I wrote earlier about the difficulties of figuring out what to do with your savings post pension freedom. Where do you put it during the accumulation phase? How do you invest it? How do you draw it down? How do you figure out how much to take every year?
I’m not the only one worrying about all this. A report just out from Willis Towers Watson and Nottingham University Business School suggests that some 50% of UK savers are now so confused and terrified that they are in a state of “pension paralysis”.
There are now so many choices when it comes to saving that people just don’t know where to start. That’s particularly the case given that most people have not just very little knowledge of the various investment choices on offer, but very little trust in financial institutions to tell them the truth about those choices. The result? Inertia.
All too many people end up in the default options offered by their employer’s auto-enrolment schemes – something that might end up just fine, or might mean that they save too little at too high a cost.
The good news is that not everyone has these problems. Today’s FT reported the happy news that the Bank of England defined benefit pension scheme is fully funded. The Bank (for which, read the taxpayer) has increased its contributions to the fund to 54.6% of members” salary putting in £90m in the year to February 2016. Bank of England employees do not contribute to the scheme themselves. Nice.
For comparison purposes you might note that under auto enrolment your employer puts 3% of your salary into your pension (not 55%). Anything else you have to drag up yourself.
So that’s one group of people who don’t need to worry about pension paralysis. They’ll all do very nicely without needing to do anything at all (which is why Andy Haldane can get away with saying that he finds pensions very complicated – he is talking about other people’s pensions).
Still Bank of England employees aren’t the only ones doing just fine. Today’s Times contains an even more irritating story. Steve Holliday, the outgoing chief executive of National Grid, a UK regulated utility, is to draw a pension of £591,000 a year (that’s £11,000 a week) when he turns 60 next month.
You may be wondering how much you’d have to save to get that kind of income in your retirement. The answer is about £20m. But, of course, you wouldn’t be able to save £20m into a pension. For starters if you are earning more than £150,000 you can no longer put more than £10,000 a year into a pension. But even if you could, and even if you managed somehow to build up a good-looking pot, at £1m you’d hit the Lifetime Allowance and start taking a 55% tax hit on anything extra. You haven’t a hope.
That’s not necessarily the case at the top of the money tree. Some executive schemes include a commitment from the ex-employers to gross income up so the recipients of these super pensions aren’t affected by the rules that bother the rest of us. Not that paying away 55% of going on £600,000 a year would necessarily be the end of the world for Mr Holliday – he also holds National Grid stock worth £13.7m as well as stock options worth £12.9m. They’ll be nice reminders of his nine years at the firm as well.