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Do you trust your employer to pick a good pension?

In October this year one of the biggest shake-ups to the pension system for decades will begin. But are we ready for it? And how can we encourage people to put aside more for their future?

Acknowledging that the state pension is too low to sustain most people in a comfortable retirement, the government has adopted a policy of ‘auto-enrolment’, where employees who don’t already belong to a workplace scheme will be automatically signed up to one.

In a country where only half the workforce currently belongs to a pension scheme, this has the potential to transform the pension landscape and deliver a better standard of living in old age.

What is auto-enrolment?

A new report from Scottish Widows suggests that, at the moment, more than half of employees are unaware of changes to workplace pensions. So what is changing?

Starting with large firms first, then taking in medium and small employers, everyone over the age of 22 earning more than £8,105 a year will eventually be signed up. If their employer doesn’t have a suitable scheme they can join the newly formed National Employment Savings Trust (NEST).

Employers and employees are both required to make a minimum contribution, which will initially be 1% from the employer, 1% from the employee with a further top up coming from HMRC in the form of tax relief. When automatic enrolment is fully implemented in 2018, the total contribution should come to at least 8% (3% employer, 4% employee and 1% HMRC).

Even this might not be enough to guarantee a comfortable retirement. Newly enrolled staff will be saving into a defined contribution scheme, building up a pension pot with which to buy an annuity. At the moment, it takes £100,000 to guarantee £6,000 a year.

Starting young is clearly a good idea, but topping up with extra contributions would also help (if you can afford it). Enlightened employers already contribute more than the minimum, helping their workforce to put money aside for a meaningful pension. More need to do the same.

Getting workplace pensions right

Low-cost schemes like NEST and a sense of pension ownership should help those who are auto-enrolled stay the course. The risk is that too many simply decide that saving isn’t worthwhile and ‘opt out’. This is the challenge we face. Automatic enrolment should be good news for millions of people, but companies must select good-value schemes to ensure that it delivers for their staff.

What do you think about auto-enrolment pensions? What would make you opt out and what would convince you to stay in? Do you trust your employer to select a good value pension scheme, or is NEST the only worthwhile option?

Comments
Profile photo of william
Member

1) I’m sure many companies will be looking to get the cheapest deal they can for themselves rather than what’s best for their staff.
2) With the BoE repeatedly turning to QE , is there any point in saving for a pension.

Profile photo of richard
Member

Well as a retired public servant I can only say the pension I received was adequate – The problem is the private sector is jealous.

Profile photo of DavidLitchfield
Member

Well, Richard, perhaps the private sector is jealous because they are forced to pay your adequate pension.

Member

I didn’t trust Robert Maxwell and he turned out to be a pension thief. I’m sure there are more corporate pension thieves out there. That is one reason why I haven’t given my money to a pension scheme.

I hope ‘Which’ and lots of other organisations are trying to ensure the new pensions are safe from corporate greed.

Member

I’m 59 and have paid into a pension since I was 21. I am now forced through illness to take my pension
as the state say I’m not ill enough to receive any benefit.I must say that if I’d known how little you receive after paying for 38 years I would not have bothered. And the fact that if you receive a pension or save for retirement you can’t claim for anything.

Profile photo of DavidLitchfield
Member

This is just a scam to put money into the hands of the politicians’ friends in the insurance companies.
You will pay in for years and when you are old find it’s worth nothing, and you will have to go through the rigmarole of making a very complicated and drawn out insurance claim.

Profile photo of william
Member

One thing your article doesn’t cover is what fees will be on these pensions that people will be enrolled into.
From a personal point of view I would have rather seen the govt concentrate on tidying up fees/ making them more transparent first.

Since I was made redundant (2 years ago now), my stakeholder pensions is only going down due to the fees I’m still having to pay even though I’m not paying money into it. Surely as there’s less admin for the company to do, shouldn’t I be entitled to a reduced fee?

