people who will be nearing the caps, being faced with tax bills and tax charges see a rapidly diminishing return on personal pension plan saving.

    This affects, for instance large numbers of people in DB schemes who used to do extra but do not have the headroom any more – such as Doctors, University lecturers, high earners at huge companies.

    This is not a sign of a new level of mistrust, but it does reflect the cynical treated of pensions by Osborne as a cash cow to be raided.

  3. “What he, my friends Andy and Maya, and many tens of thousands of others are doing is investing in something they understand and feel they have some control over, regardless of the risks.”

    Quite ! then again if their piece of art turns out to be a 10 year olds doodle, they may loose all their investment !

    What about the expensive insurance to cover such items ?

    Not like if they invest via an expensive adviser or in an expensive pension they are covered by the FSCS and will recover most of their money and / or be compensated. Hey, odds on it will grow

    “Until advisers and providers start to offer safer, easy-to-understand products with low charges, the consumer boycott of personal pensions will continue.”

    May I suggest, go out and buy a very cheap car, bottle of wine, work of art……… come back in 40/50 years, and in the vain hope that its made a few quid

    Oh hold on, scour your shed and see if you have Harrison “lesser watch” take it to auction and pocket the dough less the auctioneers expensive commission of course, “one day we will be millionaires”

    Really Nic what rubbish ! its different stokes for different folks, and at the end of the day its more about people investing in crap they know sod all about and getting scammed !

    Art, Cars, Wine, land, car parks or even chasing that 14.5% growth guaranteed per annum phone call

    I’ll stick with equities and the FSCS thanks and that’s what I advise my clients to do !

  4. Strange article in my humble, etc; parts I agree with wholeheartedly, others are frankly nonsense.
    Yes the hassle with providers is a nightmare, not just for pension policyholders dealing direct but for us IFAs as well. Any IFA will have horror stories about the service levels they have experienced and when IFAs gather for so called “networking” it invariably involves an exchange of, at times scarcely credible, tales of massive delays and incompetence form the providers.

    And yes, certain aspects of personal pensions can be very difficult to understand largely because of the seemingly endless legislative changes and changes in HMR&C practice.
    But do people really avoid pensions because of the market volatility? Surely not if they have advisers – it is not difficult to put together a portfolio which avoids stocks and shares altogether and it is essentially equities which display volatility.

    As for cars “in certain circumstances” being a better investment than stocks-well those circumstances are very rare; possibly as rare as…er…a vintage Mercedes – Benz … ..?

  5. What nonsense! People who have a mind to try and invest of their own volition in areas that they feel comfortable and well versed with (property developers, etc) would not choose to use the pensions market unless as a tax wrapper. This has nothing to do with pension charges or complexity as well you know. Good trolling though, got me going!!

  6. Trevor Harrington 1st September 2016 at 1:47 pm

    Pensions are long term investments, and as such the stock markets represent no real risk at all, although that analysis is not intended to be a statement of relative risk under the definitions laid down by our regulator – that is another story.

    However, the real risk to pensions has been historically proven, over and over again, by the various Governments of the day repeatedly changing the rules, increasing liabilities (to final salary schemes), increasing taxation (Gordon Brown in 1997), and changing normal retirement dates (state pension). In this way, they have repeatedly destroyed the investment of a simple pension scheme, often at the last minute before retirement, whereupon there is no possibility for the individual to avoid it or change it.

    For the last 40 years, Governments have consistently refused to look at the increasing risks to all pension schemes, of changing demographics, increased taxation on pension funds, and increased liabilities through changing social legislation along with the social demands from the EU.

    The result has been what we see now, that of complete distrust by the public, not of pension schemes directly, but more likely people fear what future Governments might do to their pensions in years to come.

