PENSION FIGHT!

Siam Kidd (Full time investor/Currency & Commodity Trader) VS Carl Rich (IFA)

Why pensions are Awesome!

The last time I spoke to you all I talked about the upcoming changes to pension legislation and the potential fines that employers could be facing because of Auto-Enrolment. Where I should have started is with what a pension actually is.

Anyone who says that pensions are bad quite clearly doesn’t understand what they are! I challenge anyone to (that includes you too Siam) to convince me that pensions are a bad thing! And here is why. It is impossible for Pensions to be bad! A pension is NOT an investment. Pensions do not go up, they don’t go down, they don’t give you a return and they don’t provide you with an income in retirement. A pension is a TAX WRAPPER. That’s it! It is a predetermined set of rules that tell you what taxes and relief’s the money inside the wrapper will be subject to. So how can it be bad? Of course there are good investments, bad investments and down-right awful investments but the tax treatment inside a pension is always going to be the same.

Here are some of the main reasons why pensions are AWESOME.

  • You get a massive amount of tax relief, in the right circumstances you can get a massive 66.67% tax relief on contributions you make
  • Assets inside a pension are not part of your estate for inheritance tax, typically
  • They are protected against you going bankrupt, most of time
  • There is no capital gains tax on profits
  • Business owners can treat contributions as a tax deductible expense
  • They can use funds to purchase commercial property and in some cases lend money to the business itself
  • Payments in to pensions are not treated as a P11D benefit
  • You can take a 25% tax free lump sum at retirement
  • Tax free payment of the whole fund value if you die before retirement
  • They are a great tool for mitigating your personal tax or corporation tax liabilities
  • If I re-branded all of the benefits above and called it a widget you would snap my hand off to get any investments you have invested into one.

So why do people think pensions are bad? That is due almost exclusively to the unrealistic expectations of individuals putting the money in. I have seen lots of clients putting in £40 per month into a pension with the hope that they will get £2,000 a month income at 65. NEVER going to happen! £40 per month over 40 years is only £19,200. To get an income of £2,000 a month you need close to £500,000 in the pot. With the best investment in the world that kind of expectation is always going to fall short. Most people will spend their whole lives saving up a pot to live off of in retirement. Why wouldn’t you use the most tax efficient tax wrapper possible to sit around the investment that you choose? Finally, I want to lay down a challenge to anyone who thinks if you can convince me that there is a better tax wrapper out there for long term growth I will give £200 to the charity of their choosing! Good luck!

Why pensions are crap…

First of all, great article Carl. This is like you trying to convince me that investing in Silver is a silly idea. But as I said before, I don’t think all pensions are bad. Believe it or not, I actually agree with you on several points. Like you quite rightly mentioned, the sole benefit of pensions are the tax benefits that it enables. I personally just don’t like the idea of a pension in the traditional sense. I.e. Put money into your pension pot every month for 40 years and then live off a paltry monthly income for the uncertain remainder of your life. As you said, £40 a month for 40 years = less than £20k. You’d be living below the poverty line with that! And that’s even if £20k in 40 years even buys you a cinema ticket and some popcorn.

You see my main concern is that with a pension, you’re actually ‘saving’ your money in the Pound Sterling. This is a fiat currency and will only devalue. The Pound has devalued over 97% in the last 100 years and 2/3rds of that in the last 40 years. So the purchasing power of your pension money will very likely become worthless. I’d be a bit peeved if I saved up for 40 years to be left with nothing! Also, millions of people have lost billions over the last 13 years with their IRAs and 401ks in the US and also with pensions in the UK. And one of the reasons for that is because a fair percentage of them are index-linked. So when the stock market tanks, so too does your pension. The aftermath of the 2008 crisis wiped 16 YEARS off of peoples pensions and savings in the US. Pensions just aren’t worth the paper they’re written on in my view.

Also, let’s say you did want £2000 a month for your retirement, that means you need £500 000 in the pot. That’s roughly a contribution of just over £1000 per MONTH for 40 years. Do you think that contribution amount is feasible for the average person?

But I think we’re looking at pensions from completely different angles. I’m looking at it from an investor’s point of view and I know that compounding interest is my secret weapon for ultra-wealth in the long run. I also know HOW to invest properly. Unlike most people who ‘dabble’ in the stock market which is just financial gambling. Just off the top of my head I can think of at least 5 investments which would work my money extremely efficiently with far greater returns than any pension. The key to wealth is to buy assets. Simple as that and I don’t class a pension as an a typical asset as it takes money from your pocket every month. (Yes I’m hearing everyone scream at that comment, but there’s more to that). However, the saving grace for them is the tax wrapper advantages as you mentioned. The only time I’d ever use a pension is to utilise the tax advantages and buy commercial property through it. Thereby I’d then receive the residual income which I could then reinvest into other assets.

That leads me to my other dislike – opportunity cost. I know how to turn £1 into £2 a lot quicker than any pension and I don’t have to lock it up and say goodbye to it for 40 years. Velocity of money is crucial these days. Parking your money is a grossly inefficient use of it and just like pensions aren’t an investment, the same goes for Silver. Silver is not an investment or a commodity. It’s real money with a 5000 year record which has never failed and is the best store of wealth in history. So I propose a different challenge….you put £50k into a pension and I’ll buy £50k of Silver and let’s see who’s better off in 40 years…for fear of sounding arrogant, I’m pretty damn sure I’d win. Especially as there’s only 15-17 years of total Silver underground and only 7 years of economically mineable Silver left…

Also, as a trader, (which is my forte) on a BAD month, my trading account still grows by about 3%. But even if I traded ultra conservatively and used extra strict risk management on my trades and made an easy 1.5% per month, even just after 10 years, that £50k would be around £298k. Find me a pension that returns those figures…