Workplace Pension Confusion

Thrugelmir

MissSea wrote: »

And my dad took out a private pension that was 'sold' (verbally..) to him nigh on 30 years ago that he's paid a lot of money in to and he was promised this would result in a good pay out in his OAP years. As of recent years, they've basically told him he's getting nothing back with their 'recalculations' - he's furious he joined a private pension now though. It's the same with my boyfriend's dad, he isn't getting back what he was promised from his private pension after about 40 years of paying in, so I was worried about pensions in general.

Normally this down to people not increasing their contributions over the years. A good pension requires hard saving. As inflation erodes the value incessantly.

dunstonh

And my dad took out a private pension that was 'sold' (verbally..) to him nigh on 30 years ago that he's paid a lot of money in to and he was promised this would result in a good pay out in his OAP years. As of recent years, they've basically told him he's getting nothing back with their 'recalculations' - he's furious he joined a private pension now though. It's the same with my boyfriend's dad, he isn't getting back what he was promised from his private pension after about 40 years of paying in, so I was worried about pensions in general.

None of that sounds likely. He would be massively up on his contributions of 30 years. However, I suspect it is down to inflation. 30 years ago, you didnt have personal pensions. You had retirement annuity contracts. These were nearly always set up on a level basis (same payment each month). After 1988, you were not able to take out new ones and could not top up old ones. So, inflation would erode the value of the contribution. For example, 30 years ago, £30pm would have been a very good contribution. Now, £30pm is not even worth the effort. You have to keep topping the pension up every year to keep a real terms value. If you dont, even with very high returns, you will get less than you "expected"

The biggest failure in retirement planning is people not incrementing their contributions for inflation and expecting it to have the same spending power as the initial illustrations issued 30-40 years earlier.

dtsazza

MissSea wrote: »

I don't fully understand the pension promises, and just know that my Dad who has a private pension has lost so much money that it seems crazy to join a pension scheme.
...
And my dad took out a private pension that was 'sold' (verbally..) to him nigh on 30 years ago that he's paid a lot of money in to and he was promised this would result in a good pay out in his OAP years. As of recent years, they've basically told him he's getting nothing back with their 'recalculations' - he's furious he joined a private pension now though. It's the same with my boyfriend's dad, he isn't getting back what he was promised from his private pension after about 40 years of paying in, so I was worried about pensions in general.

I consider this sort of thing ironic - people see pensions as complicated and confusing, mainly because they assume they're something magical when they're actually quite simple.

As others have said, I doubt that your dad has actually lost money. He will have been paying money into a pension pot over the years, and it's almost certain that the value of that pot is now worth more than his contributions. In which case he has made money through his saving/investing.

Now chances are, he's looking at the projections he was given for what sort of annuities he could buy (e.g. "£30pm now gives you £200pm in retirement", that sort of thing). If those turned out to be wrong - and it seems like a lot of predictions from a few decades ago were a little optimistic - it just means that the predictions were wrong. It doesn't mean that he's actually lost money.

And crucially, most peoples' reaction is to shy away from pensions, which will leave them worse off. (If £20k contributions become a £50k pot when they were hoping for a £200k pot, then they haven't lost 75% of their money; and keeping the £20k for themselves won't give them a £200k pot either, they'd just be forfeiting the £30k actual growth).


A pension is simply a pot of money that's invested for growth, just like a stocks & shares ISA or a "normal" trading account. In fact, the only way that it differs from those is the tax treatment (no income tax payable on your contributions, and no Capital Gains Tax on any growth, in exchange for not being able to claim the money until 55 and paying tax when it comes out). Plus companies will often give you "free money" by matching your contributions to pensions, which they tend not to do with ISAs.

But neither of those change the essence of what a pension is, or what it can and cannot do. The value of the pot at the end is essentially (money you paid in) * (investment growth). You can't get a £300k pension pot by paying in £30pm for 20 years. Once people understand that, they can make rational decisions about pensions, rather than ones based on fear and misunderstandings.

bigadaj

I'm not sure some of these comments are actually very helpful or constructive. The OP has taken on the positives, and the fathers views are similar to those of many of that generation. Times change and resources such as the Internet weren't available. When projections wee produced risks weren't explained as the salesman wanted to make his commission, and the fact that they worked for a big bank, insurance company etc implied a level fo trust that wasn't fulfilled. People are now hopefully more informed, but many worryingly still think that major financial institutions have their interest at heart, when the reality is that a pension is no different to a car or other commodity and the bottom line is caveat emptor.

Thrugelmir

bigadaj wrote: »

Times change and resources such as the Internet weren't available. .

The same principles apply now as 40 years ago. As soon as I started work my father told me to start saving into a pension plan. (Then a section 226 policy). Only £10 per month. Was only 17 at the time.

Wise words that I passed onto my son.

What's changed is attitude to money in general. This is reflected in the decline of % of income saved. Only in past couple of years has trend been reversed.

Jack_Griffin

jem16 wrote: »

Nothing was promised. All that he would have got were projections. Again though how much was paid in and how much is he getting?

Some of the projections they used to use were scandalous IMHO. Pie in the sky stuff like 8% compounded over 30 years.. basically a big lie & why I've never trusted financial advisers. The government is slowly whipping them into line, but there is no doubt im my mind there is some way to go on restricting them so they make realistic statements.Currently I think their tactic is to write up their advice and put lots of caveats in, so there is no comeback if it turns out bad.

jem16

Jack_Griffin wrote: »

The government is slowly whipping them into line, but there is no doubt im my mind there is some way to go on restricting them so they make realistic statements.

I don't think the government is actually doing anything. It's usually the FSA that reissues the projection figures in line with current economic conditions. At the time of 8%, there was also high inflation and higher figures were probably reasonably realistic.

People have to review pensions and not just ignore then for 40 years. You wouldn't ignore your house and do no maintenance for 40 years would you?

kidmugsy

Jack_Griffin wrote: »

Pie in the sky stuff like 8% compounded over 30 years..

There are people who comment on the threads here who come pretty close to suggesting that too. It's not a "lie" of course, though perhaps it'll prove to be a folly. Or perhaps not.

Jack_Griffin

jem16 wrote: »

At the time of 8%, there was also high inflation and higher figures were probably reasonably realistic.

No they weren't, 8% was never realistic, inflation exceeding 8% only lasted 5 or so years in the mid to late 70's & the record is better over any period in the UK over the last 250 years, I have a pension projection in my files from the mid 80's when inflation was much lower which uses 7% growth, that is not realistic either.

I don't care if it is the government of the FSA which stopped this nonsense, that isn't relevant to the argument, the point still holds, the projections were ofen if not always unrealistic, end of...

kidmugsy

Jack_Griffin wrote: »

the point still holds, the projections were ofen if not always unrealistic, end of...

But you didn't say they were "unrealistic" you said they were a "big lie". Which is ironic given that you are complaining about other people exaggerating.