Although it might be months before they realise it, the spectacle of High Street banks in crisis as Royal Bank of Scotland (RBS) asks shareholders for £12bn is bad news for millions of workers in private sector pension schemes.
By Jeremy Gates, PA Features
Although it might be months before they realise it, the spectacle of High Street banks in crisis as Royal Bank of Scotland (RBS) asks shareholders for £12bn is bad news for millions of workers in private sector pension schemes.
Pension funds of Britain's top 350 companies hold about 58% of their money in shares, sharply down from 80% a few years ago - and rock solid bank shares, promising sure and steady income, were a pension manager's dream until the credit crunch took a grip.
If leading shares fall further, and dividend income is slashed, pension funds will feel the pain.
It is said that Government, after arranging the £50m bail-out of the banks, is against RBS paying a dividend of £2.3bn to shareholders - many of whom will be pension savers with Standard Life, which owns a 3.5% stake of RBS.
I am one of them myself. My Standard Life pension fell in value by about 8% in the past year, even before the good ship RBS hit the rocks.
Moneyfacts, the financial data specialist, says many other personal pensions lost value in 2007: the average fund grew by just 5.41%, while pension savers invested in property funds lost nearly 14% of their money, and anybody invested in Japan saw an 11.4% drop.
Perhaps these falls explain why most adults don't bother to fix a private pension: in 1996/7, 54% of men and 43% of women paid into private pensions, against 43% and 37% respectively in 2005/6.
This week's report from a Public Accounts Committee (PAC) of MPs bemoaned "a widespread lack of understanding" about pensions among thousands of workers across the country. Or do they understand only too well to bother to save?
Since Gordon Brown's 1997 raid, which has drained upwards of £50bn from pension funds, hundreds of firms have swapped secure final salary schemes for cheaper defined contributions (DC) schemes - which pay pensions entirely dependent on investment performance, rather than linked to final salary.
Another key factor in the demise of pensions is the steep fall in annuity rates, which decide pension income, because people are living much longer.
Check out projected pension income by the calculator in the consumer section of the Financial Services Authority (FSA) website and you are hardly encouraged to save.
It shows that if you start saving £200 gross per month at age 20 then your pension at 65, adjusted for inflation, would be £966 per month.
Wait until you're 30 to start saving, and monthly gross income drops to £615. Wait until you're 40 - and gross monthly income at 65 is only £364.
These figures underline the gulf steadily opening up between public sector workers in final salary pensions, and everybody else.
No wonder many workers put their head in the sand - and decide state benefits, possibly boosted by money released from bricks and mortar, will cover their old age.
But as fewer save, state benefits for the elderly will be spread pretty thin by 2030 or 2040.
Despite the grim evidence, do private pensions still make sense?
Steve Latto, pensions development manager at Alliance Trust, says: "It is clearly sensible to save for retirement. Government can't provide much, and a pension is the most tax-effective way to get income in retirement."
Latto says current troubles among the banks will pale into insignificance over a long period of saving.
"Shares are always a volatile place to put money," he says. "But regular saving over the long-term offers the benefit of pound cost averaging: £250 per month buys more units for a pension when shares are low, and gives more potential to add value over the saving term."
Alliance Trust manages pensions for many investors still under 18: it claims anybody paying in £3,600 gross each year until their 18th birthday, and then paying no more, is sitting on a £1.8m pension pot at the age of 65.
One strong argument for pensions is that they build a big lump sum which most of us would never otherwise manage to do - with the right to take 25% of it as a lump sum at age 50 (rising to 55 by April 2010).
A lump sum of £30,000-50,000 enables people to change their lives, and perhaps to do something they always wanted to do.
Another attraction is tax relief on contributions: basic rate taxpayers pay only £80 of every £100 going into a pension, Government pays the rest. Higher rate taxpayers pay only £60 for every £100 invested.
Malcolm Cuthbert, pensions specialist at financial planners Killik & Co, says: "The key to pensions is compound interest over 30 years or more.
"For higher rate taxpayers, it's a no-brainer - because Government provides nearly half the money going into your pot. For basic rate taxpayers, the perk is still worth having.
"The other attraction is employer contributions into personal pensions. They have fallen sharply since final salary pensions, but it is still a perk worth having: it is common for employers to put in 5% of salary if workers pay 5% too."
Says Tom McPhail, pensions specialist at investment planners Hargreaves Lansdown, which handles both corporate and personal pensions: "Any long-term solution to our pensions crisis lies in persuading individuals to take a more responsible, hands-on approach to managing their own funds.