    Until recently, Governments have steadfastly refused to deal with the hugely unaffordable costs of Public Sector pensions, and how they have been abused through early pay offs, and so called ill health early retirements etc. The direct result is that the state pensions for the rest of us have been kicked out to age 67 for males, and for females, and they have also been averaged down to £152 per week, none of which has anything to do with life expectancy, contrary to what they would have you believe. The latest ONS figures prove that life expectancy has not changed at all in the last 35 to 40 years – some may live longer, and many die sooner, but the average life expectancy remains unchanged.

    As a remedy, and I totally agree with this, we now we have a lifetime total pension fund allowance which has been reduced from over £1.5M to £800,000 or 20 x £40,000 per year pension income.

    This is probably the limit of the reduction in lifetime allowance. However, do not be surprised to see some sort of “supertax” being introduced on existing pensioners receiving more than £40,000 per annum, in the next couple of years – and I agree with that too. The majority of such private pensions are those which were acquired from Public Sector pensions (often fraudulently), and those which are the result from unjustifiable mega salaries in our out of control Board Rooms … and nobody is particularly concerned about them anyway.

    So … “supertax” is next on existing pensions … probably those over £40,000 per annum.

  7. Well Nic as a recent ‘pensioner’ I can honestly say that I was very pleased to have engaged with pensions. (As was my wife). Indeed I also have many ex-clients who feel the same way.

    Equity investing long term has had its rewards and a 40% contribution from the government has also not gone amiss. I was less concerned with charges than investment performance and tax relief. Contributions were only made up to the 40% band. No point in getting BRT only to pay it back when you take the income. Over and above pension contributions PEPs and ISAs and then insurance bonds ensured that taxation on retirement income was minimised.

    Annuities are awful now I will admit, but not too bad at the start of this year and the end of last. Of course if you are going to retire while still in nappies you can’t expect a good rate. Taking benefits at (say) age 70 makes a significant difference. The uplift on the State Pension deferral up to last year was 10.4% p. a compound. (Today it is over 5% – still not bad in the context of the time). So for a female retiring at 70 who had worked most of her life and had not contracted out of SERPS she would have had 10 years of compounding and a male 5 years. Add to that the Class 3A voluntary and a 70 year old would get a return pretty near to 7%.

    I always encouraged clients to retire as late as possible and to do all the rest – therefore they have been happy with the pensions environment.

    For those who don’t wish to engage then they have made their bed – I can only wish them luck and hope it is comfortable. No doubt the exchequer will be pleased that they haven’t taken advantage on what is on offer.

  8. Utter clap trap. You can hardly invest £100 a month into a Vintage Mercedes Benz, and what on earth has the performance of the FTSE 100 got to do with pensions? It’s like comparing apples with trains. Nonsense.

    • Well you could if a some bright spark created a fund which invested in vintage mercs! Not sure what the collective vintage Mercedes Benz market is but sure it runs into millions. I’d invest!

  9. Thought provoking article which poses more questions than it answers.

    Those now using alternative options for achieving a level of retirement income (notice I didn’t use the word “Pension”) are no different from those pursued over my many years in the industry by those for whom the standard investments and pensions were not attractive for many reasons. This doesn’t make them wrong. Equally not all investments are structured poorly or are expensive.

    For example is holding a portfolio of buy to lets generating the income required any different to saving into a pension and moving to drawdown at retirement. Ok you can quibble over the tax efficiencies and levels of yield / asset concentration /capital appreciation opportunities but in reality they are there to generate an income in retirement. In both cases it is entirely likely if constructed properly that they can achieve their goal. The properly constructed is one of the biggest problems.

    All options for accumulating retirement income have risks and costs and potential tax advantages (and pitfalls). I cannot imagine any IFA disagreeing with a client who has chosen a property route to retirement security (and made it to retirement with the plan still on course).

