20 reasons pensions go wrong
We look at why many people are disappointed with their pensions.
As a financial journalist I've come across a lot of evidence demonstrating why pensions go wrong over the years. Lots of the problems are avoidable, some are more down to chance.
Here I've thought of 20 reasons without too much effort. Being aware of the risks will allow you to plan around them.
If you can think of any more please, add them in the comments box below.
You don't save enough. We need to save a lot for retirement, particularly if we expect to live for decades after finishing work. When the time comes, more than half regret their lack of savings.
Optimistic projections. During the 80s and 90s you'd often hear people say gains of 15% per year were normal, when less than half that is realistic. Forecasts continue to be optimistic. Read more in How to get higher investment returns with lower risk.
You don't know what you need. Most people have no idea what pension pot they need to save, and how much they need to invest each month to get there. I've had a stab at helping you with that in How much you need to save for retirement.
You don't know where to save. You have to choose a pension provider, which is difficult in itself. I've given some suggestions in New top pension for retirement savers. On top of that, you can be bewildered by thousands of investment funds. This causes indecision and makes you more easily steered into expensive “default” funds.
You pay too high charges. In the long run, hidden and open charges can easily reduce your pension income by half or more. Read Why most pension savers lose to learn about some of those charges, and how to reduce them.
You're too cautious. We worry too much about volatile stock markets. It sounds counter-intuitive but when you're a young, regular pension saver, you should want prices to fall, so that you can buy more shares at a cheaper price. However, after a crash, encouraged by headless chickens writing in the media, you're often scared into selling at a low point, and buying something less volatile that will probably do much worse in the long run.
You take too many risks. Alternatively, you get caught up in some crazy, esoteric investment that is not protected by the Financial Services Compensation Scheme if it fails.
Your employer goes bust. You might save all your life in a company pension scheme so that you can get paid a third or half your salary when you retire, but if your employer goes bust and it hasn't put aside enough money to fund its employees' pensions, you might get far less than you were counting on.
Your employer reduces benefits. With salary-related pensions, your past contributions are assured, but it makes it hard to plan for retirement if halfway through your working career your employer lowers your benefits on future contributions.
You get suckered in by marketing. “Smoothing”, “absolute returns” and other fine-sounding investment ideas can make it very difficult to make good gains, in the long run. Treat anything that tries to comfort you by making your fund more stable and less volatile in the short term with caution.
You follow the crowd. You might pull out of funds that have performed badly recently and put money into ones that have just done well. You're probably selling low and buying high. It's a common and costly mistake, often encouraged by the financial press.
You overestimate your knowledge and ability. The unsatisfactory truth is that most who actively try to beat the stock market over the long term do worse than those who just focus on keeping their investment costs down.
Tax on pension savings. The government is frequently changing income taxes and tax relief rules, both of which affect tax relief on our pension contributions. It makes planning harder.
Tax on your future pension income. We don't know what we'll be taxed when we retire either, which also makes planning harder.
Stealth tax changes. Politicians prefer to make tax changes that people can't understand, to hide their effects. Gordon Brown, for example, reduced the pension income we can expect to get by perhaps 10% with a tiny footnote in a budget in 1997, when he abolished a tax credit related to pension investments.
The sweet spot. Or rather the bitter spot – where you have saved just enough to be disqualified from benefits, but you're no better off than a retiree who has saved nothing all their lives...
The conundrum. ...Which gives you a conundrum. Do you save for the future, or spend it all and live off benefits? The reality is that relying on the state is simply too risky, but if you ever found out you'd have been better off enjoying the money rather than saving, it would be a bitter pill.
Overestimating your future pension income. It's not just disappointing investment gains that might cause you to undershoot your income requirements in retirement. As time goes by, we're living longer and our pots need to stretch out more, while also dealing with ever rising inflation. Even pension providers have been underestimating our longevity, so what chance do we have?
Claiming your benefits. Most people sell their pension pots in return for an annuity – a guaranteed income for the rest of your life. However, at least a third don't shop around, which makes your private pension income 15%-40% lower than it could be.
Huge risks with alternative pension incomes. Annuities aren't the only way to get an income in retirement, but, as many have learned in the past six months, choosing alternatives like income drawdown can be very risky, since you can see your income suddenly halve.
More: Is your work pension has any good? | One in five has no pension savings
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Your reason no. 1 should have been: we're living in a corrupt government that plays roulette with people's pensions. Britain's pensions are lower, by a very large margin, than the average in Europe. You'd have to be an MP to have a decent pension, but then of course the taxpayer, not the MP, is funding it. My own pension scheme at the moment is 40% funded. I foresee being able to begin saving for my retirement in about 5 years, when I'll be 58 (a bit late, some would say)--at the moment, I simply don't have the money to do it. But even if I could, ask yourself this: does it make sense to invest in a pension fund that is 40% funded--ie: for every pound you invest, you can expect 40 p back--and since that 40 p will be eroded by inflation because there is no inflation protection for pensions anymore, let's call it 25 p? You'd have to be a fool. And that's not taking into account all the roulette games future governments will play with pension systems by the time I retire (my planned retirement age at the moment is 75). I don't know what these games will be, but I can pretty much guarantee that none of them will work in favour of pensioners. I am really, really tired of articles offering us 20 or however many reasons why we'll be poor in retirement, 18 of which boil down to: if you're poor in retirement, it's your own darn fault because you haven't saved enough. Give the average person a salary that can accomplish this, and they'll happily save. (In that case, you'd probably blame them for the rotten economy because they're not spending enough.)
