Challenging pensions misconceptions (Part 2): Where’s the responsibility, risk and reward?
16 November 2018
In our previous ‘common misconceptions’ blog, we looked at the dangers of inertia, and the ‘why worry yet?’ school of thought.
Here, Tim Box tackles other misconceptions, setting the record straight on where responsibility lies for pensions, how to know if you’re saving enough, and what investment options are on offer.
- Auto-enrolment’ means my employer is doing everything, so I don’t need to
Auto-enrolment is a great thing, helping millions of people start saving for their retirement. But just because the onus is on employers to arrange a scheme, pay in themselves and deduct employees’ contributions at source, that doesn’t mean Future Pensioners can forget about it, safe in the knowledge that they’re automatically building up a sufficient retirement nest egg. The key word here is ‘sufficient’, and – at current levels – auto-enrolment is likely to leave people falling short on the ‘sufficiency’ criteria.
It’s widely agreed within the pensions industry that auto-enrolment rates are set too low, and that even with planned increases in headline total contribution rates to 8% from April 2019, that still won’t be nearly enough to provide most people with the standard of living they’d expect on retirement. The ACA (Association of Consulting Actuaries) and our own Bob Scott, while Chairman, have made the case for a minimum 16% contribution – more than three times the total current rate (of 5%).
On that basis, there’s a very real risk that leaving it all up to employers is going to leave many Future Pensioners facing a shock when they come to retire and find their income is not what they’d expected. People may need to take a proactive approach now to fill the gap.
- There’s no way of knowing if I’m saving enough
As with any investment, values can go up as well as down in the short-term thanks to market fluctuations, so what’s likely to happen over the long-term is what matters.
To help provide some much-needed clarity on this complex issue, there are several sophisticated modelling tools available online to help Future Pensioners work out how much their current pensions are worth and how much they ought to be saving for retirement, if possible. Most pensions providers should have one, but freely available tools such as the Money Advice Service’s pensions calculator are also helpful.
Calculators like this should be a good complement to the Pensions Dashboard once it comes to fruition, to provide 360˚ visibility not just over Future Pensioners’ current savings but to enable them to assess whether they need to save more.
- I’d be better off investing in property, shares or bitcoins
People often say that their property is going to pay for their retirement, but they don’t have to buy bricks-and-mortar outright or sacrifice their homes. Nor do they need to play the stock market themselves. It’s important to remember that Future Pensioners can invest tax-efficiently into both property and shares through their pension schemes.
When it comes to cryptocurrencies, Future Pensioners need to weigh up the risks versus the rewards of investing in niche and often volatile emerging assets. Bitcoins and their ilk may prove too much of a gamble when it comes to building security for the future through a pension: it may be better just to dabble on the side, if that’s an affordable option.
It’s worth pointing out that historically, it’s been possible to get good returns by investing sensibly in recognised asset classes – and there is a huge range of different funds to choose from to suit different interests and risk profiles. From global tech-focused funds to funds focusing on Asian Pacific equities, or sustainable investment funds, there’s something for everyone out there.
I hope my blogs have cleared up some misconceptions about pension saving. The system may not be perfect, but the arguments for saving for a pension far outweigh those against.