Charged Up

An email arrived during the week to inform me that my annual pension statement was available and I wondered if I even dare look at it? Not because of the performance of the funds over the year – I’m well aware of that because I check it online on an almost daily basis. No, it’s the fact that the statement will highlight how much I have been charged for the management of my money. Last year I almost fell off my chair when I saw what this amounted to – it was roughly 1% of the fund total. On paper, and when you say it quickly, this can seem almost reasonable. But, if your funds are heading toward the LTA (Lifetime Allowance) territory, that’s quite a substantial charge. No, let’s be honest, it’s a frigging massive amount of money – £10,000 p.a. – which may be charged every year for the next thirty years. Of course, many will feel that if you have a million quid in your pension fund then you deserve to be charged for the management of it, but really, of all the deserving people who might want ten grand of your money, is it the City who should get it? Just because they can?

That’s not to say that this fund is pushing the boundaries of the LTA –  I might have died of shock if it was. As it is, I’m shocked enough that I have no idea whether 1% is a fair charge or not. Similarly, I have no idea what the charge is for, where it is incurred or why it is incurred. My pension is now a mixture of about 25% in bond funds and 75% in stocks and shares represented by (mostly) tracker funds. I would therefore assume there’s not much active management of these funds involved, so why am I being charged such a massive amount of cash for the “management” of it? One of the funds is actively managed by Fidelity (Global Special Situations), although they aren’t the provider for the pension. I assume FIdelity is charging me for this, but is that included in the 1% that my pension provider is levying? Or is that just being deducted as a charge within that fund’s performance? Maybe this information is buried somewhere in my T&C’s, but who reads that stuff? Like the current storm over privacy in social media, it’s not that they don’t tell you what you’re signing up for, they just do it in a sneaky way, burying it within forty pages of legalistic guff that ensures you’ll probably die of boredom trying to read it. I can’t understand why they wouldn’t want to explain the charges in a simple way – if I could see it, I might even believe it was good value. But because I don’t know, I’m suspicious, and suspect I’m being ripped off.

The sum I’ve been charged on this pension dwarfs just about every other monthly sum I budget for – cars, food, heating, council tax, spending money, everything. And, what’s worse, if the fund drops fifty or a hundred grand next year, I’ll still be charged an exorbitant amount for the administration of it. Heads they win and tails you lose. Either way, I’ll still be left with no idea of how this figure has been arrived at and whether or not it’s fair value.

I feel totally exasperated by this situation. Where do I start to find out if I’m being ripped off or not? Last year I posted in several forums, such as the Money Saving Expert one, asking if an overall 1% annual charge on a pension fund was exceptional.  The answers, as far as I remember, were that it “Sounded about right”. Oh, that’s okay then. I should relax and not worry about paying a small fortune for a service that I don’t understand, while feeling guilty that it’s my fault for being too ignorant to understand it. But is it really?

I’ve seen it stated many times by many commentators, who understand the way these things work, that the fees in the finance industry are an absolute scandal. Margins in fund management are over forty percent. Tesco, not an unsuccessful customer focused business, makes a margin of around five percent. One of the main reasons for this is that Tesco are competing every day for customers on price and quality – they are not on the ‘phone fixing their prices to consumers with Asda, Sainsbury, Lidl and Aldi. Nor are they lobbying to be allowed to do so. As consumers, we can choose to shop where we want to based on what we can see and experience. It’s pretty transparent, and the absolute reverse of what we have in the finance industry.

I’ve also read recently of the outrageous fees that some consumers are being charged to take advantage of the “pension freedoms” with their fund provider. Seemingly if you want to regularly drawdown, or take a big lump sum up front, or just generally get your hands on your cash, the provider will gladly charge an arm and a leg for doing any of it. Not that they’ll be up front that it’s an arm and a leg that they’ll take – they might just carve a juicy slice off your arse instead. They’re not about to reveal exactly, in clear English, what cash they intend to take or why and where those charges are being incurred.

