Pensions confusion sparks fears of post-work poverty
A lack of understanding among employees about their pension schemes could result in ‘grossly inadequate’ retirement income for those retiring in 20 – 30 years.
The drive towards defined contribution pensions means that many workers will end up with less than they bargained for at retirement, argued a new report released today.
Individuals with DC pensions need to pay 50% more over their working life to achieve the same retirement income that those with defined benefit (DB) pensions receive, according to the study, Don’t Stop Thinking about Tomorrow: the Future of Pensions.
Despite this, DB schemes are rapidly closing. In 1973, they made up 92% of all pension provision in the UK, now they only make up less than 20%, with DC schemes making up the balance. According to Eurostat, 27% of pensioners are already at risk of poverty, one of the worst rates in Europe, and DC provision is set to see this increase in the future.
While DB schemes offer a guaranteed income - usually inflated protected - DC schemes depend entirely on what the employee (and possibly their employer) put into it. This may produce a healthy income with good investment performance, but no real guarantees.
“There is a misconception that DC is cheaper for companies. Pensions are part of an employment package; if a company’s employee pension contribution is reduced, employees will demand higher wages. This may not happen until employees realise how inadequate their DC scheme is but it will happen,” said Con Keating, author of the report and head of research at Brighton Rock Insurance.
John Whiting, tax policy director for the Chartered Institute of Taxation said: “The issue is how people understand their pension schemes. In many cases people don’t think about it until it’s too late, and while this didn’t matter so much on a classic DB scheme (in these cases pension holders typically end up with perhaps half or two thirds of their final salary provided they carried on working), it is a big risk for those on DC schemes. It might be time for a serious campaign to better educate people about their pension positions”.
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I've been a journalist for four years, writing on a wide variety of topics from business and finance to travel, culture and celebrities. I began my career as an editorial assistant for Palladian Publications, a B2B publisher specialising in technical magazines for professionals in primary industries. I later moved into consumer magazines as a...