The two pensions and why we shouldn't lump them together

How about: Retirement Income / Savings?

Ive always used state pension and personal pension to differentiate

To use a Ros Altmann phrase, later life income.

Poor pension

Rich pension

I think I would go along with Steve Bee on preserving the word Pension for State benefits. It’s a somewhat prosaic word, with the French using it to mean room and board, which is about what it covers in the UK. And for all our desire to provide better I suspect this is about as good as it gets.

On the private front pensions have already been defined as deferred pay, so why don’t we go back a few years for a suggestion - namely the IRA. For any youngsters reading this, IRA stands for Individual Retirement Annuity. Bring it up to date with Retirement Income - a simple and reasonably dignified term. By using this term we may also move away from the obsession with “pension policies” and the related complex and distorting tax relief regime.

Retirement Income can be accumulated through a variety of saving strategies, which can include provision of deferred pay from employing companies or personal schemes, but doesn’t have to.

The world has come a long way since the start of provision for retirement, which I understand commenced when people, generally those in Government Service, sold their posts for an income stream for the remainder of their lives.

It is estimated that we now spend around 30% of our lives in retirement, so we need to re-assess our thinking on the matter. The State Pension, a benefit underpin, requires a particular approach and analysis, and does not need to be tarnished with the bad publicity relating to disappearing Mirror Group assets or rather generous discretionary benefits for a departing head of a disgraced bank. The State Pension is a practical statement of how well the Nation thinks of its elderly citizens. Retirement Income is a statement of how well people think of themselves - a different matter entirely.

The “give a dog a bad name” syndrome has hit pensions, with the private variety now suffering dramatically. Mind you there are many in this country who would love to earn £45,000 a year let alone be able to contribute it to a tax efficient investment with little opportunity of getting hold of the money again except as an income. So there will need to be significant rethinking relating to the underpinning of living standards in retirement. It is important that different criteria are applied to the analysis of State and Private provision.

The term “Retirement Income” may just help people remember what they are doing and why they are doing it - it’s not to the beat the tax man, but to have a realistic standard of living in retirement, a period that is getting longer for many people.

Not too long ago I had a Scottish Equitable pension. The annual amount they were prepared to offer in retirement was so low that I would have had to live to 105 just to recover the capital value without interest.

So lets call it something that reflects what these financial vultures are really up to - eg:

Savings ripoff

Savings theft

Lost savings

Poverty creation

Institutional theft or our hard earned money

Government connivance in lining the pockets of financial advisors

A bloody disgrace!

But we have no comeback on those who control this money, the regulators, our so-called representatives in Parliament - or any other public organisation. Democracy is dead and the people have no power to change any damn thing that costs them money - try getting your rates bill changed for example.

We need a financial revolution with people refusing to pay any money into pension funds, savings or banks. Keep it all in cash I say, buy some gold and move offshore.

Dr Jimbo displays a high level of anger in his (as the name is spelt with an O rather than A I will assume a male orientation) comments, but unfortunately, very little coherence. I am not sure how this relates to the topic that Steve Bee outlined, especially as Dr Jimbo has in fact linked private and State pensions together in his tirade, despite the fact that they are two separate and quite distinct items. The first relates to commercial organisations, whilst the second relates to the Government.

However, let’s look at some of the comments he has made.

A) Scottish Equitable, as every other pension provider, has, by law, an Open Market Option in their pension policy. If the annuity they were offering was not to Dr Jimbo’s liking then he/she is entitled to search the market for better rates, and have their money transferred to that other provider.

I say this with one proviso. If he actually trawls the on-line market he will find that there are no sites that provide comparative information in the same fashion as provided for, say, general insurance. Instead one has to deal through an IFA.

If he were to go directly to companies he would have to go through a detailed, and probably off putting grilling - to make sure he is making the right decision. So, whilst his options are clearly stated in law, implementing them is far from easy, and, by default (i.e. one can’t be bothered with the hassle) people do take the original, inferior, offer.

Is the market open on Open Market Annuities - only if you work through an IFA, otherwise no. This is a direct result of FSA regulations,which reflect the fact that they listen more to consumer organisations than the general public. Consumer organisations didn’t get to were they are today by listening to the public.

