The Times - UK - 04.12.2021

62 Saturday December 4 2021 | the times

Money

IN THE

SUNDAY TIMES

TOMORROW

plus

Ian Cowie: my plan for

global domination

special report

Bank branches

are dead. What

comes next?

The real cost of all those pension promises

W

hen it comes to pensions,

trade unions let down

their members very badly.

Listen to them and you would

think that teachers, doctors, nurses,

civil servants and university staff in

defined benefit (DB) pension

schemes are getting a rotten deal.

But even with recent changes,

they are getting a fabulously

generous retirement income, even

with the proposed changes to the

university scheme, which are the

focus of staff strike action.

I wish someone would tell them.

When I hear of miners being

duped into giving up their pensions

or of university staff who don’t save

because they think it is too

expensive, I blame the unions for

failing in their duty to protect their

members’ interests.

Certainly, DB pensions are not as

good as they were in the past.

Today they are largely

career-average schemes

instead of final salary.

What you will get,

though, still far

exceeds what you

pay in.

The problem in

understanding this

value lies with the

price you should put

on security.

Public sector workers

and university staff pay in

high amounts each month

compared with workers in defined

contribution pensions. In return

they get a promise that they will get

a retirement income based on a

proportion of their salary: that’s

guarantee one. Guarantee two is

that this income will be paid every

year they are in retirement,

whether they live for 10, 20 or 40

years. Guarantee three is that the

money built up will rise in line with

inflation. Guarantee four is that

your spouse will get some of your

pension income for life if you die

before them.

Each one of these

promises costs money.

According to the

universities scheme,

someone earning

£30,000 would

contribute roughly

£2,352 in a year before

tax relief. For this year

of contributions they

would get a guaranteed

annual income in

retirement of £400 and a one-

off £1,200 tax-free lump sum. The

estimated value of that pension pot

is £9,200 — but this does not reflect

some of the guarantees. To get its

full value, a worker would need to

save £11,000 in an average defined

contribution pension in one year,

according to the pensions firm AJ

Bell, which is a lot for someone

earning £30,000.

If people in defined benefit

schemes really understood how

valuable their promises were, they

would never give them up. DB

pensions protect you from risk: you

don’t have to consider where to

invest your money or how to

produce an income in retirement.

The problem is that unions have

not explained to university staff

that refusing to accept changes to

their pensions actually creates the

risk — that the scheme may run

out of money. It has an £18 billion

black hole, though this is disputed

by unions. It’s true that the scheme

may not run out of money, but

there is a good chance that it could.

University staff can increase the

odds of getting their promised

pension by paying in more, or they

can strike to keep the status quo

and run the risk that the scheme

goes bust. The question is: how

much of their pension are they

prepared to gamble on this bet?

@jimconey

James

Coney

Money

editor

Comment

6.6m

public sector

pensions offer a

guaranteed income

for life

Sorry mum,

death comes

to us all —

so let’s talk

M

y mum is competitive. If

she can’t win, she’s not

playing. I once took her

to yoga to try to show

her a way to exercise

that did not involve thrashing an

opponent, and she was not impressed.

Those in the room who believed that

practising yoga is about far higher

things than ego or comparing yourself

to others — which was basically

everyone else — were horrified to

hear my mum lean over to me, mid-

plank, and whisper loudly, “This is

easy!”

Now 70, she is much fitter than I

am and has a far more active social

life. So the idea of her dying is,

mercifully, at the very back of

everyone’s mind.

But even so, doing the job I do, I’m

very aware of the need for families to

have conversations about money in

later life. I’d go so far as saying that

discussing wills, powers of attorney,

and what happens to people’s finances

as they get old or die is vital. Duck

them and a lot of hurt can happen.

All too often people, not always

intentionally, detonate a relationship

bomb when they die without

communicating the contents of their

will, leaving others in the family to

clear up the pieces.

So I decided to broach the topic

with her. I know about her will, but

I asked if she should consider getting

a power of attorney, so someone who

loves her can make decisions about

her care and money if she’s unable to.

We also spoke about her assets, and

whether she needed to think about a

possible inheritance tax bill very far

down the road.

The power of attorney was the

easy part (we decided it was a good

idea) while the other part was

trickier. Mum said she’s happy that

some of her estate may be hit by

inheritance tax and is not minded to

go to too much bother to get round it.

I felt a complex mixture of

admiration for her saying this, while

at the same time less selflessly

wondering how much this might cost

me down the line.

I retreated from the conversation

quickly.

Yikes, talking and thinking about

these things is hard. Part of my

discomfort is that it feels as if talking

about it is going to make it more

likely to happen somehow. How

stupid is that?

But then, I’m British and, on the

whole, we’re extremely bad at talking

about money. We’re not very good at

talking about death either — my

grandfather died of cancer with none

of his children being told that he was

dying or even that he had cancer. I’m

not even sure if he knew.

These are two areas of particularly

British dysfunction that, combined,

can result in horrendous arguments.

Go to the US and someone will

cheerfully tell you what they earn

over dinner.

It’s not just a conversation you need

to have with older relatives, either. I

have recently had to have a stern

word with myself on the issue,

because here I am, an otherwise

reasonably sensible fortysomething

professional with two young kids, and

I don’t have a will. I am fully aware

how stupid and foolish this is, and

that you don’t expect this from

someone who does this job, but there

you go.

I don’t exactly understand how I’ve

got this far without having one. It

doesn’t make it better, but I’d be lying

if I said it was no consolation that

there are a lot of other people in this

country as idiotic as me. Between

50 per cent and 60 per cent of people

don’t have a will, depending on which

research you listen to.

So what has stopped me (and half

of you)? For my part, it’s not the

difficulty of organising the money —

that’s the easy part — but I find it

hard to think of my kids being young

and living without me. So much so, I

shut down any thoughts related to

this, and therefore my husband and I

have not spoken about it long enough

to agree what will happen to them.

This process of shutting down the

thought happens so subtly, and so

quickly, that I’m barely noticing I

have had the thought before I’ve

disallowed it.

After my mother-in-law recently

talked me through exactly what

would happen to our kids if we die

without a will I realised enough was

enough. I’ve made an appointment to

see the solicitor with my husband,

and fingers crossed we don’t die

before December 15.

Another thing I’ve become aware of

is that if a conversation is difficult at

first, it doesn’t mean it always will be.

After raising it the first time with my

mum, we have since talked about it

again. And it was far easier the

second time. We both could cope with

it better, and it didn’t feel like we were

tempting fate. It felt more ordinary;

we were able to make plans, and to

articulate what our concerns were

and what we wanted.

So the moral of the story is that

abandoning a conversation just

because you are not used to the topic

and it makes you want to run out of

the room rather than discuss it isn’t a

good enough reason.

If you do abandon it, try again.

Having an awkward conversation the

first time means that the second

time you do it, it’s not so bad. And

the third time you speak about it, it

will be almost as easy as discussing

what you’re having for dinner (and I

take conversations about what to

have for dinner very seriously).

My competitive mum and I have

managed it, and you can too.

Andthen, when it’s out the way, we

can go about our normal lives —

her pummelling her fellow retired

players at the tennis club; me

choosing my non-competitive

yoga — knowing that there are no

awful surprises on the horizon.

Yoga — it’s easier than talking money Namaste.

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Home Economics

Jessie

Hewitson