Who Has £6 Million?

Mark Siara - Mon 17 Mar, 2008

The government and financial industry should do more to help people save for retirement

A report on BBC Radio 5 Live this week quoted research undertaken on behalf of the National Lottery into how much money you needed today to live a “Millionaire’s Lifestyle”. This basically meant a large house – no mortgage of course – plus a holiday home abroad. In addition, two decent cars – presumably an Aston Martin or one of the more expensive models from the German marques would count. Evidently, no self-respecting millionaire would need to work, so you’d have to be able to live off the interest.

The cost of all this was put at around £6 million on average. There were regional variations – a “millionaire” in London would need around £9 million whereas a “millionaire” in South Wales would only need a mere £4.7 million. Peanuts really – it wouldn’t even cover the interest on the £100 billion required to bail out Northern Rock. Or, put another way, you could create 200 “millionaires” by using the £1.2 billion the MoD reckon has overspent on the Iraq and Afghanistan campaigns. (Apparently £200 million is down to increased operational requirements, leaving £1 billion unaccounted for – perhaps some of it has been used to refit the kitchens and bathrooms of all our glorious MP’s second homes.)

The point is £6 million is more money than most people can even dream about but for the super-rich it’s not even all that much. Think Warren Buffett, Roman Abramovich or even Posh and Becks. Now that’s wealth – they could probably find £6 million in loose change down the back of their designer sofas.

So, how do you build yourself a decent enough sum so that you never have to work again? The vast majority of us can only do it through a pension. No, no wait, come back. Pensions are really fascinating, honest. There’s lots more choice than ever before and a bit of forward thinking can mean the difference between a prosperous retirement and an impoverished one.

The problem in the UK has been that we don’t have a saving habit any more. The Everest of debt held by the British consumer is one reason. Now that people have actually started to wise up to the Brownian myth, their first priority is (rightly) to pay down their debt. This leaves little left for savings of any kind and a pension is often last on the list.

If the supply-side of the pensions problem is bad (ie no-one has any money to put in), the demand-side is even worse. People don’t like pensions or, more accurately, people don’t like saving with pensions. There are a number of reasons for this but most of them come down to one factor: the pensions industry and the government have lost the trust of the UK population.

The mis-selling scandals of the early 1990’s, when workers with perfectly good final salary pension schemes were encouraged by unscrupulous financial advisers to switch into poorly performing money purchase schemes was the start. The personal finance industry did themselves no favours a few years later with the endowment mis-selling debacle, further eroding consumers trust. Moreover, the rise of the internet means that the average pension punter is now better-informed than ever. Log on to numerous financial websites and there are figures showing that 80% of fund managers underperform the FTSE 100. Give your money to these jokers? No thank you, I can do better myself. Hence the rise of the SIPP.

But you can always rely on the government – to make a bad situation worse. Gordon Brown’s scrapping of tax credits on share dividends in pensions in 1997 was borderline criminal – robbing the average fund of an estimated £60,000-£120,000. Furthermore, his taxation of company pension surpluses lead to firms taking pension holidays, a subsequent £77 billion pension black hole and suspension of final salary schemes across the board. Brown’s constant tinkering with the rules didn’t help. Keep your hands off Gordon; what are you, some kind of control freak? Err. It’s no wonder people are shying away. And I’ve not even mentioned falling annuity rates. Stakeholder pension? Hah! My money’s going into gold/grains/the mattress. Fortunately the Darling non-Budget made little difference to UK pension provision this time (is it just me or does Alistair Darling look like a Thunderbird puppet? I think it’s the eyebrows. That and the fact that someone on high is obviously pulling his strings – F.A.B.)

So what can be done? If you’re a 40% tax payer or have your own company or are a non-earner, a SIPP can still offer some good tax benefits but typically it’s the middle earners who fare worst. The tax relief is irrelevant as you are essentially deferring the tax you pay rather than making a net gain – although you still get a tax-free lump sum and the benefit of an increased personal allowance. A good alternative is to invest via an ISA. You can still generate a sizable tax-free lump sum and then invest it where you like. It’s also flexible; you can withdraw at any age that suits you. The downside is a smaller choice of investments (AIM shares are not ISA-eligible for example) and there is always the temptation to “dip-in” to your ISA fund in hard times.

As its St. Patrick’s Day, I thought I’d illustrate the pensions’ problem with a joke my Irish Grandmother told me: two English tourists were hopelessly lost and asked a local man for the directions to Kilkenny. After several minutes trying to explain the route he became frustrated at the tourists lack of understanding. Finally he blurted out: “Well if I was going to Kilkenny, I wouldn’t be starting from here in the first place.” The local man’s frustrations mirror exactly our own situation when it comes to pensions.

Given that we are where we are en-route to pensions’ security (i.e. lost) we are going to need some help. The biggest boost could come from the people that helped create the problem in the first place. To be fair, the financial services industry seems to be getting its act together somewhat. The cost of pensions are coming down and a whole new range of investment vehicles are now available – low cost index trackers, Ishares, ETFs, commodity funds – to help boost the average pension pot.

But what about the major culprit - the government? Well how about this slightly left field idea: give every new-born in this country £6,000 at birth. Invested in a FTSE tracker with an assumed average return after inflation of 7% over 65 years (admittedly this projection looks a bit racy right now), this fairly minor sum turns into around £500,000. This would provide a decent pension for the approximately 750,000 children born each year into the UK. The cost would be £4.5 billion per year; not cheap, but affordable. Yes, a fix for the pension crisis costs money and it costs money now. But, when the time bomb finally explodes, Gordon Brown will no longer be Prime Minister and Alistair Darling no longer Chancellor (OK, so he probably won’t be Chancellor next year, but you take the point). It’s tomorrow’s problem and that means it belongs to somebody else.

There is a vision I have of Gordon Brown, dressed in a long coat and trilby hat, standing on a street corner. He calls me over, “Pension problem, eh. Don’t worry, I’ve got the solution.” He then hands me a folded up piece of paper before he slinks away. I open the piece of paper. It says “1, 7, 13, 23, 35, 44 – It could be you”. Thanks Gordon, thanks very much.

Regards,

Mark Siara
For The Daily Reckoning