At the moment I’m not too sure what to do about this. I could write and ask for a detailed breakdown of where the charges come from, but suspect part of the answer may well be “Providing detail of charges for people like you”. And I doubt their response is likely to be, “Ye Gods, you’re right, we are charging far too much for what we do. Let’s reduce it by two thirds.”

I’d also like to know that if I decide to drawdown, say, £1,000 a month from this fund, then what will I be charged for that service versus, say, taking £12,000 in one lump sum? Or £120,000? Is it the same? They’ll probably tell me if I ask, but whatever the answer is I doubt I’ll be left with a clue as to why I should actually be charged anything for withdrawing my own money when I feel they’ve already been charging me for “managing” it to date. But I feel I should at least make my feelings known and threaten to switch providers if I’m not satisfied with the response. If millions of us did the same then it might change things. I struggle to think of anything else that will.


Into the Woods

I see on my Twitter account that the Early Retirement community is winding a lot of people up again by being a bit opaque about the financial facts that underpin the objective – namely, that you need a rather large wedge of cash to be able to do it.

This week it was the Frugalwoods and their 66 acre Vermont abode that was ruffling feathers, and no wonder. I won’t go into the detail, because you can read the article and comments for yourself, but I do understand the annoyances expressed over it. I used to feel the same about Mr Money Moustache and Jacob at Early Retirement Extreme and, to be honest, a whole load of bloggers exalting the FIRE lifestyle, including myself. You absolutely need to have money in the bank to do it in the style some of the bloggers extol. Quite a lot of money. You can be relatively up front about this, like Mr Moustache is, or you can fudge around the issue, as I tend to do. Yes, I did retire aged fifty one on pretty much the same income as I had while I was working – but I don’t think that reaching 51 and retiring readily qualifies as  “early”. That, however, is how long it took me to save the money necessary to quit work and not worry about it drastically altering my lifestyle.

I’m not about to divulge how much I had in savings, investments, pensions, cash, payouts and the rest that allowed that choice. But I do recognise that it was a substantial nest egg, regardless of how much I felt that my career, lifestyle and habits up to that point had been aimed toward that goal. I feel I was quite a committed saver as opposed to choosing to “Spend Spend Spend” as I “Earned Earned Earned”, but I was also in the fortunate position of having disposable income to make the choice. Many people don’t.

It seems to me now that it’s quite obvious that FIRE is an aspirational, middle class fixation. After all, in Britain, if you never want to work, if you shun possessions, if your ambition is to life a frugal life and have then all the time in the world to follow your muse, then do it. You can tailor your lifestyle accordingly and you probably won’t starve or live in a bus shelter – but you certainly won’t be living in a 66 acre rural estate in Vermont.  However, for many of us in the FIRE community it’s the latter type of lifestyle that’s the goal as opposed to a pretty basic existence.

Our dream is to be financially independent on our own terms. We won’t have to rely on others – either an employer or the State – to determine the financial course of our lives. This might mean that we still set out to generate income, but we’ll be doing it through our own endeavours and we’ll feel that this is more of a choice than a need. Which makes a big difference and, I think, is a valid and worthwhile ambition to have. It’s about taking control, striving to get to the goal you’ve set for yourself and discovering the myriad of ways and options that you have to realise it. You can choose the level of income you want to attain. We like having the feeling that we are captaining our own ship, which is why so many of our Recommended Reading lists are peppered with Self Help and “Be all You can Be” books, as opposed (or in addition) to the collection of Stephen King or Lee Child novels.

