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Are pensions 'finished'? Yes, because ISAs are better
Pensions expert Michael Johnson prefers to do his retirement saving in ISAs and says we should all pay down our debts before saving.
by Michelle McGagh on Feb 22, 2013 at 14:39
Forget pensions, adopt the ‘negadebt’ school of saving and keep topping up your ISA (individual savings account) if you want to have a decent retirement. These are the recommendations of pensions expert Michael Johnson, who believes ‘pensions are finished’.
Johnson practices what he preaches. Although he has a ‘very small’ self-invested personal pension (Sipp) he said ‘all of my wealth, apart from my house, is in ISAs’.
However, he is also entitled to a generous defined benefit (DB) pension from his previous life in investment banking. He is now a research fellow at the Centre for Policy Studies, the right wing think tank co-founded by Margaret Thatcher in the 1970s before she became prime minister.
This penchant for ISA saving has led for Johnson (pictured) to call for a combined pension and ISA allowance of between £30,000 and £40,000 a year. Each year savers could decide where to save and which tax break to receive.
‘Those who have access to a decent occupational [workplace] pension scheme should save into it, it makes sense because you get your employer contribution,’ said Johnson.
‘But I think pensions are finished. Pensions are from a bygone age before things like college debts and unaffordable housing existed. Equally important is the change around culture – we have emerged from an era of thrift post-world wars to a population living for today.’
Johnson believes that many young people are looking at their parents who are pensioners or coming up to retirement and have a good lifestyle, and thinking that they will recreate it.
But what younger people fail to realise, he says, is that the older generations benefited from the sort of defined benefit pensions of which he is a member, where they received a pension based on how long they worked and a percentage of their final salary. Now employers offer defined contribution (DC) schemes where the income is based on how much the employee contributes.
It is not just the type of pension that has changed, attitudes towards pensions have changed, says Johnson.
Last year the Office of National Statistics released figures that showed £14.3 billion was saved into personal pensions in 2010/11 but £15.8 billion was saved into stocks and shares ISA – the first time ISA saving has surpassed pension saving in a decade.
Johnson said the figures signalled ‘a sea change in attitude to pension saving’.
‘A pension is like any other consumer product but unlike any other consumer product there is no immediate return, you have to wait 20, or 30, or 40 years,’ he said.
‘You are waiting decades to receive an uncontrollable return that has been eaten away by annual charges.
‘With Generation Y, we need to get them to save at all. It is not about what mechanism they save in to.’
Encouraging Generation Y-ers, those in their 20s and 30s, to save is a tough job and the reason why Johnson supports pensions early-access, which he describes as ‘the lesser of two evils’.
Although the pensions industry has warned early-access would lead to poverty in retirement, Johnson doesn’t subscribe to the idea.
‘The risk is that someone blows all their money but that argument doesn’t make sense because most people with the common sense to save will not have a glitch and spend all their money,’ he said.
Of course, the government is pushing everyone to save more with the introduction of auto-enrolment, which will see workers who are not yet contributing to a workplace pension automatically placed in one.
Johnson believes there are many people who ‘should not be compelled to save’ because of on-going debt problems.
‘I asked a Department for Work and Pensions select committee how they can ask people to save when the average family is paying interest on consumer debt of £2,000 a year…I didn’t get an answer,’ he said.
Johnson believes ‘negadebt’ – or negative debt – is the best form of saving and quite simply involves paying down debt before saving.
Brits have a combined £228 billion consumer debt, which equates to £8,000 for each household, and increases to £56,000 per household when mortgages are taken into account.
‘The average interest rate [on unsecured debt] is 18% which is serviced out of post-tax income and equivalent to paying an interest rate of 22%. If you repay your debt then you are earning 22% on your income,’ said Johnson.
He believes that the government should help people to pay down their debt through the auto-enrolment mechanism before encouraging them to save.
‘When someone is auto-enrolled they should be asked if they are a serial borrower of consumer credit. They should be asked: ‘are you servicing credit cards every month?’ Then if yes: ‘can we have your permission to use the money to pay off your debt?’ That is a responsible thing to do,’ he said.
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