Tag: Pensions

Pensions: people on lower incomes can be confused and disadvantaged by defined contribution pensions

New research released finds defined contribution (DC) pension schemes, which do not automatically offer a secure, guaranteed income for life, can lead to poor outcomes for those on lower incomes.

Since the introduction of ‘pension freedoms’ in 2015, the vast majority of consumers are opting against a guaranteed income, resulting in them facing significant threats to their retirement security.

Researchers from the University of Birmingham, supported by abrdn Financial Fairness Trust, conducted in-depth interviews with DC pension consumers and gained insights from industry stakeholders to shed light on the experiences, risks and challenges of pension decision-making in the new retirement landscape.  

They concluded that the existing system disadvantages people who are already vulnerable to poor pension outcomes.

Those from more disadvantaged backgrounds are less likely to have access to networks of friends and family who can help them with their decision-making. In addition, the support available for those without access to regulated financial advice (typically those with smaller pension pots and/or low-to-middle incomes) remains largely limited to written information and checklist-based guidance.

This means many people do not have access to the kind of support they need – i.e. a personal recommendation on the best course of action.

Researchers found:

1. Consumers feel confused and overwhelmed by the DC withdrawal decision. Many people feel ill-prepared for making the ‘right’ decision about accessing their DC pension savings. They are often overwhelmed by its complexity and feel they need more help in the form of personalised advice, however, the cost of this advice is unaffordable for those on lower incomes.

2. Consumers (particularly non-advised consumers) do not know who to trust when they need support with their decision. This leads to poorer outcomes for those from less affluent backgrounds, who do not have social networks of people who can recommend trustworthy advisers.

3. Consumers have to manage high levels of confusion and uncertainty about the future when making a decumulation decision. Consumers are aware they have to manage multiple risks when deciding what to do with their DC pension pot. This includes several highly unpredictable aspects of the future, such as their health and longevity, the need for care, and stock market performance. This ‘individualisation’ of risk creates a sense of insecurity and adds to the discomfort and difficulty of the decision-making process.

Researchers have called for government, regulators and employers to do more to protect low-income DC scheme holders.

They make the following recommendations:

  • Better value products – Government and regulators must ensure industry works harder to meet the needs of people on low-to-middle incomes by creating more flexible, better value products. For example, by introducing a charge cap for DC investment pathways and drawdown arrangements to prevent consumers paying unnecessarily high charges, and help rebalance some of the responsibility for achieving good consumer outcomes
  • Price-capping – There should be Government-funded, price-capped, financial advice services so that lower income people can access regulated financial advice to support their pension decisions.  
  • Reducing risk – Access to affordable, trustworthy regulated financial advice should be expanded as an option for all DC pension consumers. Through the introduction of pension freedoms, Government has created a situation where individuals are taking on too much responsibility and risk for securing an adequate retirement income. Government therefore needs to redress this balance by taking responsibility for providing appropriate protection and support. More regulation is needed of DC pensions to ensure value for customers.

Dr Louise Overton, Assistant Professor in Social Policy and Director of CHASM from the University of Birmingham, said: “Seven years on from the introduction of pension freedoms, too many people are facing poor retirement outcomes because industry and government aren’t doing enough to protect them.

“Our research shows that Pension Wise (set up as ‘a first port of call for DC consumers, offering free and impartial information and guidance) does not offer adequate support, and those without access to good quality regulated financial advice (those with smaller pension pots and lower incomes) are particularly at risk of adverse outcomes.

“We call on government, industry and the regulator to expand the scope of money guidance, widen access to regulated advice, and prioritise product innovation.”

Karen Barker, Head of Policy at abrdn Financial Fairness Trust, said: ““The current ‘one size fits all’ system is not suitable for those on lower incomes. Whilst the new pension freedoms introduced by the government have benefitted many, this research shows they cause a great deal of confusion.

“It’s not practical to expect those with smaller pension pots to pay a lot of money for advice on how to manage those pots.

