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Why don't you save into a pension?

There are lots of reasons people do not save for retirement. Is the government's auto-enrolment programme tackling the real problem?

 

by Michelle McGagh on Jan 31, 2013 at 13:04

Why don't you save into a pension?

Auto-enrolment might be the right step to kick-start retirement saving in the UK but we also need to confront our own demons and decide what a good pension looks like.

The process of auto-enrolling employees into workplace pensions started on October and plans to get up to 11 million people saving for their old age by 2018.

While it isn’t compulsory and you can opt out of your employer's scheme, it seems that 70% of people plan to stay opted in, according to research by the National Employment Savings Trust, the government-run pension scheme into which many will be auto-enrolled.

For the nearly in three (30%) of people who are left, half of them are undecided about whether they should opt out or stay in.

The research also found that nearly two thirds (63%) of people agree with auto-enrolment, and most people knew that saving for retirement is important and see auto-enrolment as a ‘critical step’ to achieving it.

Brits aren’t the most prepared when it comes to retirement, although most people said they have a retirement plan of sorts: 70% said they are looking to the state pension to fund a large part of their income; 49% planned to downsize and sell their home and move into something cheaper and 26% of people are relying on inheriting money.

None of these plans are particularly concrete and only 14% of people said they were reasonably confident their retirement plans would be adequate.

From the research it seems that we are anxious about pensions: 67% of people said they were happy auto-enrolment meant they didn’t have to worry about retirement anymore. Still, we’re doing too little about it.

So, why don’t we save for our old age?

Affordabilty

Ask many people whether they can afford to save some more, or anything at all, and chances are you’ll be met with a ‘no’

Nest research shows that 82% of those who are not saving into a pension said they cannot afford to. A quarter of people said they have less than £50 a week left after living costs.

‘Unpensioned workers are confident short-term financial planners and budgeters. Some of them are concerned about whether they can afford pension contributions but for many pensions simply aren’t seen as a priority,’ said the report.

‘Even if they had more money, other things would take precedence. Holidays, home improvements and socialising are seen as far higher priorities.’

Nest notes that affordability may cause people to opt out of their workplace pension, it said half of people think that not missing the money taken out before they’re paid would be something that would motivate them to stay in the scheme.’

Basically, if we don’t have it we won’t spend it, so take the money before the wages go in the bank and we won’t miss it.

Tim Jones, Nest chief executive, said: ‘Despite the economic challenges, the time is right for automatic enrolment.

‘Given the current economic constraints on the household budget you might have expected opposition from consumers for automatic enrolment but our research strongly suggests that they welcome the policy.

Negative emotional response

Pensions are both dull and complicated and many people don’t want to have to think about them. The idea that pensions are too difficult is daunting and many people are scared to tackle their retirement.

According to the survey 47% of unpensioned workers say they have put off saving for retirement for fear of making the wrong decision.

Auto-enrolment is hoping to change this by taking the need to make a decision out of pensions, unless you want to opt out of course.

‘A fear of making the wrong decision has put many people off joining a pension in the past. However, the knowledge that their pension is being taken care of through a low-maintenance approach driven by their employer gives savers peace of mind,’ said Jones.

Nothing to do with me

According to Nest, pensions are ‘often simply not on people’s minds’, particularly when it comes to younger people.

‘People struggle to imagine themselves in the future and this potentially deters them from doing anything about it,’ said the report.

Although pensions are not a priority, 63% agree auto-enrolment is a good idea and those that have rejected pensions in the past still support the reforms.

Most of us will not be able to work forever, despite the increasing state pension age, particularly in manual jobs. Unless you plan to live on the £7,500 a year the state pension will provide, you need to stop burying your head in the sand.

Lack of knowledge

Half of unpensioned workers claim to have only a basic knowledge of pensions, according to Nest, and it suspects that many pensioned people are still have gaps in their knowledge.

This is a task that the government and pension providers have to take it upon themselves to rectify.

The report said: ‘People are keen to know more. While they aren’t interested in detailed information on pensions, there’s an appetite to have clear answers to two central questions: what happens to my money – where does it go and how safe is it? How much will I get at the end?’

Fear

The report states that ‘there is a general sense of unease around pensions. Many people – both with and without any previous experience of pensions – are concerned about how safe their money is’.

Consumers are concerned that they won’t get their money back and pension investment exacerbates this fear.

‘For unpensioned workers, retirement planning is all about being prudent, sensible and conservative. It’s implicitly about safety and securing the future, and therefore at odds with chance, risk and uncertainty.’

In short, people expect to have at least the equivalent of their contributions to spend in retirement.

