How can we restore trust in pensions?
‘Pensions’ is a dirty word for many people, which is hardly surprising given seemingly endless negative headlines about them. Most of us will have read stories about scams which have tricked people out of thousands of pounds of their retirement savings. There are also tales of unscrupulous advisers who’ve transferred pensions into unsuitable plans, or companies which have collapsed leaving their pension scheme members wondering which way to turn.
According to research by workplace pension scheme NEST, one in four of us don’t trust pension companies, even though not saving into a pension could have disastrous consequences when we reach retirement.
A separate study by the city regulator the Financial Conduct Authority (FCA) last year found that over half of pension pots which were fully withdrawn weren’t spent but instead were moved into other savings or investments, with some of this due to a lack of public trust in pensions. The FCA said consumers taking this route can end up paying too much tax, missing out on investment growth, or losing out on other benefits. Unfortunately, due to the mistrust, consumers are missing out on advice on how they could potentially stagger the withdrawals from their pension, which would mean losing far less to the tax man when wanting to draw funds or move them into another savings or investments.
Building trust in pensions
Getting people to trust pensions certainly isn’t going to happen overnight, but the industry is taking action to try to restore people’s faith in saving for retirement.
For example, a number of organisations, including the Department for Work and Pensions, HMRC and the Serious Fraud Office, are part of ‘Project Bloom’, a multi-agency taskforce that is working to tackle scams. There is also the national ‘ScamSmart’ awareness campaign to raise awareness of pension scams.
Check out our blog on how to protect yourself and your money from pension scams for lots of tips on spotting scams, and how to report them.
Earlier this year the FCA and The Pensions Regulator launched a call for input on its approach to regulating pensions, so that it can tackle “the key risks facing the pensions sector over the next 5-10 years.” The report will be published this Autumn.
Why we can’t afford to ignore pensions
Although there’s still a long way to go before trust in pensions is restored, there are plenty of reasons why we simply can’t afford to ignore them.
Saving for retirement is crucial, as the State Pension alone is unlikely to provide you with enough to enjoy a comfortable lifestyle when you stop work.
According to calculations by insurer Royal London, an average earner on a salary of £27,000 would need a pension pot of roughly £260,000 to provide them with a guaranteed index-linked annual income worth two thirds of their salary. This works out at just over £9,000 a year in retirement on top of the State Pension of around £8,500. Workers who can retire on two-thirds of their income usually won’t see a fall in their standard of living. That’s because by the time we retire, we typically have lower outgoings, as we may have finished paying off our mortgage, or no longer have to pay work-related costs such as season tickets.
Fifteen years ago, when life expectancy was lower and interest rates were higher, a pension pot of around £150,000 would have been required to deliver the same level of guaranteed index-linked income during retirement.
One of the biggest benefits of paying into a pension is the tax relief you’ll receive on your contributions. Pension providers can claim basic rate tax relief at 20%, so for every £80 you pay into your pension, the taxman will top this up to £100*. If you’re a higher or additional tax payer, you can claim back an extra 20% or 25% in tax relief on top of the basic 20% through your self-assessment tax return.
Changes to pension rules in 2015 have also made pensions much more flexible, giving you a greater range of options on what you can do with your pension from the age of 55, including how best to access your cash.
If you’re unsure how much you should be saving, or whether your pension is working as hard as it can for you, seek professional financial advice on the options available to you.
*Subject to certain limits