Danger for the passive, prospective pensioner

Danger for the passive, prospective pensioner

Pension Freedoms and the almost complete demise of final salary or defined benefit pensions in the private sector have massively increased the dangers of lousy pension outcomes for people not actively managing their pension choices.

Back in the old days, (50s, 60s, 70s or 80s), if you worked for a private sector company with a pension scheme and you joined, then took the default option each time a choice came up, you were probably OK in retirement. This passive approach to retirement probably did not make the most of the opportunities available, but on the other hand, it would not come back to bite you either.

These days, if you are lucky, you either have an older money purchase pension scheme or you have been auto-enrolled into a money purchase scheme that has a default investment portfolio, possibly including Lifestyling as you near retirement age. If you have followed the passive approach outlined above, then it is highly probable that your pension fund will be inadequate for your needs, invested in low risk, low return assets from inception or “Lifestyled” into them by the time you get to retirement.

A recent article in the Saturday Telegraph has demonised Lifestyling as the most recent evidence of a conspiracy of ineptitude by the pension providers, (See the original article at http://www.telegraph.co.uk/finance/personalfinance/pensions/11685944/Pension-freedom-flaw-750000-savers-lose-9pc-in-four-months.html).

I would disagree with the Telegraph analysis and I would suggest that the real issue is one of apathy towards pensions in general. Our political betters have not convinced the bulk of the population that they need to actively contribute to their pensions and exercise personal choice throughout their working lives. Most people seem to be sleepwalking into poverty.

Thinking back to the decisions my parent’s generation had to make, so long as they joined the employer scheme they would be well provided for and failing that, the State pension would provide a minimum level of subsistence. These days, unless you are a full-time public sector worker, the default choices will not be enough; auto-enrolment schemes will only put 8% of annual earnings into a scheme, where the Money Advice Services own estimates suggest that a 22 year old man on average industrial wage would need to put in at least 17% on top of his employer’s 3% to get half pay at 68, his state pension age. (See  https://www.moneyadviceservice.org.uk/en/tools/pension-calculator).

As I see it, the choice for those not in full-time public sector employment is stark, either actively get involved in your pension choices and be prepared to put money away consistently or accept the inevitability of poverty in retirement.

As a starting point, if you are in a pension scheme, is the pension fund suitable? If you are more than 10 years from retirement, then you should have equity exposure to generate gains. If you are less than 10 years from retirement, then your attitude to investment risk and attitude to retirement comes to the fore; if you are expecting to go to flexible drawdown for retirement income, then either learn the ropes or pay for advice.

If you would like to know more about how we can help you plan and realise your financial goals then contact us at info@martin-redmanpartners.co.uk or call us on 01223 792 196.

 The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.