For pension savers who are auto-enrolled, risk is negative and they focus on what they have to lose, rather than what they have to gain.

‘Uncertainty is always perceived in a negative light and suggests the possibility of a disappointing or worst-case scenario outcome, rather than the possibility of getting a better outcome than expected or even just slightly less,’ said Nest.

What is a good pension?

A decent pension is could be argued, negates all of the things that stop consumers from saving: affordable, understandable, limited risk, and relevant to their needs.

Pensions minister Steve Webb has said auto-enrolment is a good initiative but ‘does not address all the barriers to pension saving’.

He said the Department for Work and Pensions was working on creating ‘a future private pensions landscape that gives consumers high-quality schemes to save in and creates trust and confidence in pensions’.

‘With so many more people newly saving into a pension, quality is key. The introduction of Nest has already driven down charges and spurred on innovation in pension provision. We will examine issues such as charges and whether large-scale.

The National Association of Pension Funds head of policy and advocacy Helen Forrest said people needed to save into the right pension schemes. 

‘Our regulatory system needs to create alignment between the provider and saver through strong governance and by delivering value for money through scale. Only then will our industry be able to start improving confidence and really delivering for members,’ she said.

Consumer group Which? has called for ‘defined quality standards’ for pensions to be established to ensure a good deal for consumers and that pension savings are not depleted by charges.

‘Setting quality standards will not be an easy task, but the alternative ‘wait and see’ approach risks damaging confidence in pensions and automatic enrolment,’ said Dominic Lindley, financial services team leader at Which?.

‘Alongside ensuring that all schemes are good quality we need to take steps to improve consumers’ ability to engage with their pension scheme. Consumers should be provided with clear and jargon-free information at every step of their pension journey, from making contributions through investment and choosing a retirement income.

‘They also need to be helped to determine how much they think they will need to live comfortably in retirement and be provided with regular updates about how far their existing pension scheme is from fulfilling their goals.’

14 comments so far. Why not have your say?

Tony Peterson

Jan 31, 2013 at 15:34

To answer the headline question:

1) I am too old, and,

2) It was the most stupid investment mistake I ever made.

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Tony Peterson

Jan 31, 2013 at 15:39

And just in case the previous post wasn't clear, the mistake was having any involvement whatever in any sort of pension plan during my working life.

They are all scams. Where possible avoid.

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Rob Walker

Jan 31, 2013 at 15:46

Ha, ha!!

"‘People struggle to imagine themselves in the future and this potentially deters them from doing anything about it,’ said the report."

Oh yes? Maybe people worry too much about the future...seeing themselves with a mortgage and no job, maybe. Or kids that don't leave home, or deciding to buy a better house with a bigger mortgage and less disposable income? there are myriad uncertainties for anyone in their 30's and 40's and so pensions, rightly, is not the priority, unless your job is to sell them, of course. Much better to wait until uncertain risks subside in your 50's (if you're lucky) and once the mortgage has been paid and the kids lhave left home, put something aside for retirement. To suggest that pensions are better value if you start contributing early is a complete fallacy. All cash savings accrue more, the earlier you start, the only difference with pensions is that some funds screw up.

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Anonymous 1 needed this 'off the record'

Jan 31, 2013 at 16:49

Equitable Life - continual interference by the Government in all matters to do with pensions including restricting how much can be drawndown - total distrust of the insurance industry especially because of the lack of transparency - buying an annuity is for mugs.

Save by all means but don't put money with the insurers no matter the supposed tax advantages. Put it somehwere where performance and cost are clearly visible.

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Tricky

Jan 31, 2013 at 16:53

Financial Advisers beware! It could and in my view should be argued as with Rob and Tony above that pensions are possibly the worst investment vehicles available and have been for most of my working life. Could this be the next mis-selling scam in the making?

The real reason that people don't buy into pensions is that they lock your cash away, offer abysmal returns and annuity rates are ridiculously low, why does this article fail to mention this?

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Colston Hicks

Jan 31, 2013 at 17:48

Pensions were perfect up to 1997. In 1996 large schemes and the smaller insured schemes had about £1,5trillion invested in them. Final salary schemes all in Gilts.

They were all annihilated in 1997.

Public sector workers were saved by being free pensions by the Govt.

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Paul Scaife

Jan 31, 2013 at 17:55

I paid into a life endowment with the Prudential from the age of 16 to 65. All the time I was the only breadwinner and had children it provided my wife and I with a certain reassurance. For the last about 7 years they wrote and said that I didn't have to pay any more as the yearly payment was to low to warrant it and I would receive the same benefit on retirement, which at retirement I did in the form of a large sum of money. I don't consider that I was scammed and in fact thank my father for starting it for me.