“However, it’s vital that those on low-to-middle incomes are properly advised if we are to avoid a return to high levels of pensioner poverty.”

Retirement misery still looms for thousands, despite reforms

New pension regulations came into force on 30 November 2021. The new regulations permit Trustees to block or suspend a suspicious-looking pension transfer if they believe that the transfer could be to a scheme that is fraudulent.

These new regulations could prove to be the most significant development in preventing pension scams.

Paul Higgins of Pension Justice, a law firm that has helped recover millions of pounds in mis-sold pensions, says: “I am delighted that the Government has brought in this new rule, and I hope  that this will prevent pension scams taking place so that pension investors will not lose their life savings.

“Unfortunately, there are still hundreds of thousands of people who have previously taken their money out of pensions and handed over their life savings after being badly advised to invest in worthless, unregulated investments like carbon credits, ethical forestry, storage pods, to name but a few”.

One of Pension Justice’s clients, Mrs F from Burnley, lost her entire life savings worth over £157,000 after being persuaded by an “advisor” from Asset Management Advisory Services (AMASS) Ltd (t/a AMASS Europe) to transfer her pensions into a SIPP and “invest” in an EPS Portfolio with Avalon.

The advisor paid themselves £3,842.10 in commission and then arranged to “invest” Mrs F’s £149,000.00 in what turned out to be unregulated funds promising unrealistically high returns.

The investments subsequently failed, and Mrs F lost her entire life savings. It then transpired that the advisor and their company had minimal authorisation from the Financial Conduct Authority and were not authorised to provide advice on pensions and investments.

Pension Justice took up the case with the FSCS (Financial Services Compensation Scheme) and recovered compensation of £85,000.00 on behalf of their client which was the maximum payable under the scheme.  

Paul says: “One of Mrs F’s pensions was a gold-plated defined benefit scheme pension with Proctor and Gamble. Under the new rules Proctor and Gamble could have prevented the transfer from taking place and, in which case, Mrs F would not have lost her life savings. 

“Unfortunately, we know that there are still hundreds of thousands of pension investors who have lost all their pensions and are facing a miserable retirement with little or no money apart from their state pensions. Some are even being forced to carry on working way past retirement age”.

Paul and his team at Pension Justice have managed to recover sums up to  £189,591.37 for his clients, many of whom have been scammed by cold callers and told that they could “double their money” or are promised potentially incredible returns if they transfer their hard-earned pension pots. 

UK facing ‘pensions tsunami’

Treasury’s ‘£17bn mistake’ that will take “generations to resolve”

In its report published today the Public Accounts Committee says HM Treasury has “done little to identify and manage the stark differences in average pensions between genders and other groups” and “should have foreseen the age discrimination issue that gave rise to the 2018 McCloud judgment”.

In 2011 and 2015 the Treasury introduced reforms aimed at making public service pensions more sustainable and affordable, but a 2018 Court of Appeal judgement (the McCloud judgement) ruled parts of the reforms unlawful.

The Treasury now wants pension scheme members to pay the estimated £17 billion cost to put that right, despite the unlawful reform having been “its own mistake – a mistake which could have been avoided by listening to advice and which will take many decades to resolve.”

Around 25% of pensioners and 16% of the working-age population are members of one of the four largest public service pension schemes covering the armed forces, civil service, NHS and teachers. The schemes are almost all unfunded, meaning retirees’ pension benefits are paid out of current workforce contributions.

The Committee saw “evidence of public service pensions issues affecting delivery of frontline services, and independent schools opting out of pension schemes because of increasing costs”.

It says HM Treasury doesn’t have the data it needs nor evaluated the impact of its reforms, or whether they are achieving its pension policy objectives – the PAC is “not convinced it is on track”. 

The Treasury also seems “unconcerned about the drop in enrolment by some workers”. The Committee warns on the “a danger of a perfect storm where some young people believe they cannot afford pension contributions because of high costs of living and retire with a reduced public sector pension as a result.

