Dirty Secrets About pensions
When pension industry tuxedos meet to dish out sponsored awards or negotiate the next layer of incompressible rules with Civil Servants, the dirty laundry is rarely discussed and certainly never published. Neither are you likely to read anything like this from hacks dependent on industry goodwill for stories so here’s an insider list of the Top 25 Dirty Secrets. You won’t find this in any brochure, website or lecture on pensions, so feel free to share.
25 Dirty Secrets, De List
1. Private and Employer Pensions are just simple savings with a set of tax rules around them, no different to any other investment, but the rules are so complex that 99% of investors know more about the Theory of Everything than about where their money is, what it’s costing and how much they can reasonably expect from it, when the gold watch and cake arrives.
2. Soundly funded and guaranteed Employer pensions are dead, Irish Life just craned in the tombstone, Buried Herein, Defined Benefit Pensions, Born 1940’s Died from Global Financial Crisis 2008. RIP. It’s everyone for himself or herself now; what you save, what it all costs and how you invest it. Sink or swim, that is the truth.
3. The State Old Age Pension system has zero assets, just debt and, at the present rate of PRSI contributions, it is a busted flush. The missing money is equivalent to 1.6 times the National Debt at €324bn, that is the projected deficit over the next four decades, so if you are counting on getting twelve grand a year from the State, you better start lighting votive candles, staying real fit or sign the register for the best pension by getting hitched to a well-paid public servant. (see no.6 and no.10 below).
4. Expect to work well into your 70’s, it’s the only way out of the dodge that is the PRSI Ponzi fund, unless Ireland adopts a massive inflow of young immigrant workers and finds the houses needed for about a million families. More than half the current workforce, that is over a million workers, have zero pension savings and most of the rest haven’t enough, it is why forced pension savings are shortly on their way to a payslip near you.
5. There’s no pot of money to pay Public Sector pensions, the missing money, equal to over half the national debt, simply isn’t there. The total level of income tax collected from the public payroll is equal to the current pension pay out of €3.1bn and for every three at work, there one is retired so the ratio is unsustainable without massive subsidies. That is why the hated levy hardly makes a dent, and why you can expect to subsidise the tab through with your taxes for the rest of your life.
If you’d like to chat about your pension or if you were thinking about starting one email me at eddie@eddiehobbs.com
Forget the Sex, Think About the Pension
6. Private sector pay in 2018 is just about reaching average Public Sector pay at the Millennium 18 years ago so if you think that the Public Sector pension benefits will be hollowed out like the Old Age Pension, you know little about how Ireland really works, who gets first dibs and who gets shafted. You work first and foremost to maintain insider privileges, baby. So, marry that public servant, forget the sex think about the pension.
7. Many surviving Defined Benefit pension schemes are mirages kept aloft by the Regulator setting solvency limits that are based on hope rather than sound economics. Expect to hear recurring stories of cuts to pensions in payment for years to come as gravity catches up.
8. National private pension savings is the easiest bank to rob when a country goes burst. Last time out, but cast as a wheeze about recovering tax relief, the State simply helped itself to nearly €3 billion of private capital. In another solvency crisis, if Ireland starts at an elevated national debt and is locked out of markets, to whom do you think they’ll come first to raise cash? Pensions, like Property is immovable wealth, it is right in the cross hairs. Badly insolvent countries fully nationalise their pensions by appropriating private savings in return for dodgy Government IOU paper, that is the pattern.
When Pensions go Ridley Scott, Alien Ugly
9. The alluring attraction of saving through pensions has been the subject of a growing gastric band by the Department of Finance civil servants. There is now a lifetime tax free cash limit, it is no longer a quarter of what your investments have earned but restricted to the first €200 grand. That means when grow your pot past €800 grand, your pension investment begins to lose its good looks.
10. Go north of two million Euros in value and pension savings go Ridley Scott, Alien ugly. This is where the excess is digested in a double helping of income tax, yes that’s well over 70% but if you are public sector brass don’t worry it doesn’t apply to you. Although your high pension may be worth well over two million, the multiplier to calculate it was jimmied to get your colleagues out of the trap during the austerity years, without paying a bob. Those who did get stuck lately for extra tax have a unique get-out- of-jail card; the bill to the Revenue dies with you. Think of it as free life insurance cover.
Escape with the loot at 10% tax
11. Most SME owners would be far better off building up wealth within companies and then selling them, each sale now means earning the first million Euros at just 10% Capital Gains Tax, double that if your spouse is a joint owner. Entrepreneurs Relief is not age restricted and you can take your winnings and bugger off to places like Portugal where every cent you bring into the country is tax free, for ten years. The sunshine isn’t taxed. There’s many other ways to grow wealth and pension savings isn’t top of the list.
12. Ask pension investors what their properties, shares, art, gems, cars are worth and you can expect a reply pretty close to market value. Ask them about their pensions swag and expect to see that look, the one when you’re short taken at the side of the road and here comes the damn headlights! There’s a reason for this bafflement, you are expected to forage in the long grass in the dark for answers like, how much exactly in cash terms am I paying to whom, what assets am I investing in, why are those the right assets now and who is driving that damn car.