So, FIRE is about personal ambition for self-improvement. Other people will have other goals – maybe their ambition will be to improve the life of others before themselves. Maybe it will be just to simply live for today. Maybe it will be to care and provide for their family and community while a job – any job – provides the means to better achieve this. Each to their own, which is the problem with the Frugalwoods interview – God, they sound pretty smug and pleased with themselves, don’t they? Did they really have to shout about what they’ve achieved so publicly, or is that because they have a book to sell? It’s an underlying paranoia that I have myself – while I’d love to advertise the virtues of being Financially Independent and consequently Retiring Early, I don’t want to sound all smug and self-satisfied while doing so. It’s a difficult line to walk. Perhaps I was trying  to have my cake and eat it when I chose to go back to work?

I still haven’t turned against being Financially Independent though. Try as I might, in the society that we live in today, there’s very few downsides I can see to reaching that goal.

Community Care

I’ve written a couple of versions of this post, about a subject that’s quite personal for me at the moment. Let’s just say that it concerns social care and the cost of it. In summary, if you’re unlucky enough to be affected by dementia or Alzheimer’s, have amassed some savings in your lifetime and haven’t acted to “protect” them from the State, then the State is going to come after you to pay for your care. They will demand to see bank statements, investments, divestments, savings and anything else that they see fit to request. If they feel that you have knowingly tried to move money in order to avoid paying for a relative’s care, you could end up in jail. It’s serious stuff.

I know from reading forums that plenty of people feel that this is fair enough – if, in your dotage, you have the cash to fund a plush care home, what better way to spend it? Especially if you don’t have kids, or likeable relatives, or a favourite charity, to leave a financial legacy for. Choose somewhere you’d like to live and pay for it.

The costs are quite breathtaking when you face the reality of them. For a standard, council care home, you’ll be looking at finding between £700 and £800 a week to stay there, of which the State will pitch in around £200 for as long as you have financial assets to cover the difference. If this is the case, then the remainder of the bills will be funded by you, until you’re down to your last £16,000, when the State will step in to pick up the charge. From your pension, investments, savings, sale of your house, whatever, you’ll be finding and funding around £500 a week.  And you’ve pretty much no idea how long that is going to go on for. One year, five years, ten years, more? The way medicine is going, they’re able to keep YOU going, whether you want to or not, for a long time.

If you want to scare yourself witless about a potential future, take a stroll around the nearest dementia ward local to you and ask yourself how, in God’s name, the country is going to be able to afford to look after the legions of poor souls who’ll require round the clock care in the near future? Yes, the big idea is to keep people at home for as long as possible while pumping in community care teams to “look after” their needs. It wouldn’t surprise me, however, if this is even more expensive than caring for someone in a home. The cost of it all is mind-boggling.

When you consider the amount of people who have no pension other than that which the State will provide; when you consider the average amount of savings people have in the bank; when you consider – if you can – the cost of looking after a person twenty four hours a day, seven days a week, plus their medicine, plus their emergency call-outs, their wheelchairs, zimmers, adapted homes for living, the medical teams required for support, the falls team, the social workers, the ambulance service, the heating bills, the solicitors, the GP’s, the administration….look down your street. How many people in their houses are going to need care at the end of their lives, One, two, ten? Then multiply your street up to imagine your village, town, city and country. 

I don’t know about you, but I’d be prepared to pitch in a couple of pence more on income tax if it would guarantee secure care for our elderly. As a community this is surely the right thing to do. My only reservation is that the money would soon be squandered and wasted hand over fist, but what’s the alternative? We’ve got to do something.

Of course, maybe because of my recent personal experience I’m worrying about a potential future of my own that I don’t particularly want to fund out of my own savings if I can help it. And maybe there’s a truth to that, and maybe I feel a bit guilty about it because I was brought up to not break the financial rules, nor even bend them. You paid your way, fairly and squarely, that was how a caring community was built. Everyone contributed what they could, or at least that was the ideal.

The way the health service is going, it’s obvious that the money it will require is way more than a small number of individuals can shoulder. We’re all going to have to contribute more, as a massive public insurance against an uncertain future. There may be a myriad of ways to approach this, politically, economically and socially, but fund it we must as we venture – a lot more slowly – toward the dying of the light.