Is your brain effort-to-pound quotient all wrong?
Most people don't spend nearly enough time thinking about what matters - their pensions, says Bengt Saelensminde. Here's why it's time to take action.
On Wednesday we looked at the reasons investors are turning their backs on pensions. It stirred up a bit of interest and thank you to everyone who left comments.
I guess it's not surprising that it's a topic of great interest. For most of us, pension saving is one of the most important things on our minds.
And yet, most people don't invest nearly enough time in finding out how pensions work and how their savings are doing.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Well that's crazy. I mean when you choose a new car, a school for your kids, or even a sofa I bet you think long and hard about it. So why not put the effort into your future financial security?
Save some of that brain effort for the stuff that matters
Let me tell you about the brain effort:£ quotient (yes, I've just invented that). It's how much effort you invest thinking about what you spend/invest. And that's probably pretty high when you're buying that comfy sofa.
Say you want to spend about £2,000 on a sofa. And you invest eight hours of your time finding the best one. That means your brain effort:£ quotient is 8/2 = 4.
Now when it comes to a pension, I suspect the brain effort:£ is an awful lot lower.
If you want £15,000 a year (to top up a state pension of about £7,500) and you want that cash to go up with inflation, then you'll need to have saved about £500,000 by the time you come to retire (that's based on today's annuity rates). Alas, you'll be taxed on that income...
So I don't think £15,000 is an unreasonable amount. Although remember, by the time you come to retire, £15,000 may look pretty modest.
Anyway, let's use the £500,000 pension pot as a basis for a modest person's ambitions. Now how much time do most people give over to pension considerations?
If you've ever set up a private pension, you've probably talked to an adviser who asked some gormless question like: "High, medium, or low risk sir/madam?" Most people probably spend a few seconds before plumping for an answer. Then, "Now where would sir/madam like to invest? UK, US, Asia, blah blah..." A few more seconds of serious reflection, no doubt...
Is your sofa worth 100 times the effort as getting the right pension?
Let's be generous here say most people give half an hour over to the initial set-up. And let's say most people use another half hour a year to contemplate the ongoing situation. Add it all up over the years I guess we get to about 20 hours. Divide that by the £500,000 value, and you've got a brain effort:£ quotient of 20/500 = 0.04.
With the sofa quotient coming in at four, that equates to one hundred times more effort going into evaluating a sofa than a pension!
To me, that's wrong, wrong, wrong! And if it applies to you, then it's time to take action.
Why things are going to get better
Most seriously rich people are well looked after by the finance industry. But for most of us, the industry is out to rip us off.
But, things are set to improve though if you listen to the IFAs they'll tell you it's going to get worse. I'll explain and let you decide...
You may have heard about the Retail Distribution Review (RDR) that's coming into force at the end of this year. One of the main ideas is that IFAs will no longer be paid commissions from your pension pot. Instead you'll pay a fee for advice in the same way you'd pay a mechanic for the time he spends on your car.
Many IFAs are up in arms. They say they'll have no choice but to dump clients by the thousands. They say it's simply not economic to look after small accounts unless they get all the lucrative trail commissions. Just think about that for a moment.
What they're saying is that if they handed a client a bill for advice that equates to what they're currently earning out of commissions then nobody would pay! What they're saying is that the only people who'll pay for advice are the guys with mega-bucks.
Well, at least things are going to be out in the open from now on. I reckon this is going to be a fantastic wake-up call for many Britons.
It's time to start upping that brain to pound quotient...
The DIY approach to pensions
I've always been a big fan of DIY, be it an innate propensity to save money (you can call it tight!), a love of learning new things, or just through downright arrogance (I can do the job better myself!).
Usually it works out. But, as my boy will attest, last week's DIY attempt on the headphone socket of his tablet computer wasn't quite as successful. Some things are evidently best left to the pros!
BUT from where I'm sitting, one thing that's not best left to the pros is a pension. We can't simply abrogate responsibilities for something so important.
The first thing to do is gather together all the paperwork you've got for your pension.
If you're anything like me, you've probably got several pensions in different places. You're entitled to get an up-to-date valuation from the pension provider. I recommend you do so.
The most important thing you can do at this stage is to invest a bit of time to get to grips with your pension arrangements. How much has your pot increased over the last five years? How much have you put in and where's it all going?
When it comes to your own finances, fewer people know better than you what you want to risk, your timescales and how best to go about achieving your ambitions.
After you've got all the information together, you should know where you are. Now, by all means go and see a specialist. He may be able to give you good advice on tax issues and perhaps (just perhaps) some advice on funds.
But be prepared to put some work in yourself nobody else is going to do it for you unless you're mega-rich, that is.
Get your brain effort to pound quotient up for your pension. It could be the most important thing you do this Diamond Jubilee.
This article is taken from the free investment email The Right side. Sign up to The Right Side here.
Important Information
Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
Managing Editor: Frank Hemsley. The Right Side is a regulated product issued by Fleet Street Publications Ltd.
Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No 115234. https://www.fsa.gov.uk/register/home.do
Join more than 165,000 subscribers and keep yourself informed with the latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.
He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.
Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.