Many younger workers will continue to pay rent in retirement because they cannot afford to buy a home and the cost of supporting this generation will fall on future taxpayers”.

Meg Hillier MP, Chair of the Public Accounts Committee, said: “The Treasury’s £17 billion mistake on pensions reform is a ripple compared to the tsunami of costs to the public purse if Government fails to address the growing number of young people unable to afford to plan for a proper pension.

“It’s lack of curiosity about why nearly a quarter of a million workers are not joining these pension schemes is a concern. Pension planning must be long term; mistakes and poor planning have an impact for decades. Short term cost savings can become long term costs to individuals with lower retirement incomes and the taxpayer who may end up supporting them.”

The secret to a happy retirement? £26,000 per year, says Which?

Two-person households need an average annual income of £26,000 for a comfortable retirement, Which?’s latest research has found. 

With the past year altering many people’s spending habits or potentially accelerating their plans for retirement, finding out how much money is needed to finance a reasonable standard of living in later life has taken on an increased importance. 

Which? surveyed nearly 7,000 retirees in February about their spending to develop retirement income targets for one-person and two-person households. The findings can be used as a guide to how much people are likely to spend and how much they might need to save, factoring in the state pension and tax bills. 

The consumer champion split the income targets into three different categories – essential, comfortable and luxury – to reflect the budgeting needs of different savers. 

  • Essential: food and drink (excluding meals out), housing payments (mortgage, rent or council tax), transport, utility bills, insurance, household goods, clothes, shoes and health products. 
  • Comfortable: includes the essentials, as well as regular short-haul holidays, recreation and leisure, tobacco, alcohol and charity giving.
  • Luxury: includes both ‘essential’ and ‘comfortable’ spending categories, as well as extended or long-haul holidays, health club memberships, expensive meals out, and a new car every five years.

Which?’s research showed that retired couples spend an average of £18,000 a year on essentials. This goes up to £26,000 when including spending on categories in our ‘comfortable’ retirement bracket, and £41,000 to include the extras for a ‘luxury’ lifestyle. For single-person households these figures were £13,000, £19,000 and £31,000, respectively.

Many of the survey respondents in two-person households had spent less on things like recreation and leisure (down by 14 per cent) and transport (down by 10 per cent) this year than they had compared to before the pandemic in 2019. Spending on cars, charitable donations and groceries had risen by six per cent. 

For single-person households, spending on long-haul holidays and leisure memberships was down by 14 per cent and 9 per cent, respectively. 

Which?’s calculations found that, on average, couples need a pot of around £155,000 alongside their state pension to produce the annual income for a comfortable retirement of £26,000 via pension drawdown – or just over £265,000 through a joint life annuity. 

For single-person households, achieving a comfortable retirement would mean a pot of around £192,290 alongside a state pension to get to an annual income of £19,000 via pension drawdown, or £305,710 through an annuity. 

The consumer champion is calling on the government to press ahead with reforms to help provide savers with greater clarity about their pension savings so they can know if they are on track for later life. The government must move swiftly to set out the mandatory timetable for pension schemes to provide information to pension dashboards that give savers access to all their pensions information – including their state pension – in one place. 

Which? believes that the Department for Work and Pensions should also move forward with plans to shorten and simplify annual benefits statements, and it should ensure consumers are provided with clear information about costs and charges in one simple, personalised figure.

Jenny Ross, Which? Money Editor, said: “For many people, the events of the past year will have caused them to rethink their retirement plans and  brought the amount of money needed for later life into sharper focus.

“Our research shows that most people will need to be putting away significant sums if they want to ensure they can enjoy a comfortable retirement – but many do not have access to the clear and accessible information they need to help them plan.

“The government must move swiftly to introduce the pensions dashboard and simplify annual benefits statements to enable people to understand how much they’ve saved, what this could be worth in retirement and, crucially, extend its proposals to include how much savers have paid in charges.”

Which? – We need a Pensions Dashboard

Which? is calling for the urgent introduction of a comprehensive pensions dashboard after an investigation exposed how the current system leaves workers struggling to track down and understand their retirement pots.

