Correct information is key on defined contribution pensions
WE have recently been examining the challenging situation faced by those in mid-career, when trying to save for retirement.
The new report we mentioned last week, Aon's ‘DC and Financial Wellbeing Member Survey', highlights how many of us in mid-career (aged 35-49) feel that we cannot make a proper plan for our retirement, because our decisions would not be informed decisions. We lack the correct information needed.
This relates specifically to people saving into defined contribution workplace pensions. The DC pension is different from the very prized ‘defined benefit' or ‘final salary' pensions that were once widespread in the UK, which offered a guarantee of what you would get, usually based on a calculation using your final salary combined with your number of years of service.
However, as stock market performance took a hammering in the latter decades of the 20th century, large companies found that investment returns in their final salary schemes were not just falling short, they were falling to bits – leaving those companies to dig deep into their own pockets to meet their commitments to employees.
In 2009, when Pirelli became the latest large UK company to close its final salary scheme to new members, and instead put new employees into a defined contribution scheme which carried no guarantees, it joined a host of other household names that had been forced to do the same: Dairy Crest, Barclays, Costain, Morrison's Supermarkets, IBM and Fujitsu had all failed to predict the corporate bloodbath caused by the stock market nosedive of the 80s and 90s.
That's the history. So today we sit with our defined contribution pensions, which are great schemes, but carry no guarantees. Good planning and correct information is more essential than ever, to keep our retirement plans on track.
The irony is that the vast majority of us agree with this: Aon says that ‘support with saving for retirement is the most popular request from employees across all age groups.'
Have you ever heard the phrase ‘pensions apathy'? It used to refer to our tendency to put off, or just not bother, joining our workplace pension. This was why government started automatically enrolling eligible workers into workplace schemes in October 2012.
Aon found that nearly half (46 per cent) of people are waiting for the information they need to come from their employers, rather than looking for it themselves. It looks like, as far as getting information goes, pensions apathy is still alive and kicking!
In this regard, I like to quote my favourite Chinese proverb: “If you stand on the side of the mountain with your mouth wide open, waiting for the roast chicken to fly in – you will have a long wait.' In other words, you can't wait for the information you need to come to you. You need to get up off your sofa and go looking for it, by getting financial advice! If you don't, then you may seriously damage your retirement plans.
Aon found that a third of us expect our living standards to decline when we retire, and a quarter of us have no clue what we can expect as our retirement income.
Over half of people expect to rely on the state pension as ‘one of their main sources' of income in retirement. We have emphasised in this column that the state pension, in its present form, is not sustainable in the longer term, and we know that the age for accessing it is on the rise: women have already had a shock to see their state pension age rise from 60 to 65, it will rise to 66 for both genders by October 2020, and to 67 between 2026 and 2028.
News to you? Call it the miracle of finding new information!
Such uncertainty leads to insecurity and bleak expectations. Less than a third of people think they will retire at retirement age. Less than half expect to be retired by 67, a quarter expect still to be working at 70, and 14 per cent expect they will never be able to retire.
Perhaps it is time to come down off your mountain and look for your roast chicken where it really can be found. As financial advisers, we are the KFC you are looking for. Our information is finger-lickin' good, and will help you get that retirement plan in place!
:: Michael Kennedy and Shaun Doherty are independent financial advisers and pensions specialists, and can be contacted on 028 71886005. More information on Facebook at “Kennedy Independent Financial Advice Ltd” or at www.mkennedyfinancial.com