The European machine is in trouble. Greece is essentially bust. Italy’s sinking further into the mire each day that passes. Spain’s in trouble, too. Even France could end up shocking us.
But you know all this. Question is, is there anything that we can do about it?
Well I’ve been thinking a little about what could happen next. And I’ve come to a firm conclusion: we need to take steps to protect our pensions. Why?
Well let’s just think about it for a moment. Eurozone leaders are scratching around, looking for ways to top up their dwindling coffers. The widely discussed Tobin tax – a tax on financial transactions – is being seriously considered as a way of tapping the banking industry for cash. But as George Osborne points out “There is not a single banker in this world that is going to pay this tax… The people who will pay this tax are pensioners”
And the Tobin tax is not the only way your pension could be raided in the years ahead. Because when governments come looking for money, it’s usually the pension funds that get tapped first. They’re the ones with the money after all. So you absolutely can’t take it for granted that your pension is safe.
Pension funds are always tempting targets
No sooner was a cure found to save Greece than the patient told the doctor where to stick it. So the markets have moved on. Today, the bond markets are giving Italy a run for its money. And saving Italy is going to stretch the EFSF to breaking point – after all nobody seems to want to pump any more money into this bottomless pit anymore.
It’s going to be very tempting for the authorities to look for a little ‘investment’ from pension funds. When the politicos are desperate for money, they have to go where the money is. And anyway, people may not notice the larceny until much later!
If you think that this doesn’t affect us, then think again. They may come after your savings.
A shocking history of theft
In 2008, Argentina was frozen out of global debt markets. Yields were heading towards 25%. And the country was long past the point of being able to pay its foreign investors. So the government decreed that private pension assets were to be transferred over to the state. Of course this wasn’t theft they said. No sir… The State will now pay the pensions as they come due. Yeah right!
Closer to home and more recently, Hungary shifted private pension assets into public hands. Now this is a corker.
In 1998, the government forced all workers (private and state) to save into a private scheme. And that made sense. Get workers to save for their own retirement rather than coming cap-in-hand to the state. But in 2010 as Hungary’s public debts spiralled out of control, the politicos gave its citizens an ultimatum. Move your private-pension fund assets to the state or lose your state pension (like here, you get a state top-up for your private fund).
That’s right, when the government needed cash, they blatantly nicked it all back. And what a ploy… this way, not only did the government get their hands on pensioner’s savings, they also ensured that any new contributions now go to government too. And now that government has control of the assets, they can use the cash to buy their own bonds. What a fix!
What about somewhere even closer to home? In Ireland, the National Pension Reserve Fund, set up at a time of budget surplus, is providing €12.5 billion towards the bail-out of the banks. That’s around half of the fund’s assets!
Could that happen here?
Well, it sort of already has. Let’s not forget Gordon Brown’s raid on pension cash back in 1997. Having noticed that the pension funds were well financed, he spotted a golden egg. He just couldn’t resist taking it.
And that was at a time when the government was relatively solvent!
It doesn’t even matter which political party we’re talking about. Just look at the present debacle over public sector pay. Contrary to popular belief, most state workers pay a proportion of their take-home back to the state in return for their pension rights. And now that the government needs to cut down on its expenses, they’re reneging on these existing contractual promises.
I’m not here to stand up for the so-called ‘gold-plated pensions’ of the public sector. All I’m saying is that when push comes to shove, the government will bend and break the rules on your pension promises.
When the nation is in trouble and the politicos see a big pot of cash they can grab, then it’s damned tempting to grab it. The ‘rich’ savers that have prudently set aside savings could get taken to the cleaners.
How you could protect yourself
We’ve been told time and time again that we need to increase our pension savings. Basically, the state doesn’t want to get lumbered with a big bill for millions of idle retirees that couldn’t be bothered to save. That’s why they offer generous tax advantages for putting away your cash into a pension.
Fair enough. But we should always remember what can happen to those savings should our leaders find themselves backed into a tight fiscal corner. We need to take a pragmatic approach about how we save.
As with all things financial, the key is diversification. You certainly don’t want to be reliant on any one form of savings.
I’m all for pensions. For most people the tax advantages are well worthwhile. But there’s something to be said for keeping some of your savings outside the pension system.
I’m seriously considering whether it’s worthwhile making overpayments into a pension. I could save any overpayments in an ISA instead. Like pensions they offer income tax and capital gains tax advantages. Of course, you don’t get your tax straight back on contributions as you do with a pension – but then again, you won’t get taxed as you drawdown your fund.
With ISA allowances now over £10k a year (and with a partner, that’s £20k) it means your ISAs could grow into a serious addition to your core pension. At the same time, it’ll make it harder for the government to ‘grab’ these savings.
And if you’re really worried about the state encroaching on all of your savings, then you can always save physical assets too. Gold, silver, even classic cars and antiques are tangible stores of wealth. When government is in a fix and they need readies, they probably won’t ‘borrow’ your Louis IV wardrobe or your beautiful silver candlesticks and trade them in for gilts!
It’s going to be interesting to see how the authorities tackle the brewing crisis on the continent. If things continue to deteriorate, just watch out for the pension funds grab. What goes for the Continentals could easily go for us too. It’s an uncertain world out there – don’t trust anyone. Especially not the government!
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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