The heading rather begs the question as to whether you had any confidence even before the latest news about Carillion. And, whether you know the difference between 1) Defined Benefit Pensions and 2) Defined Contribution Pensions.
First BHS, then British Steel and now Carillion – all major companies that had promised Defined Benefit Pensions to their staff but, at a time of corporate crisis, were found not to have put enough into the pension pot to support the pension promise.
Fortunately, and as we have said before, there is a Pension Lifeboat that sails to the aid of employees when Defined Benefit promises are broken – the Pension Protection Fund (PPF). Where employers fail and pensions are at risk, the PPF – funded by a levy on the pension industry – will step in and pick up most of the bill. The PPF is itself a £30 billion fund with a funding SURPLUS of around 120% i.e more cash and assets than liabilities.
Most ordinary employees of Carillion who are not transferred into the public sector or other jobs will have their pensions paid (but reduced by about 10%) by the PPF.
Defined Contribution Pensions – which form the bulk of new workplace and all personal pensions – are COMPLETELY different. There is no promise of a certain amount of pension payable on retirement. Instead, the trustees (or insurance company in the case of many personal pensions) strive to achieve the best outcome for the saver given the amount of savings made (the industry rather confusingly uses the word “contributions” rather than “savings” hence the term Defined Contribution).
To achieve the best outcome requires just two things:
The biggest savings pot possible – achieved by a combination of maximum “contributions” from your earnings and excellent long term investment;
Good decision making when converting the savings pot into retirement income.
Easy! What could go wrong? Certainly, not the collapse of an employer – the savings pot belongs to the employee; or the collapse of an insurance company – the Financial Services Compensation Scheme protects 100% of any claim in relation to pensions.
The risks are:
You have not saved enough!
You, your employer or the insurance company invest poorly.
You make the wrong decisions on converting your savings to retirement income.
Did you notice how often the word “YOU” appeared in the above risks!?
Unlike Defined Benefit Pensions where you have little or no say, Defined Contribution Pensions require you to take responsibility for a successful outcome in retirement. You have to make decisions. This is not easy because we have always assumed that pensions simple “arrive” at retirement and have therefore disengaged from the subject.
But, you can’t afford to do this any more.
You need to make the difficult decision to save as much as possible while you are working. Effectively, deferring income for later in life.
You need to get involved in how your savings are invested. This is a huge gap in most people’s education. Employers and the pension industry need to do far more to fill this gap.
And, at retirement, you need to understand your options and start to form opinions about what is best for you. Use the Government’s FREE advice service PensionWise. Often the best starting point for this is a telephone call to The Pensions Advisory Service on 0300 123 1047.
And, attend Booming Lives events!
You may also feel that you need to take financial advice. But take care that the advice is impartial and you are not simply buying the “in-house” product of the adviser.
John Barrass of the Personal Investment Management & Financial Advice Association will be speaking at our Forum on 14th March. Booking is now open, so come along and ask all those questions you have about Financial Advisers!