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Lee Appleton

Jan 31, 2013 at 18:22

The problem is that once you hand over the money to the Insurers industry it ceases to become yours and they assume it is now theirs, plus Government continue to shuffle around the goal posts.

Having been given 3 weeks notice my draw down pension was going to reduce by some 30% due to GAD reducing 120% to 100%. I am struggling to get Aegon re-instate this in March now the GAD have bumped it back to 120%.

Clearly, Aegon benefit by keeping the payment as low as possible, as this extends their charge lifetime.

My advice to my son is pay the tax on the way in and put his savings into an ISA and maintain control, only handing over pension cash to the Insurance bandits as a last resort.

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Tortoise

Feb 01, 2013 at 14:51

Judging from most of the posts here the great British people are finally waking up to the fact that the only people who benefit from a pension fund are the government and pensions industry. No one, repeat no one who is a basic rate tax payer should touch them. Not my opinion, but an IFA that I know.

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Tony Peterson

Feb 01, 2013 at 18:15

Farewell, friends.

Citywire seems to be blocking my access to stories. Perhaps it's as well.

For my final fling, Tortoise is utterly, totally right.

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Dave Hill

Feb 02, 2013 at 01:47

In replying to tricky, I agree annuity rates are abysmally low so I haven't cashed my pension in yet. Nothing is being paid into it as I've retired, but on January 1st. 2013 it was worth £34438.48. February 1st. 2013 it is worth £36321.53. An increase in one month of 5.47%. I don't call these returns abysmal.

Unlike most people I take an active interest in my pension. I can choose which funds I want to be invested in, up to 10, out of the 132 offered by Scottish Widows.

The funds I'm currently invested in are a UK and European real estate funds. My UK funds are a smaller companies, mid 250 and a growth fund. A US smaller companies, a European, a Japanese and a S.E. Asia fund.

I've tried to get a balance of what I think is going to do well over the next year or two. If a fund is not performing I can change it into another fund at zero, or minimal cost.

Replying to the contribution by Tortoise, if I've got it right, as from April the maximum tax relief is only going to be 20% for everyone, as if they are a basic rate taxpayer, so I'm glad I'm now retired.

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Roy England

Feb 02, 2013 at 07:16

Dave Hill: In every one of your funds the manager is taking charges for buying, selling and just managing. They are all taking a piece of your money - and the same goes when the values are falling. I hate to think how much you are paying in charges and fees. The consistent winners are the government and the providers. Notice that Ministers and MPs do not have traditional pensions. They have nice index-linked arrangements underwritten by the rest of us.Cameron and Osborne should reform their own pensions and especially those working in the Treasury and the BoE. Then these people might take greater care over the running of the economy.

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Tony Peterson

Feb 02, 2013 at 08:51

My access appears to have been unblocked. I am grateful for the freedom to express my experience of the pensions racket on a website dedicated to selling pension and other funds.

Tortoise and Roy England have the whole system bang to rights, though, whatever the odd enthusiast might think.

Don't trust others, scammers, burglars, the financial services industry, the government, or any others with your hard earned, but depreciating cash. If you have a surplus at any point in your working lives invest it in income generating assets that come with ownership rights attached. FWIW that's my advice to you youngsters.

Your own home. Then shares. Directly.

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snoekie

Feb 02, 2013 at 15:59

Saving via a pension WAS a good idea, but the scheme proposed by the govt is going to end in floods of tears for many people.

Gordon Brown (and Balls), no doubt with the connivance of the Treasury (and the servants were handsomely rewarded with higher pay and bonuses for their treachery), effectively nailed down the lid on the coffin.

Following the huge success of the theft from those who had saved for a pension they thought it such a good wheeze and scam they dreamt up the compulsory pension for the average Joe Plebs, and Osborne (again with the connivance of the Treasury) have continued the ongoing raids of peoples pension pots.

Just think of it, the govt made something like £130+ billion thus far from relatively few savers.

Now if they got the whole country into pensions, fairly soon there will be trillions to get access to, with not a lot of effort, because records have to be kept, and all they do is demand it from the employers whenever Osborne/Cameron, possibly even siliband (being nudge nudged by the crooked couple, Mr and Mrs Balls), decide they need money for one of their cock up ventures, or even to fund their or the public sector (and that includes the ever growing number of quangos-the bonfire hasn't happened, somebody lit a match and that was their bonfire) pensions which are unaffordable and will shortly cripple the Nation. Still nothing has been done about it, but they will happily penalise anyone who made pension provision with a 56% tax ON TOP of the 40% if they dare have the effrontery to live beyond 75 to continue to draw a state pension.

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