"For any hope of a reasonable retirement income, workers must pay a minimum 10% of salary, preferably over 40 years.
"For a comfortable retirement income of well over half of final salary, the realistic contribution level is 15-20% of salary - although few can afford to contribute at this level."
Tom McPhail believes the realistic cost of a public sector final salary pension is about 30% of income. Hardly anybody could afford to pay this, and public sector workers only get it because of a large taxpayer subsidy.
McPhail says: "People have not yet woken up to the implications of living longer, and simply haven't adapted to much lower investment returns than we saw in the 198s and 1990s.
"That is why, in their 20s, 30s, and 40s, savers should invest heavily - probably 100% of their pension fund - in shares, including aggressive growth sectors like Russia, India, and Agriculture. They should maintain some exposure in equities even as retirement approaches."
If McPhail's analysis is correct, pensions are no longer something which workers can ignore until they retire. But too few of us have woken up to the new reality.
INFORMATION: Pension Calculator - www.pensioncalculator.org.uk; Alliance Trust Savings (01382 201 900 and www.alliancetrust.co.uk); Killik & Co (0207 337 0777 and www.killik.com); Hargreaves Lansdown (08000 138 212 and www.h-l.co.uk).
POUNDNOTES
:: The new one-year internet-based, fixed rate savings bond from Yorkshire BS pays 6.20% gross and is available until May 31, on deposits from a minimum £100. The new bond is available only online, and investors taking monthly income get 6.03% gross.
:: Two weeks on from the latest Bank of England base rate cut, some 38 lenders have announced a cut to their Standard Variable Rate mortgages, says Denise Harvey at Moneyfacts.co.uk. Most opted for the full 0.25% cut, but five offered less and Northern Rock - keen to dump customers - went down by only 0.10%.
The average SVR is now 7.11%, but half the top 10 lenders are above this figure, with Northern Rock on a stonking 7.49%.
Moneyfacts says lenders have also hiked variable tracker rates, up from 6.23% to 6.51% in the last month alone, while two and five year fixes have also shot up. Two year fixes have jumped to 6.52%, five year fixes to 6.37%.
:: All we need to feel financially secure is a lump sum of £92,500, according to Kaupthing Edge, the online retail financial services arm of Iceland's largest bank Kaupthing and its UK subsidiary Kaupthing Singer and Friedlander.
Interestingly, women would feel secure with a lump sum of just £81,200, while men think £102,000 is the minimum which would give them peace of mind.
Kaupthing currently offers an Instant Access Savings Account paying 6.5% AER on minimum £1,000 deposits, and guarantees to remain 0.3% above Bank base rate until February 1, 2012.
:: Small investors holding RBS shares can sit tight and "feel a little more optimistic about the company's future" says Nick Raynor, investment advisor at the Share Centre which says that RBS has given itself the best possible chance of raising the money by being first in the queue for new money.
Top buys among small investors at the Share Centre last week were RBS, Tesco, British Airways, BT and Alliance & Leicester. Top sells were RBS, Tesco, Barclays, BHP Billiton and Lloyds TSB.
The Share Centre says the most researched companies among its members are currently RBS, Barclays, HBOS, Barratt Developments and Tesco.
:: HIGH FIVE SAVERS:
Phone No Rate Account Period Deposit Interest paid
Birmingham Midshires 0845 603 2286 6.81% (F) Direct Internet Fixed Rate Bond One Year Bond (T) £1 OM
Birmingham Midshires www.askbm.co.uk eSaver None £1 Yly
Coventry BS 0845 766 5522 6.45% (F) 50 Plus Notice 60 Day (S) £10,000 Yly
Kaupthing Edge www.kaupthing-edge.co.uk 6.31% Savings None £1,000 Mly
Barclays Bank 0800 300 6159 6.31% Tax Haven ISA Instant £1 Mly
:: TOP FIVE BORROWERS:
Phone No Rate Period Max% Adv Fee Incentive
HSBC 0800 494999 5.39% (F) to 30/06/13 90% £999 Yes
HSBC 0800 494999 5.43% (FTB) for two years 90% £999 Yes
Abbey 0800 100802 5.49% (F) to 02/08/11 90% £675 Yes
Bradford & Bingley 0800 113333 5.54% (FTB) for two years 95% £999 Yes
Co-Op Bank 0800 633 5286 5.64% (FTB) for three years 90% £599 Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T- Operated by Telephone
*W- Operated by Internet
*H- Operated by Internet/Telephone
*S- Available only to those aged 50 or over
*R- Available to those aged 60 and over.
:: Source: Money£acts (01603 476 476). All rates subject to change without notice.