    The problem I have noted in over 20 years of advice is the sheer level of income/capital needed to provide a secure retirement (and the need to accumulate this), the lack of understanding of this level of need, the level of risk accepted in some alternative investments and the feeling that there must be an easy “safe” short cut (so common in life these days… work up from the bottom. No I want to be MD by my third year). This is even more extreme when the investments used towards this goal are those which rely on the need to sell at a higher price and actually yield nothing (or have an inherent cost to hold). There is nothing wrong with someone investing in Art as a way of achieving sufficient capital in retirement. However the pitfalls of this route include:
    *Valuations are very much reliant on fashion and buying at £100 and a valuation of £1000 a year later has absolutely guarantee of a higher value 20 years later (as viewers of Antiques Roadshow can attest). You could say the same of companies but their dividends provide at least some demand and many investment trusts have very long track records.
    *Being able to sell alternative investments at a perfect peak is not likely to be possible.
    *Costs of sale can be very significant.
    *The forgotten costs (… oh what do you mean the insurance cost for the last 10years is connected to the overall sale profit).
    *The fact that amateurs in the Art market are likely (as with shares) overvalue their expertise and feel it is easy to make profits.
    *The level of risk involved in transactions is very difficult to assess.
    *The illiquidity of this type of investment (you cannot sell part of a statue or a corner of a picture).
    *You need to rely on either selling everything before retirement to provide cash (which then yields little again), or that Art markets remain benign throughout your retirement so you can sell at ever increasing prices as required.

    The illustration of the classic car market shows factors of this. just because it has increased by 85% in a few years has no connection to it’s future value (and it could just have easily fallen). The costs of maintaining vehicles of this type are very large they need to be garaged (a significant cost in many cities). To illustrate In 1985 I had an option of 2 1960s cars one at £3000 and one at £1000. As I was young the cost of insuring the £3000 for me was £1500 and the £1000 was £900 (in 1985!!!). I bought the £1000 car. By 1990 the £1000 car was worth £2000

  10. So not investing in pensions is well-founded if you consider some Uncle Tom Cobbley anecdotal evidence and scanty three-year performance data that would get you laughed out of a Moneysavingexpert forum thread to be well-founded.

    I’m not surprised their art collection apparently outperformed the FTSE given that you can put whatever valuation figure you please on artworks – if you’re not actually trying to sell them.

  11. As a recently retired IFA like Harry I have read all your comments as I like to keep in touch and all the comments have missed the important point Nic was making.

    It is obviously extremely sad that his friend has felt the need to try and provide for his retirement by gambling by buying art. He did not have the confidence in the pension industry to use it to provide for his future, whether going direct to a provider, bank or even an IFA.

    Talking about pension investments being available for a monthly figure is not relevant. This chap has obviously saved sufficient to invest small lump sums into Art which he is doing. The question surely is how can IFAs contact and help such people?

    • This guy has a “good mate” who is a financial services journalist and hasn’t been pointed towards regulated financial advice. There is no hope.

      It’s a good job Nic has no duty of care towards his mate and a regulator looking to regulate him out of business.

  12. Each to their own but I fail to understand the logic of keeping art under the bed. It should be enjoyed because one day it may be worth the sum total of the component parts, which is not a lot. As for art and vintage car prices I must remind Nic’s and his friends that past performance is not a guide…….

  13. No wonder the public are confused.
    Apparently pensions aren’t much cop because the annuity rates on offer are rubbish.
    This argument is so flawed that if it were a diamond it would actually be a lump of coal, because the same point could be applied to ALL accumulated pots of wealth IF one were to choose (yes its a “choice”) to convert said pot of wealth into an annuity at whatever point.
    But of course you don’t need to convert either the Art collection OR the pension into an annuity, unless you think at the time its the right thing to do.
    So lets not confuse people even more on that one.
    ….which leaves the hassle of dealing with providers – I doubt anyone will argue on that one (although they’re still a bit easier to deal with than some rental tenants!) – and lastly the inability to “understand” pensions, possibly true even though the basic “need to knows” are actually incredibly simple, but if there is difficulty understanding the whole subject, its probably down to Government tinkering and overcomplication, as well as repeated confusing press articles!