The consumer champion challenged 12 volunteers to track down key pieces of information about each of their 38 pension schemes, to see what difficulties they faced.

Of the volunteers, nine (75%) encountered gaps in their data, while only three (25%) were able to find all the requested information via paper statements, online accounts and phone calls.

Some volunteers struggled to find the value of their pension or projected entitlement under a defined benefit scheme. One was told by their provider that they had to wait 40 working days – almost two months – for a new statement to give the information.

Several participants discovered worrying errors. Among the top concerns consumers had was missing information – particularly when it came to pension charges and investment strategy, with some unable to find anything at all about either.

Which? also found that even where information was available, it wasn’t always correct.

One participant, 36, from London, had a shock when she started looking at her pension with her last employer, a US-based marketing agency using a UK payroll provider.

For a period of eight months, pension payments had been deducted from her salary, but neither this money nor any company contributions had found their way into her pension account – potentially breaking the law through non-payment of contributions.

Other volunteers found that pension company mergers and takeovers can add to the sense of confusion, with one having historic correspondence from three different providers for the same scheme. This was after her pension company was first taken over by another provider and then her employer switched its nominated firm.

The new research was published as Westminster debated the Pension Schemes Bill, which legislates for the introduction of a pensions dashboard.

In a separate survey, Which? asked more than 300 members across the UK whether they would use a pensions dashboard to manage their retirement and what they most wanted to see included in it.

More than three quarters (77%) said they would be likely to use the dashboard to find out about their pensions.

Among the top requests for inclusion on the dashboard was an update on the state pension, with nearly three quarters (74%) wanting to know how much they’d get at state pension age.

Almost two thirds (62%) were keen to have a projection of their future retirement income, while more than half (55%) wanted to know their current pension value and a similar number (54%) wanted to see charges.

Which? has long called for the introduction of a pensions dashboard to ensure that savers can see all their pensions in one place.

The consumer champion has pressed the government to ensure that a dashboard provides people with relevant information about all of their pension pots in one place – including the state pension. The dashboard must also publish key information such as charges and income projection figures, to ensure savers are equipped with the information they need to plan for their future.

The pensions dashboard project was first announced in the 2016 Budget and the government originally promised to ensure that it was designed, funded and launched by 2019. But a prototype version won’t probably be available until 2021 at the earliest.

Gareth Shaw, Head of Money at Which?, said: “A pensions dashboard could be a game changer for consumers who have struggled for too long with a complex, fragmented pensions system.

“For the millions of pension savers to get genuine benefit from a dashboard, the government must use this opportunity to ensure that it delivers all the information consumers need to see including their charges, income projection figures and state pension entitlement.”

Which?’s Pensions Planner checklist:

  • Get to grips with the basics: ask for an up-to-date statement if you haven’t had one in a while and make sure any online log-ins still work.
  • Update your details: if you haven’t updated your address since moving, your pension statements may end up with someone else.
  • Nominate a beneficiary: after your death, most pension schemes will allow anyone to inherit your pension.
  • Find lost savings: the Pensions Tracing Service is a free service that searches a database of more than 200,000 workplace and personal pension schemes.

New pension scheme “could deliver improved returns for millions”

Millions of workers could eventually benefit from better retirement savings when a new type of pension scheme is introduced to the market, under pioneering proposals rubber-stamped by the Work and Pensions Secretary yesterday. Continue reading New pension scheme “could deliver improved returns for millions”

Scots at risk of being unprepared for death

 

  • Half (50%) of adults in Scotland with important financial information online haven’t told their next of kin about their online financial accounts
  • Whereas one in eight (13%) in the region have thought about their Facebook account when they die
  • Almost two thirds (63%) of Scottish people don’t have a will
  • Nearly half (47%) of Scotland’s parents with children aged 18 and under don’t have plans for their children in the event of their death

Continue reading Scots at risk of being unprepared for death