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My early years were spent in the Royal Navy when one could get a pension only after 22 years service. If one departed from the ranks earlier then no pension whatsoever. I then spent the next 10 years in the police which had a reasonable pension although in those days the wage was very low. Upon leaving the force my meagre contributions were returned to me as there did not exist any transfer arrangements between pension funds (except for the Metropolitan Police). To save for a pension in those days was not possible owing the very low wage schemes that prevailed. Even if one did manage to save the constant rise in the cost of living and the depreciation of currency made it impractical to maintain the value of savings. I was 35 before I was able to get a position that provided a pension and I am glad to report that from there onwards pension schemes became transferable. I had a life policy of what seemed like a whopping £4000 after 25 years. With the passing of the years this sum was increased but so did the contribution; what started off as £50 monthly soon rose to £100. Friends who resided in a council house in Stevenage were able to buy the house for £5000 paying into a mortgage at £50 monthly. Within a few short years the value of their property rose dramatically yet they were still paying only the £50 monthly mortgage. It became evident that my wife and I should do the same but sadly we were in tied accommodation and were not able to leave (this was the law). It was sometime before we got on to the property market and had difficulty saving the initial 10% of the mortgage which then was another requirement. At the age of 48 I paid into my pension scheme as much as was feasibly possible (here again the law had changed allowing this to happen) so my 'salary' (the situation here again had changed from getting paid weekly by cash to employers paying it monthly into the bank so hence salary but without the parquets) but the consequence was that my income was always considerably lower than that of my colleagues. I retired early (58) for some admirable reasons on what then was seen as a reasonable pension. This was 25 years ago but Margaret Thatcher had interfered with the indexation linkage to pensions placing all government and State pension on an annual decrease and this continues today and its effect has placed me financially in a difficult position and especially so with the regular 'quantitive easing' (currency devaluation) that is taking place. During my life time to be able to save for retirement was a dream that was as far away as the moon! When one did try to save the benefit gained was clawed back by the government so what was the point at seeking to secure a reasonable pension when the government changed the rules to rob pensioners? Those on State benefit today appear to be better off than I am. What a crazy society in which we live where change is a constant feature but without improvement.
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All of your points are very relevant and should be helpfull. If you do not know the question how can you get an answer that helps you. The first big question is are you likely to end up with a fund where your inbut will be more than 120k over 40 years. If so a SIPP would be a good idea. If not you may be better losing the tax relief and putting the funds into an ISA, but you must treat it as your pension and not touch it. Invest for Income, anything above 4%. reinvest the income and ignore market swings, only sell if you have a very large profit or the income stops. When the time comes this income will not be effected by the swings in the market and be subject to dividend growth which can be drawn tax free and not reportable. The same investing format should be used for the SIPP. Due to the tax relief you get better compounding and if you have been increasing your contributions for example the money to pay off the mortgage switched to the SIPP could give a great leap forward for say the last 10 years before retiral. The down side of the SIPP is the uncertainty due to politicians who have know knoweledge of the rules. Rule makers who have no regulators.Civil Servants with index linked pensions and a massive bias in favour of Annuities. They create rules that are unreasonable,unfair and subject to age discrimination. Think on this. Unless you need to pay off your mortgage or other major debt,why would you build up an income fund paying 6,7,8,or 10% on cost per annum. Then sell it off possibly at a loss depending on timing to obtain a tax free lump sum and buy an annuity where someone is going to take at least 2.5% or more in commission plus charges for the rest of your life. This is what you are being bounced into. SIPPAG (sipp action group) members 1 has been in communication with the Revenue and Treasury for a year and nine months making a case for change. As you can imagine little progress is being made but evidence is building. One option put forward was that if the Revenue concede the 25% Tax Free Lump Sum why should they care or control when you take it. They do control it due to their bias in favour of the Annuity Industry. For example you have built up a fund of 200k at the point you wish to start your pension you lock in the 25% = 50k Your fund is producing on cost say 8% 16k per year. You then start drawing your tfls from income on whatever ratio suits you. Remember your fund has not changed it may swing up or down but the 16k continues, with dividend growth should even grow. The alternative 50k taken Annuity at 65, male on remaining 150k = 8.4k annual fixed pension approx. By the By the 16k income, your not allowed due to the GAD rules which relates to Gilts that few buy at present. At 65 male you are only allowed 11.2k on 200k. This is where the bias comes in the Annuity companies are not restriced to GAD so that they will always look more attractive on the surface. Sorry this is so long but this is only a small part of how we are disadvantaged. Cheers
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14 November 2012