By the time I get to retire its going to be almost worthless, rather wished I hadn’t wasted all that money saving, when I could have paid for double glazing, a new tv etc etc

Profile photo of DavidLitchfield
Member

Let’s be frank; unless you have a fabulous public sector pension funded by the taxpayer the best course of action is to spend all your money now whilst it is worth something and then live on state benefits. Whatever you save now will be worth nothing come retirement and the insurance companies will take their generous cut too, reducing it further.

Member
Chris B says:
5 October 2012

I agree – saving into pensions has a big credibility problem: a history of employers investing badly, under-investing or indulging in outright criminality; opaque products that are an outright swindle, or anyway benefit the financial industry more than the investor. Its hardly easy to invest with confidence…..

But David L’s solution ” spend all your money now whilst it is worth something and then live on state benefits” is risky too. It assumes that there is money left in the future for state benefits, and popular will to keep paying them. Easy to imagine a less generous future where those who did save (or are of working age and struggling to save now) don’t vote to bail out those who could have saved but didn’t.

Profile photo of DavidLitchfield
Member

I have to agree with Chris B that my solution carries risks too, but who can predict the future? We can only live in the present.

Some time ago I read an article about State Pensions, the general drift of which was that since the State Pension was introduced (to be funded by National Insurance contributions) working people had paid billions of pounds into the NI fund. More than enough to pay every older person a decent pension (as they do in other countries), but that the fund had been depleted by successive raids by politicians of all parties to the extent that it was virtually empty. If an insurance company did that there would be trouble!

Can any Which? expert comment on this?

Profile photo of william
Member

Just to back up my point about pension fees …

https://twitter.com/SkyNews/status/257973616409456640/photo/1/large

The Daily Telegraph have been going on about this for months now, just Google “daily telegraph pension fees”

Profile photo of dlorde
Member

I can’t say I’m surprised at all the negative comments, but the government had to try something to get people to save their own money for retirement; the state simply won’t be able to afford to support them all with a decent pension. All savings and investment schemes are a gamble, but with recent changes, pensions are now and will probably continue to be the least risky gamble, plus you get free money from gov & employer contributions plus tax relief. No other investment is likely to give that kind of initial return.

The idea of working 2/3 of my life and living the rest in poverty was unappealing to me. I’m glad I put everything I could into my pension, using all the tax advantages, and despite losing some in Equitable Life, it means I’m now retired before age 60 and have a tolerable income.

I feel sad for the people who reject the pension option without taking the time to properly compare it with the alternatives.

Profile photo of DavidLitchfield
Member

” but the government had to try something to get people to save their own money for retirement”

Possibly you haven’t noticed but the government already takes a large percentage of our money to pay for pensions etc. Where does it all go?

Profile photo of roy81b
Member

I believed that ‘auto-enrollment’ was not liked by the Conservatives, remember Maggot Thatcher and the Trade Unions. Although you may respond with utterances to the effect that this will be beneficial to the employees, you can bet your bottom dollar that ‘others’ will gain a greater benefit. Who will look after the fund? How much will they take in salary and bonuses.
Unfortunately I don’t see there being much gain for even young employees.

Member
Dave Harvey says:
5 October 2012

Remember S.E.R.P.S the pension for everybody , paid out of an increase in National Insurance Contributions,launched in the 1970’s and which has had benefits diluted by the Government because the benefits were too generous?

What makes this “new” idea work and why is it any different?

Member

I don’t think it will matter whether employees want to put money into a scheme, if they don’t want to work forever they will need a pension.- the same applies if they become ill.

I’m not looking forward to old age but having to live in poverty and off charity will make it all worse.I see a pension as the way to have an enjoyable life after work

Profile photo of DavidLitchfield
Member

AIC, you are quite right; a pension is the way to have an enjoyable life after work. The debate is where does that pension come from.
We already pay the government huge amounts of money throughout our working lives, and now they are saying we must continue to do that AND set aside more money to support ourselves in old age. Effectively they are saying we must pay twice for the same thing.
The question really is, what are the government doing with the taxes and NI contributions we have paid to provide our pensions.

