Prudent savers hit by ‘excessive’ hidden fees on pensions
… sayeth the Telegraph…
The National Association of Pension Funds says that fees are too high and that consumers face an “eye wateringly complex” system of hidden levies. Last year, The Daily Telegraph exposed how pension charges could strip pensioners of up to three quarters of their income.
Well ok, that is entirely possible.
But does the fees that ‘prudent savers’ get charged not pale into insignificance compared to year after year of what artificially (i.e. politically driven) low interest rates has done to the very notion of being a ‘prudent saver’?
Indeed if you simply save your money in some safe low yield instrument, in such an environment as we find ourselves today you are not being a ‘prudent saver’ at all. There is nothing prudent about it as your money is very unlikely to maintain its value vis a vis inflation… and that is exactly the intention behind the policies of the Fed and Bank of England. They want you to spend in order to appease the animal spirits that drive the economy, rather than be a ‘prudent saver’.
That is who would-be ‘prudent savers’ should be railing against.
Unless you’re investing in physical currency, you’re not losing to inflation at all. Assuming steady inflation, pretty much every bond pays a positive real rate, so you gain even after inflation there. And stocks have value because of future dividend streams and asset values, which are paid in inflated dollars. Inflation is not a tax on savings, it’s a tax on holding cash.
By “Railing Against”, I assume you mean “Hanging From the Nearest Lamp Post”.
Something like that 🙂
But that *is* what the traditional ‘prudent saver’ invests in… he keeps a reserve of money in the bank.
No, that’s a traditional “person who doesn’t understand investment very well” invests in. Keep a couple grand in the bank, and put the bulk of your savings in vehicles where they earn more than demand deposits. Sure, it might be called a retirement account, but as long as you can get the money at need, the name doesn’t matter much.
Imagine my lack of sympathy for ‘prudent savers’ who expect large returns for low risk.
That happened for a tiny, tiny, brief and weird period in the history of mankind and it is over and not coming back.
If you want a return, you need to save and also to take a risk. Putting the money in the bank does not qualify.
Unless you’re investing in physical currency, you’re not losing to inflation at all. Assuming steady inflation, pretty much every bond pays a positive real rate, so you gain even after inflation there.
You would if you didn’t have to pay taxes. Assuming inflation is running at 6%, your bond pays 8%, and your marginal tax rate is 30%, are you winning or losing?
The most eye-wateringly complex and excessive fees I pay on my private pension are to one HMRC.
“Unless you’re investing in physical currency, you’re not losing to inflation at all. Assuming steady inflation, pretty much every bond pays a positive real rate, so you gain even after inflation there.”
I don’t believe that this is true at the moment. Inflation is at 5.2%. UK government bonds pay from 0.5% for 1 month- 2 years, to 3.4% for 30 year bonds.
“Inflation is not a tax on savings, it’s a tax on holding cash.”
This is never true. Inflation is always a tax on savings, it’s just normally less than the gains. If I have 5% inflation and 8% interest, I am having my interest gains taxed at 62%, which is not nothing.
I work in the industry so…
You currently do not get a real return on government bonds for tenors below 10 years. For the next 6 years they are hovering around -1.0% (-2.0% over the next 2-3 years). If you retire in 20-40 years time you can lock in a real return of about 0.4% p.a. if you purchase a long dated index linked gilt.
If you had a 50%/50% investment in equities and corporate bonds you would, by most estimates, be reasonable to expect a real return of about 3.0% p.a. over the next 30-40 years. This is broken down 0.5% real return, 2% from the equity investment (4% in excess of gilts, but half of this given the allocation), and say another 0.5% from the corporate bond investment.
You can lock in the inflation protection by buying it in the market, at said 0.5% rate. While this would require derivatives there is no reason why you couldn’t design a relatively low cost retail product with a real return expectation of c 3%.
The market does not fear inflation as much as many of the people on this blog do, so it is still possible to design a reasonable long term investment.
The cost issue raised by the Telegraph is a very real one, and if I were a regulator and not a libertarian, I think there is an extremely good case to be made for clamping down on fund manager charges. Frankly, 90% of them are a total waste of space. Most of them are in the active management business (and certainly this is where most of the costs are), even though active management of investments, as opposed to index tracking investment, has been proven time and time and time again to be completely unworkable. I guess people like to believe that ‘things can be done’, and aren’t prepared to resign themselves to their own unimportance.
Addressing the point Perry makes about most people using cash to invest. This is a good point, and I think if we are to have a central bank it has a moral duty to provide the populace with a high quality currency that will do as an investment as well as a medium of exchange. This would be a great social benefit.
Perry is, of course, correct.
What is happening is a distraction tactic. Much like the energy market.
In the energy market prices are being put up by the government’s “Green” taxes and regulations – so, to distract attention from this, the establishment (of all political parties and none) attack the energy companies.
With saving it is even more blatent.
Interest rates have been forced down to virtually zero for savers (at a time when prices are rising at about six per cent – at least)
Savers are essentially being wiped out. Banks are not paying for the right to lend out the money of savers – the banks do not need to give a flying f…. about savers (the banks are getting their money from the Bank of England, and the Federal Reserve, and the E.C.B. and ……).
So what do the establishment do?
They make a great big song and dance about such things as evil “hidden fees” on pension plans.
Classic diversion tactic.
“But you have not dealt with the speficif issue of pension”.
Very well.
Private pensions are hit by such things as Mr Brown’s annual special tax (introduced in 1997). Which has (over time) helped make the private pension market a joke.
Also the value of pensions has dropped by a third (even from this low base) since 2008.
If you retired in 2008 you would be about one third better off than people who retire right now – due to the financial meltdown in the private economy (government pensioners are protected – so far).
And it has not ended – because what is left of the stock market is just a credit bubble which collapse over the couple of years.
And the establishment are pushing stories about “hidden fees”.
Is the above “specific” enough for people?
Way back when gold was $380 an ounce, I had some loose money. So I bought gold as a hedge against inflation. It has certainly appreciated. I just wish the government would index capital gains tax to inflation. The magnificent gains look to be about four times the original cost, but if you figure inflation, it’s only doubled. But they want to tax me on the full dollar gain, which wipes out almost all of the appreciation.
I do not like the taxman, no I don’t.
Which inflation do you figure, Ellen, the official or the real one?