  14. I made it on property
    Earn it in the expensive places
    Invest in the bombed out- spain and Argentina was but now too late to get in
    But good examples
    Have a couple more in mind just a wait and see
    On stocks I am very disheartened and feel like a guy who has been a Japanese fund manager for thirty years – how disheartening that would be! I will plug on with the stocks maybe one day – everyone gave up on gold miners and look what happened there

  15. I am stuck out of the country for now
    Waiting to hold 62500 k in a bank account (for 6 months) so I can bring my non eu wife in
    Maybe I will come back maybe I won’t but useful to keep options open
    As someone else mentioned I will probably look to use part of old uk funds to top up uk state plan (before they block that one) The other part that keeps me busy is making sure HMRC don’t nab my estate for IHT as they seem
    To like targeting non Res with non eu wives and I fully intend not to let that happen

  16. Hope your friends house doesn’t catch fire or they’ll have nothing to retire on!

  17. I have to agree with the sentiment in the posts above – there’s a great deal of misinformation here.

    A pension is a tax wrapper which no longer sees benefits (either directly or indirectly) linked to annuity rates unless an investor is seeking a guaranteed income in retirement – ergo the current poor level of annuities has no impact on whether a pension ‘is good or bad’.

    If a guaranteed income is retirement is sought and an annuity is sought with non-pension funds, the same issue would apply.

    Pensions are ‘seen as bad’ if you choose a ‘bad’ investment and yet pensions are ‘good’ if you choose a ‘good’ investment. The main issue I see is the confusion investors have (and articles like this add fuel to the flames) between a tax wrapper and the underlying asset.

    Just like those consumers who seem to think ISAs are poor / pointless because they’re only paying around 1% – I’ve heard this countless times.

    I realise i’m stating the bleeding obvious but just wanted to get it off my chest.

  18. Nic’s friends may well be “wrong” to rely on the vagaries of the art market to fund retirement. But if the rules around pensions and investments are so byzantine and the returns appear to be so uncertain, who can blame them for trusting a more tangible asset. It is a similar impulse to buy-to-let.

    Ernst & Young came out with an very interesting report about where the monies are flowing in the savings and investment market. Cash, direct property and other tangible assets are the big winners.

    Nic’s friends are part of a much larger picture (forgive the pun) which we ignore at our peril.

  19. So many comments which could be made (and many already have) but what is the point??

    Nic will continue to earn his crust from taking cheap shots at our industry and doing very little to actually try and rectify the issue, which can most certainly be done to a significant extent from the media, not to mention advisers, providers and legislators.

    Sad, very sad.

  20. @Michael Moore

    I think you are being a bit unkind. Nic is highlighting what many of the public actually think. Many are disengaged and disinterested with pensions. It was always complicated, but now it has been compounded and the maze gives many (if not most) a headache.

    The constant tinkering deflates any remaining confidence.

    Nic is in fact providing a valuable service in making us – and it is to be hoped those in authority – the opportunity to reflect.

  21. I am glad I am not the only one who read this and thought “what the…………”.

    If I understand it correctly we have two people who have decided that they are experts in a particular field, which presumably was initially a hobby, and have now decided that they will invest their money and retirement prospects into this hobby. All of this is based upon the fact that he managed to pick a couple of good prospects out a few years ago.

    Now, they decide to keep their investment under their bed where it is at risk of any number of catastrophes rather than in a safe or secure storage. Whats more, they have decided to invest in an asset thats valuation is entirely dependent upon the prevailing fashion and trends of the time. What makes this guy think he can predict with any level of confidence the value of anything under his bed?

    We all know that pensions aren’t perfect, far from it, but the reason that they aren’t perfect isn’t the performance of the underlying investments, the risks taken within the funds or even that you have to spend an hour on the phone to your provider anytime you want anything. The reason is that successive governments have used pensions to score political points and in doing so overly complicated the rules around pensions. This message filters down to the public who are then turned off saving into them.

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