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09 Aug 2022
by Jasmin Clark

5 things you might not know about pensions, but need to

There's more to pensions than people realise – and not just how much they need to save for a decent retirement

5 things you might not know  about pensions, but need to.jpg 1

 

On the face of it, pensions should be simple. Employees pay into a plan and can only withdraw their savings when they reach the age of 55. So what is so confusing? Well, there’s lots of rules about what you can and can’t do, lots of different types of pensions (and schemes) and lots of regulation. There’s also a silly amount of technical jargon.

Here’s 5 things you might not know about pensions.

1. How much you need to save to have an enjoyable retirement

Pensions and Lifetime Savings Association (PLSA) Retirement Living Standards research shows only 23% of people realise how much they need to save.

PLSA figures suggest a single person will need at least £11,000 each year, £21,000 for a moderate standard of living and £34,000 to be comfortable. For couples, the equivalent numbers are £17,000, £31,000 and £50,000 each year.

Pensions are important and we should all be thinking about them, not just when we’re older. Since millennials are less likely to receive a pension in the same way as their parents, let alone enjoy a comfortable retirement, it’s important they start contributing sooner rather than later if they want to live their desired lifestyle. Few people realise this.

2. How much effort is required to run a pension scheme

There’s more to pensions than you’d think. Some of us thought the money was put into a pot and that was it. We didn’t realise quite how complex running a pension scheme can be, with detailed administration happening behind the scenes, the number of advisers involved and the way trustees draw from their knowledge to make strategic decisions for the schemes. It’s so much more than ‘how much is in my pension pot?’.

3. The need for accurate scheme records

It’s vital to have accurate scheme records and good scheme governance so benefits can be calculated correctly and members aren’t unfairly disadvantaged by poor historic scheme management. Employees should keep a record of statements to spot anything they weren’t expecting. They should keep previous policy/membership numbers so they know where all their savings are from all the different jobs they’ve had, even if they weren’t contributing a lot. Pension dashboards will help when we get them, but they’re still a work in progress.

4. Expressions of wish can avoid problems

Family disputes over where money should go after death are always difficult, especially where the employee who has died was living with someone financially dependent on them, but who isn’t mentioned in the employee’s expression of wish form or will.

Help your employees by reminding them to make sure their expression of wish form is kept up to date, so the pension trustees are aware of how they’d like any lump sum benefits to be paid if the worst happened. Also make sure the pension administrators have the correct contact address so they’re able to contact members with details of their pension entitlement when they reach retirement age.

5. The differences between defined benefit (DB) and defined contribution (DC)

Employees in the current DC type arrangement are responsible for their savings. Their member contributions (and those you make as an employer) are invested individually in each member’s own pot. Contributions for DB schemes are pooled together and invested to provide a return and pay pensions now and into the future. 

Most employees have never thought about how expensive DB schemes are for employers. Employers pay any additional contributions needed to meet any shortfall in the pension scheme, with employees guaranteed their benefits on retirement (in all but the most extreme cases of employer insolvency). Yes, employees contribute but it is the employer that has to make sure there’s enough money in the scheme to pay all the benefits and take on all the risk.

On the other hand, with a DC plan, the amount going in is certain for both members and the employer, but members won’t know how much pension they’ll get out until they reach retirement. The risk and uncertainty sits with scheme members and that’s why it’s important they engage with your pension communications and learn about free government financial advice services to help them plan for retirement.

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In partnership with Punter Southall Governance Services (PSGS)

PSGS are trusteeship and pension governance experts.

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