Member

I had to retire earlier than planned on health grounds and had two occupational pensions (one tiny), an AVC and a personal pension (again tiny). I amalgamated the smaller occupational pension with the AVC and personal pension and receive a pittance from that, which has recently been almost halved due to changes in the “draw down” rules. Needless to say, the change in rules was imposed without any consultation!
Despite doing what the Government advised in providing as far as possible for my retirement, I feel as if I’ve been ripped off, as their advice turned out to be rubbish and from what I’ve seen of Auto enrolment it looks to be in the same league!

Member
annie d says:
6 October 2012

I am a widow,with one child just starting his second year at Uni, and one child just started their final year of A levels, and wanting to go to Uni( 9K tuition fees per annum). We are deemed a low income family. I am self employed. If I were offered the same protection to my pension as the Public sector get ( and lets face it Politicians are looking after themselves here) I would scrimp and save to try and pay for a pension. But it seems that no protection is offered to the private sector regarding pensions. Whilst I would be very happy to pay for a pension, if I had the means, I feel everyone, from Politicians down should have to pay for their own pensions as if it’s the private sector, and it would improve the performance of Pension companies, as the Government would show more interest in what was happening to their money. I know too many people who payed into pension plans, and having reached retirement, find it’s worth a third of what they paid in. The Public sector have no idea how good they have got it. Their pensions are protected ( and generally paid for by the private sector).

Member
mcthedad says:
8 October 2012

Its a bad idea pensions are a rip off , I had a private pension,after I took a lump sum I finished up with about 19 grand, all I get is about £1000 a year after tax. thats only garenteed for 5 years ,if I kick the bucket my wife get half my pension £500 a year , if she dies , what happens to the rest of that money.

Member
florriebunda says:
9 October 2012

It is amazing how people think 1. just because they’ve paid into a pension scheme that it is ASSURED It is not. Nor is it INSURANCE ie pay in now and get pay back later. Bad choice of names Besides we are so cushioned in our western ‘civilisation’ that we forget that life is a risk and is very fragile. What happened to self sufficency and responsibility. Unfortunately we seem to want more than we need and have become greedy – as a society. WHY should be expect someone else to look after us ?????? I do not aim my remarks at hardworking, self reliant people who give generously of their time or donations to those who are genuinely less fortunate and are really needy.

Profile photo of roy81b
Member

annie d although I have sympathy for your situation you must realise that this auto-enrollment pension will in all likelehood pay out even smaller pensions to the people who stay enrolled than people like myself receive today (i.e. it will not be inflation proofed). Therefore I cannot imagine the ‘fund’ accrueing enough interest etc, to pay out anything approaching what employees & employers put into it. It seems like its a ‘cunning plan’ to further line the pockets of the mega/hyper rich, with their fees, salaries and bonuses paid to manage the scheme.

Profile photo of DavidLitchfield
Member

The general response to the scheme seems to be negative, and rightly so.
Probably the best way to secure your future whilst working is to put as much money as you can afford away in an ISA every year, and make sure you move it around to get the best interest.
.

Profile photo of Ian Robinson
Member

On pension scheme charges- several different providers have announced low-charging schemes, aimed specifically at those engaged by auto-enrolment. NEST has an annual management charge (AMC) of 0.3% plus a ‘contribution charge’ (initial charge) of 1.8%; NOW (from the Danish provider ATP) has an AMC of 0.3% plus an administration fee of £1.50 per member, per month; The People’s Pension (from B&CE) has an AMC of 0.5%.

Profile photo of DavidLitchfield
Member

Ian, Thank you for that factual information.
As you seem to know about these things, do you have any information about projected growth in invested funds. I wondered whether any growth would compensate for the charges?

Profile photo of dlorde
Member

To those asking what our NI and tax contributions are used for – where do you think the state pension comes from? The new changes are an attempt to ensure people are not wholly dependent on the state pension, which can only be subsistence level. The government must ensure you have enough to survive, but beyond that a competent individual must make every effort to support his/her own retirement. Population dynamics mean that subsequent generations will not supply enough taxes to support the retired at a comfortable level.