Dr Jimbo may also like to look at the state of competition in the market. There is some, but remarkably little. Then he may like to look back 20 years, to the start of Regulation, and find a far more healthy level of competition. He may then like to cogitate on the apparent relationship between the rise of regulation and the demise of competition, and whether this has been beneficial.

B) Lining the pockets of financial advisers. An interesting one. Whilst there are exceptions, most annuities pay 1% commissions to IFAs. I understand that the majority of pensions maturing yield less than £100,000 - many much less. But at £100,000 the payment is £1,000 which looks good on the face of it - until you look at the files.

Insurance Companies are amongst the most inefficient organisations devised by man. They will use every trick available to slow down the transfer of money out of their coffers, so the level of work for an IFA is, generally, unnecessarily high.

Many of the tricks arise from the excuse of “The FSA Regulations”, and the FSA have made little effort to make this excuse redundant. The Adviser industry has complained long and hard about this inefficiency, not for years, but for decades.

In addition the IFA has to go through an administrative procedure, again laid down by the FSA, that would make your eyes water with the inanity of most of it.

So you may be angry at Advisers, but in this instance your anger may be misplaced. I would admit to being an adviser, so my remarks may be biased.

C) Your next point is however spot on. There is no control over the financial regulator. The Bank of England have to write to the Chancellor is they get the rate of inflation wrong. The FSA do not have to report to anyone if they get things wrong. In fact, every time they have got things wrong they have just turned around, stated they were understaffed, and raised taxes on the financial serviced industry without any reference to any outside source. I seem to remember from history that the Yanks had a bit of a party one night declaring “No taxation without representation”. The British response, then as now, was “Bogoff”.

And you are spot on when you say that Parliament has no control - read the Financial Services and Markets Act 2000. The FSA are a Company, not a Government Department, so obviously Parliament do not have control - they merely pass the legislation with a “Yes, sir - three bags full , sir”.

D) You may be right about people refusing to pay into pension policies - but do not cut off your nose to spite your face. If you want a reasonable retirement save somewhere - even if it is only into cash. But more importantly, do not confuse commercial pension with the State variety. That is an entirely different discussion.

But buying Gold suggests that you are not thinking about what you are doing. You complained about the low income from Scottish Equitable. Gold does NOT provide an income. And don’t get carried away with its current growth rate. Between Jan 1975 and Jan 2005 its annualised growth rate was 3%; the average rate of inflation was 6.23%. Whilst the price of Gold is currently showing a long term growth rate of 5.40% it still falls behind the inflation rate of 5.74%; whilst Gold is really just trying to catch up, it still hasn’t done so - even though the World has been through a dramatic financial crisis. I won’t depress you with the Cash figures.

Nor will I depress you with the returns that has been available to my clients and the clients of many of the advisers I know. If my pockets have been “lined” I know that the vast majority of my clients are very happy with that situation because they too have benefited from the process.

Like anything else - you get what you pay for. In this case you paid nothing, and apparently got nothing.

If you want a good "later life income" try shorting the banks during a financial crisis

Superannuation?

I contributed substantially all my working life to the state pension, SERPS and a private pension scheme. Tax allowances were merely a postponement of tax which is now collected from my pensions with a vegeance for being prudent. I resent politicians calling it state benefits because it isn't for all pensioners in my class .We bought the pensions out of our wages and hard work. Secondly the politicians have a convenient habit of forgetting the Law of contract, example the try on to halve the full widows' hereditary rights in the SERPS pension. We now live in a state where the politicians lurch from one thing to another to grab other peoples savings in their desperation to sustain an unsustainale so called welfare state. Look at the fatuous "Robin Hood Tax" movement. clammaring for a transaction tax on the London market. The surest way to kiss it all goodbye instantly. It is all symptomatic of casting around wily nilly to try and plug up the Grand Canyon over spend by Blair/Brown Governments. Tough isnt it.

I think the only differenciation required is to separate the paying in from the paying out. The state pension relies on National Insurance contributions [in theory]. For private pensions the paying in used to be called superannuation. Paying out is the annuity. We don't need any more words - yet.

How about scam? Most people will never see the money that have 'invested' in a pension.

Surely the major difference is:

State Pension: Untaxable income

Any Other |Pension - Taxable income

The latter also relating to a complicated means tested formula which reduces your 'other pension' dramatically be reducing your age related allowance.

If you also have some of the latter you will be required to complete a 'tax return' every year, just to ensure that you are paying as much tax as can be legally extracted by you know who.