#Penguinpensions
13. The service level in the industry is lousy, competition is muted by poor investor insights, costs are typically bloated and most investors are in Penguin Pensions, huddled together, the same as everyone else. These are sold to appeal to herd safety, some have posh names like Consensus funds, Managed Funds and Multi-Asset funds but there’s no safety in numbers.
14. Track the huge run up in risky assets since the Global Financial Crisis and it matches Central Bank money printing over nine years. But the game is up, values are hugely at risk to another trapdoor event but when did you ever read an alert from your pension provider about what action to take?
15. Costs can be cut dramatically but few pension investors have any idea how to terminate hidden commissions on contributions or how to swap to lowest price funds that track stock market indices when high priced active managed funds cannot compete. Don’t be misled by dumb comparisons to free pensions, just like you can’t shop for groceries in an empty car park devoid of staff, isles, lighting and a roof, stuff still costs money. The trick is to find the lowest cost way to good returns not the highest cost way to poor ones.
If you’d like to chat about your pension or if you were thinking about starting one email me at eddie@eddiehobbs.com
Less Reality than Ex on the Beach
16. Pension promotion about superior performance ability is just about as real as Ex On the Beach. The compounding effect of time and how much you contribute is far more important than what Pension office you select. In the long haul there’s no material difference between competing fund choices. Despite all the advertising guff, the key is the time you’ve left on the clock and how much you or your employer is willing to cough up.
17. Bombing out post-retirement by running out of cash in your ARF is set to become a huge problem because, you are compelled to pull out a minimum each year of 4% regardless of your circumstances and pay tax on it. This can lead to high risk taking that ends in tears when asset prices slump and post retirement funds are cannibalised to maintain lifestyle. Running out of money before running out of life is one of the reasons why prematurely gifting assets to adult kids ought to be very, very carefully considered.
18. For small savers there’s an unpleasant set of handcuffs at retirement that forces you to keep the first €63,500 locked away until age 75 for fear you’ll actually spend it. This regularly surprises and screws up plans for Irish families with low savings.
19. Pension products are simply Deferred PAYE vehicles, nothing more or less. Unlike every other investment where you can’t be taxed on your capital unless you sell at a profit, 100% of every cent in pension savings, (after allowing for tax free cash), is taxable when you go to collect it.
If you’d like to chat about your pension or if you were thinking about starting one email me at eddie@eddiehobbs.com
Bristling with Conflicts of Interest
20. Irish pensions bristle with conflicts of interest. Corporate Trustees whose job is to act as the protector of scheme assets are owned by firms that charge fees and commissions for management, advice and administration. Professional, independent arm’s length Trustees are the way to go but don’t expect to hear that from the compromised Trustees that saturate the Irish market.
21. Concealed commissions on transfer values from scheme to scheme and on contributions means that the advisor is acting as the agent of the commission payer and not you. In advance of a ban on upfront sales commissions don’t expect impartial advice, not without hard disclosure about fees.
Dodgy Between the Stools
22. There is split regulation between the Central Bank, the Pensions Authority and Revenue so when nasty problems arise don’t be surprised to find complaints falling between stools. The Pensions Ombudsman which arbitrates on complaints can only deal with bad administration so the best thing to do is not to follow dodgy advice like moving your pension offshore.
23. Investors in Self-Administered schemes can get alienated from their own assets for years if their corporate Trustee goes into liquidation, suddenly trapping schemes in limbo so be real careful about whom you choose, check CRO returns, ask for a declaration of legal cases pending and seek a copy of the firm’s Professional Indemnity policy. Remember when you are subcontracting ownership you must be really careful, especially if it involves parking the title documents with an unregulated and unaudited unit trust.
If you’d like to chat about your pension or if you were thinking about starting one email me at eddie@eddiehobbs.com
Ask for a Discount off Audit fees
24. If your Accountant refers you to a pension firm ask him or her for written disclosure on any introducer fees paid and offset it against your audit. Look for professional qualifications and technical fluency from your advisor but especially look for open disclosures and consistent messaging about economic trends and their impact on your assets. Don’t let your curiosity awaken at retirement when it is too late to address problems.
25. Your pension savings will always stand at the cross roads between Left and Right Irish Governments. The political trick is to win popularity by promising the majority of constituents easy money by taking it from the minority of them. This is how you get elected. Sinn Fein, Labour and most Left wingers want to gut tax relief, eliminate it entirely or reduce it to the standard rate but still want to tax the benefits at the other end at the top rate. So be quite clear, Irish national pensions savings are forever at risk to ideological swings from Ministers for Finance cheered on by left wing backbenchers who want to get reelected and grow their Dail pensions.
If you’d like to chat about your pension or if you were thinking about starting one email me at eddie@eddiehobbs.com
Eddie Hobbs, April, 2018.