Can we make the impossible possible in pensions again (Cont)

In my last blog I recounted comments by Steve Bee regarding Final Salary Pensions.  To continue his narrative, he wrote:

“Yes, employees are usually required to pay something towards the cost of such a pension but nowhere near the true cost of the benefit. For a “good” DB scheme, the total annual cost averages out at something like 23 to 25 per cent of payroll. The employer pays the lion’s share of that. And very few employees in such schemes understand or appreciate that.

“But here is the thing those people not in workplace DB schemes fail to understand: to get a “good” pension in retirement, something equivalent to the sort of pension they would get from a “good” DB scheme, they need to save something like one pound in every five earned through the whole of their working life.

“I do not know what the statistics are on that but I would hazard a guess that someone who did so from the age of 18 to 68 (a typical 21st century working life?) would be pretty unusual.

“I certainly do not think many with growing families and a mortgage, or high rental costs, and probably saddled with the task of repaying the price of their higher education, would be in a position to defer a fifth of their earnings year on year. It just does not seem possible.

“And yet we once made this “impossible” idea possible through the active engagement of employers in the provision of DB schemes. Schemes that worked real financial magic for generations of British workers. We need to discover how we might engage employers in making the pension magic work once again.”

I’m not sure if we will ever see the likes of DB Schemes again but it surely must say something to pension contributors (including Employers) that they have to think really hard about ensuring people save enough for retirement.

And maybe the Government should rethink the ridiculously low Lifetime Allowance!

Can we make the impossible possible in pensions again

A well respected name in the Financial Services Industry, Steve Bee, commented recently in “Money Marketing” about Final Salary Pension Schemes (also known as DB Schemes).

He wrote the following:

“It is not unusual for someone who has been in a defined benefit scheme for a large part of their career to have pension assets worth more than the house they are living in.

“The value of deferred pension benefits is something very few of us really understand, even those of us who work in the financial services industry.

“The fact someone’s pension could be worth more than a home they have spent their life scrimping to pay for seems too counter-intuitive for many clients to comprehend.

“How can something you get as a perk from work be worth more? It is not that painful to pay for; most people do not even notice the money going out. Surely it is just financial mumbo-jumbo to say they are worth that much? But, of course, it is not. It is just that, for many in workplace DB schemes, the value of the contribution made by their employer is grossly underrated.

“A “good” DB scheme provides a pension of a 60th of an employee’s salary at or near retirement for every year of pensionable employment completed. A 40-year career could thus provide a pension of around two thirds of the income the employee was used to receiving while at work. Such schemes are regarded as the gold standard in the world of workplace pensions.”

To be continued…

Final Salary Pension Transfers

Savers 10 years away from retirement could lose nearly half of the value of their defined benefit pension (Final Salary) if they choose to transfer, according to new research.

The analysis from Royal London and consultancy Lane Clark & Peacock finds for those people the transfer value on offer will on average only be around 55 per cent of the “full value” of the pension given up.

It shows that for members within one year of retirement, the transfer value is, on average, 75 per cent of the “full value” of the pension given up.

Despite these statistics, the research also shows that advisers are expecting the impact of the FCA’s new rules on pension transfers to have little impact on people’s decision making.

If you are considering such a transfer, please be very wary.  It may not be in your best interests.

Cloth ears

Boarded a flight the other day and an automatic announcement intoned that as the plane was  refuelling, passengers should keep all their electronic devices switched off, seat belts unfastened and blinds up. So I sat there with people around me on their phones, seat-belts on and blinds down. So, I couldn’t help wondering, had the plane ignited and gone up like a Christmas tree, we were all doomed. Just thought I’d share that with you.

Inflation

UK inflation hit a six-month high of 2.7% in September, having held steady earlier this year.  The rise is not good news for consumers- slowing the recovery in spending power

Could it be good news for savers?  Only if the Banks and Building Societies increase their rates. 

The question is – will they?

Answers on a postcard to…