At the moment it probably pays to save a great deal for your pension, or nothing at all.

An OAP.

Conversley you could put as much as possible into ISAs. Much, much more sensible, so perhaps we might call other savings for old age ISAs????

I agree with Michael Hellman. State Pension and Personal Pension are usually understood by most people and do the trick, so to speak. I don't see the point of seeking a different Tag to what is a Personal Pension, just to try to clarify even further the difference between a State Pension and another type of Pension, other than perhaps, trying to be cleaver!!! Both of the above Tags do the job of identifying the key types of Pension income, State and Personal (i.e. other pensions). It would be a huge exercise across the UK to change the terminology further and for what? I submit it would probably be a pointless exercise. Tom Peak.

To David Rouse:- MAY I REMIND YOU THE STATE PENSION IS ALSO TAXED!

Just because the definition has evolved over a century is not in itself a reason to change the name. The same could be said for savings, mortgages and in fact numerous different aspects of life. Windscale = Sellafield - the people are not conned!

There are, in my opinion, several aspects in play here.

1) Government (mainly) create complexity by continual tinkering & changes.

2) Retirement planning & provision can be complex.

3) People are easily discouraged by 1 & 2.

Wise words above from Mr Barlow re government breaking unofficial contracts - you pay us x now and we might or might now pay you back y later - oh and by the way plan for your retirement!

Wise words also from Mr Rowse - contribute a lot or contribute nothing. Unfortunately, for the masses inaction and contribute nothing is the easy option.

Going back to the root cause, government has to take more seriously its part to play in all this. Simpler is usually better. However, commitments not to mess with the system are more important. People are very clever. Witness the effort that benefit claimants put in to get their heads around that system! But they are also clever enough to smell a rat when it comes to deferring income and high product charges.

To Tom Peak: these are two entirely different products from two entirely different sources, but too often spoken of in exactly the same terms and subject to the same vitriol. In simple terms it should be different analysis and different vitriol.

For example why is David Rowse intimating that the State Pension is “Untaxable ” (?), when it is blatantly taxable. And one could as easily say that the State Pension reduces Age Related Allowance, depending on income levels.

And Graham Barlow gets himself into right state over SERPS. He rightly identifies that tax is postponed not relieved, but appears to include the SERPS payment in this, when the NI Contribution was not tax relivable, except for the contracting out anomaly.

The reason for different names is primarily to have people understand the rationale behind each element - and apply the correct analysis to each element. At the moment we are having a very muddy wrangle with comments being directed at the wrong target. Politicians love this because it provides them with the ability to dance around the problem for ever.

The British have a penchant for being lazy with language - which allows us to have a “heavy light bill”. There is a lot of anger at the current pension scheme - the energy could be better directed if the analysis was better directed. In which case don’t you think there is now cause “to be clever”.

As we already have a state pension and a private pension in normal use what point in (a) writing pointless articles and (b) failing to use the words already in current use?

If we were talking football and the discussions turned to the qualities of Vieira, we wouldn't get far if you are talking about ManCity's Vieira and I am talking about Fleetwood Town's Vieira. The surname is one already in current use, but lack of differentiation means a totally meaningless discussion. And frankly, most of the comments in this blog indicates that there is major shortfall in comprehension of the separate systems. If you want to improve a system first of all know what system you are talking about.

Glen - are you talking about soccer or the American rugby type thing?

Point is you fell into your own trap of using a term that's been around for over a hundred years and made an assumption. The same habit you want to change. For many things, chnage is unwelcome if it complicates people's understanding as much as it clarifies. Pensions have got to the point that yet more changes just make folks eyes glaze over.

The one that does my head these days is 'wrongdoing' as somehow being better than illegal / lies / deceit etc.

Mr McKeown's comments seem to miss my point. That I bought into SERPS and I paid full NI plus the maximum contribution into a private pension, which took a bit of doing at the time. The payments I receive are all taxed and if you put the State pension on the top I am paying 40% current tax for which I received no tax relief. It is called "Lets have the shirts off their back pension policy". You wait to you get there to find out. Honesty, Hardwork, and thriftyness are all penalised in Britain. At the final analysis ,no matter what name it goes under they the Govt. insist on calling it benefits. Yes to them and their idle clients, all 8 million of them.

Point of clarification.

