After a few days having to pick my way through the misunderstandings around our auto-enrolment retirement savings system, I read the PPF’s “Get retirement ready in 2022” with relief.
It was good to be guided through a report by people who clearly understand the value of pensions , rather than pension pots.
That said, the PPF’s survey of 2,000 of their customers suggests that a good proportion of our population are clueless, which is profoundly depressing
Only 49 per cent of DB pension holders are concerned about knowing how much their defined benefit pension scheme is worth. The study reveals an acute lack of understanding and engagement among a sizable proportion of pension scheme members when it comes to their DB pensions.
Almost one in four people (24 per cent) believe their DB pension will be the same amount as the annual salary they receive or received from the employer associated with their DB scheme. Additionally, while only one in five (18 per cent) of all those surveyed are unaware that a DB pension provides retirement income for life, this figure rises to 42 per cent for 18–34-year-olds.
The research showed that:
- 30 per cent of those surveyed believe that they had to be working for their employer at the time of retirement to receive the DB pension
- Roughly the same number (29 per cent) were unsure if they could access a DB pension before they retired. This figure rose to 40 per cent amongst women.
PPF’s Chief Customer Officer, Sara Protheroe commented
“It’s extremely worrying that so many people with DB pensions are unaware of the valuable protection available to them if their employer failed, and this may result in inappropriate DB transfers.
It’s also concerning that one in three people are concerned about not having enough to live on in retirement yet fewer than half know how to find out how much their DB pension scheme is worth, particularly when our research also revealed misunderstandings around how much a DB pension typically pays.”
Ignorance is the breeding ground for scams
This ignorance is habitual. It fed the pension liberation scams of the noughties and the flood of transfers between 2015 and 2020. So long as people aren’t able to comprehend the value to them today of an income for life tomorrow, people will continue to undervalue their pensions. That goes for the state pension (which you would be hard pushed to buy from the market for less than £300,000). It goes for all the public sector pensions which are unfunded (and have no published transfer value) and of course it goes for the funded DB pensions which we swap for wealth without regard for the protection they give us.
It is in the public interest that we promote the value people get from their DB plans and that we make sure they can access information about how much they’re due to get and when – without bother
Knowing the value of what I’ve got
I am determined to help the PPF in getting us retirement ready in 2022. The comfort of receiving a monthly payment from my pension scheme is immense. Knowing that that the money that arrives in my account with a pay slip and with all the documents I need to make my annual declaration to the taxman, takes away a huge financial burden from me.
I can only imagine that burden would have increased in later life, had I been dependent on my managing my retirement income from my wealth. While I do not know to the penny what my pension is paying me each month (it is subject to changes in my tax position), I follow the impact of each annual increase granted by the scheme rules and am gratified when my payments go up.
I do not take these things for granted as I know I’m a lucky lad for having a DB pension in payment. In 7 years time I will start getting a second payment into my account from the State. I can see how much extra I will be getting by getting a state pension forecast from this link.
It took me 1 minute and I can go back using my Government Gateway details any time I like. I can also see my national insurance history going back to 1977 and I know how many more years I need to work to get this amount paid in full.
Your current or past employer’s DB pension scheme should have a website. If you want to trace where your benefits are now by using the Government’s pension tracing service which works particularly well for DB schemes
Pension schemes are there to pay benefits and to help you get them paid to you.
So why is nobody talking this up?
We have a lop-sided (asymmetrical) financial services industry.
The pensions that we get from employers and state are managed for us and delivered without fuss , with precision and with great security.
The pots we get change in value every day and provide us with none of the comfort we get from our pensions. We need to determine our monthly payments and hope that we are not taking too little or too much. We need to organise increases each year to cope with inflation or decide to forego inflation proofing if we are worried out pot may be running out. We have to worry about what is going on to the fund from which our payments are paid and we have of course no means of knowing what the future will bring in terms of how long we live.
A world of relief against a world of worry.
Just comparing the lengths of the last two paragraphs makes my point. There is so much more to say and do with DC pots and that is the opportunity for the financial services industry to make a lot of money.
It advises us on our drawdown rate and manage the funds within our Sipps. It warns us of risks to our future well-being and advise us of ways to avoid those risks. Advisers become indispensable to us because of the complexity of the solutions they advise on.
Meanwhile, nobody is talking up pensions, why should they? Instead the financial services industry has preyed off people’s ignorance of the value of pensions. This is especially the case with the PPF. As Sara Protheroe says
“It’s extremely worrying that so many people with DB pensions are unaware of the valuable protection available to them if their employer failed, and this may result in inappropriate DB transfers”
The value of our DB benefits , including our state pension benefits should be a comfort to people approaching retirement as it is for those who enjoy those benefits today. Failing to promote the value of DB has led to billions of pounds of pension value being transferred into pots.
It is time for those who run DB pensions to start telling the home truths, the PPF’s report is a good start.
Henry, if only the pundits could write more positive articles about Financial advisers then pensions educated numbers would increase. There is a cost of advice and a greater cost of ignorance.
You might also report on the mortality of the companies that sponsor pensions as I guess that the life expectancy of the member is now greater than that of a British company especially now that the U.K. continues to fall down the rankings of the G20. Let’s see what happens to the Gilt market
The UK’s latest round of quantitative easing (QE) has now ended, with the total having reached £895bn. The Bank has indicated it will start to unwind its mountain of bonds by ceasing to reinvest maturity proceeds once the base rate is 0.5%.
That is now just one increase away. If, as seems possible, that increase happens at the next Monetary Policy Committee meeting in February, then, in March, the Bank will receive £28bn of gilt maturities. Unlike the case hitherto, that sum will not find its way straight back into gilts. In effect, what had been the market’s largest buyer will have turned into a major seller
From the report recommendation number 2
“Speaking to a professional financial adviser is a good option to understand how your savings and DB pension can work together to fund your retirement plans. Seek advice early as an adviser will help you decide if this is the best option for you based on your savings and goals and you will still have time to make changes if you need to before you retire.”
The market needs forward looking early intervention and less backward looking useless examination of the entrails of a failed system
I can quite understand the younger folks not understanding the details of their pensions. The trouble is, things change. They can be fairly certain that the rules won’t be the same when they retire as they are now.
To give one obvious example. At one time, it was all the rage to opt out of SERPS and S2P. Then it was deemed a bad idea and gradually stopped as the people who had opted out often did worse that way. How things change with the New State Pension. Now people can find that staying in SERPS and S2P just got them to the normal maximum of the New State Pension earlier, whilst those who opted out have got a pot of money on top of that.
It is difficult to argue against people having a better understanding of their pensions. However, they also need to understand that things change and that what was good in the past may not be good in future.