Have you ever heard the phrase about someone ‘being on the fiddle’? Or how about being ‘sold a pup’? Both of these sayings stem from confidence tricks that are hundreds of years old. Despite originating in medieval times, the fundamentals behind them are still used today and examples can be seen in emails from Nigerian dictators needing to stash a few million of their ill-gotten gains in your ISA Super Saver account or pathetically poor phishing emails allegedly from your bank asking you to ‘verify your account details’ by phoning a UK call centre and telling them your account number and password. Somebody should tell the tricksters behind these fake emails that it may be more realistic if they asked you to phone a Bangladeshi call centre otherwise it’s a bit of a giveaway.
The fiddle con involved two grifters working together and armed with the cheapest violin that money could buy. One would dress shabbily and enter a bar or restaurant, with said instrument, and order the most expensive meal on the menu. When presented with the bill he would make up a story about losing his wallet. He would then claim that he could borrow some money from a friend and return later to settle what he owed. The savvy restaurant owner, figuring the tramp needed his violin to earn a living busking, would agree, on condition that the violin was left as collateral.
Sometime later, his smartly dressed accomplice would enter the establishment and sit at the bar for a drink. During the course of conversation with the Landlord he would notice the violin, exclaim that it was a very rare model and offer a substantial sum to buy it. An agreement would be made for him to return later with the required funds and off he would skip.
When the tramp returns to settle his bill and reclaim his violin, the Landlord sees an opportunity to make a handsome profit. He offers to buy the violin from the tramp for a sum significantly greater than it is worth. The tramp barters a bit and then reluctantly agrees to sell his worthless piece of driftwood for a small fortune. The smug Landlord thinks he has outwitted everybody and waits for the smartly dressed man to return. And waits, and waits.
The second con, the ‘Pig in a Poke’, originated in medieval markets. At his stall the trickster would have on display several big fat juicy pigs. Tempted by the boars the punter would pay a not insubstantial price in return for his choice of pig. Animals of the time were transported in sacks called pokes (which actually came from the French word ‘poque’ and was ultimately lengthened to ‘poquetts’ and then colloquially to ‘pockets’ to describe a small bag secured around the waist) and the chosen animal would be wrestled into the poke for the victim to carry home. During this process, and with some practiced sleight of hand, the bag would be switched for one containing a stray cat.
Once home the hapless punter would ‘let the cat out of the bag’ and be duly crestfallen. Sometimes small dogs were used instead of cats and this is where the phrase ‘sold a pup’ comes from.
The fundamentals behind these cons, and most others, is the ‘mark’ (grifter speak for the person about to be gently relieved of his wealth) not understanding the value of what he is getting, or what he has to give in return for it. The icing on the cake for these cons is to add a bit of officialdom to provide some gravitas. That is why those fake emails from the bank or the taxman can catch people out, especially the older generation who still think it was the ‘man from the gas board’ who knocked on the door and convinced them to change their tariff.
‘Such a nice man he was. He had a clipboard and everything. Told me I’d be better off with an online Direct Debit saver tariff or something’.
‘Yes, but you haven’t got the Internet Grandma, or a bank account. In fact you don’t have a gas supply.’
There is one other example that has recently reared its head and from an unlikely source. We all trust pension companies about as much as we trust banks these days but this mistrust is normally focused on insurance companies that provide private pensions and not on company pension schemes. Final Salary company schemes, and in particular civil service schemes are renowned for their gold plating despite the Coalition’s plans to downgrade it to more of a chrome spray job.
These Final Salary schemes are very valuable because all of the liability rests with the employer or taxpayer. The employee can sit back, make their fixed contributions and be guaranteed a certain percentage of their salary at the end. If there is not enough money in the pot when retirement comes to fund such a pension then the company or taxpayer must make up the shortfall. Hence the reason why most companies have shut their schemes and the Government is trying to water down the taxpayer’s commitment.
Benefits from such schemes are normally given as an income and an additional tax-free lump sum. Recently however, some schemes have been offering the facility for an ‘enhanced lump sum’, in return for sacrificing some of the income. To a lot of people this can be an alluring offer, especially when it is referred to as an ‘enhanced’ lump sum. Enhanced means better right? Well, yes it does, but by proxy that means that the income is worse. How much worse? Well that depends on the value of that which you must give up. Here comes the stray cat switch…..
Most final salary scheme pensions are index-linked, which means that they rise each year with inflation, and include a spouse’s pension as standard. If you were to purchase an annuity (private pension) with the same benefits it would cost a 65 year old about £28,900 to buy £1,000 of gross annual pension.
Admittedly, the fact that the lump sum is tax free whereas pension income is taxable gives it a certain advantage and for most people this is worth an additional 20%. However, even if you build that 20% in to the calculations, it is still invariably the case that the extra lump sum on offer is pitiful compared to the value of pension given up. So why is it offered? Well, just because you worked for the company for forty years doesn’t mean that the pension trustees are going to play fair with you. They want you off their books as quickly as possible and a lump sum payment looks significantly better on their balance sheet than a liability to pay an ongoing income for someone who could live to 120 in their worst, and your best, case scenario.
Now to call it a con is perhaps a bit mischievous as for people who are higher rate taxpayers or have no spouse then taking the extra lump sum may well work out in their favour. It does however include all the ingredients that a good trickster would be proud of, such as a complicated presentation of the options and numbers, no comparative value for the income you are being asked to sacrifice, a tempting offer of an ‘enhanced’ lump sum and all this wrapped up in officialdom and preferably with a ‘please reply within 14 days’ just to add a bit of pressure. A Scottish Power doorknocker would be proud.
So, in order to see whether you are getting a good deal, first work out how much gross pension income you are being asked to sacrifice and multiply that figure by 29 if you are age 65 (use 34 for age 60 and 39 for 55). This will give you a rough guide to the amount of lump sum they should be offering you; if it was a market value trade. Now, compare this figure with the so-called lump sum enhancement on offer to confirm whether it is a big fat juicy pig in that bag or a scrawny cat.