My state pension is not taxed and I am informed that there is no mechanism for doing so.

Instead I pay the tax due for my state pension out of a second pension.

If someone knows differently and is paying income tax direct on their state pension I would be very interested to know - I am informed that this is not possible.

Further, further clarification:

I have been informed that state pension cannot be taxed at source, as other pensions can and therefore has to be paid from some other 'income', which in my case is a second pension.

So,,, it can be taxed, but not directly. I hope this makes sense as the whole of the pension issue 'does me 'ed in!'.

You are quite right in that I did make an assumption as did you because you missed Rugby Football. This lack of precision is why I believe it sensible to debate the use of the word pension. Financial services is riddled with unclear terms and assumptions, which is why we end up with problems. Clients do not, in general, use our terms in every day life with the precision that would be expected from a professional. if they are to understand us the terms we use should be clear. So yes I believe it would be beneficial to ensure that people are very clear about what we are saying. Yes, it is a habit I would like to change - and one of which I am as guilty as anyone else.

But I also find that when I am clear to a client the glazed-eye syndrome disappears - they become interested precisely because they they understand, and can then make a decision based on clear rather than vague understanding.

A high percentage of problems in life arise because of misunderstandings, e.g. the definition of football. Clarity does clear away with these problems - but it does not guarantee agreement, merely comprehension.

And I was talking about Association Football, colloquially referred to as "soccer' in the US of A.

Curiously Graham Barlow makes my point quite eloquently. If the State Pension arrangements, and private Retirement Income arrangements, were more clearly identified and defined it would have become clearer to more people sooner that the State Benefits create "double taxation".

But because we are casual in our language pensions and tax relief are synonymous. Ergo no-one has addressed this aberration with the State Pensions.

And in David Rowse's dilemma, one may wonder why the value of the Personal Allowance and the Basic State Pension are so closely aligned.

Anomalies become more apparent when the facts are clear.

Justin Urqhart Stewart of Seven Investment Management once suggested 'M3' (My Mound of Money) as an alternative name for a pension. And I recall a newspaper competition where the winner suggested the acronym SMILE (Save Money and Invest for Life's Enjoyment).

Simple rules for those running their own business:-

Only save through a pension scheme if you can afford substantial contributions.

Use a sipp or ssas scheme.

Do not use insurance companies.

Do not buy annuities unless absolutely forced to do so.

If you cannot afford large contributions, pay tax now and use ISAS.

Watch for rule changes going forward and adjust what you do to take full advantage.

Rely only on yourself to look after your interests, why should anyone else bother?

Lastly, you can call your retirement income anything you like, just be sure you have one.

And dont forget all you future happy pensioners, and Mr McKeown. The state benefit ,err pension ,if you are like me ,TRIED HARD TO PROVIDE you will find yourself penalised by losing the age allownce, which again puts up the rate of Tax you are paying, as your state benefit takes you over their decided limit to the money you are allowed to keeep. Make no mistake this is definitely Brave New World. You will be pleased to know your pension(Benefits) have been cut again If I was 21 again I would scram to Australia tomorrow. The future looks really bleak and obscure at the same time

Your article asks an important question but th wrong one. A pension is defined as "a fixed amount, other than wages, paid at regular intervals to a person or to the person's surviving dependents in consideration of past services, age, merit, poverty, injury or loss sustained, etc". I agree that people should define where their retirement income comes from but that is an issue of god coimmunication. To change the meaning of the word will cause more confusion than it will solve. The real question I think you pose is were did it all go wrong? A pension is a very positve part of a civilised society and it has helped the problem it was designed to solve. However it has become warped by the self interest of a few not that their pension necessarily affect the bigger picture but their greed encapsulates the grab society. The real question is how much is enough? Bigger questions have then to be asked; if we can`t properly look after the people who are here why are we continuing to grow the size o our population? The pensio issue sits within this not aside on its own.

The confusion over the name is a huge issue but the logical thing to do is to call the state pension 'old age income support' or something similiar and use the term 'pension' - which consumers understand - for private insurance products.

The majority of consumers understand that a pension pays for their retirement - the challenge is to make them understand that they have to take personal responsibility for this.

If the government continues to provide a 'free' pension, a great swathe of consumers will never invest in one of their own - and if you call it something new and unintelligible - standard practice for FS marketeers - you will only add to the confusion and apathy.