Are workplace pensions any good? Ask a room full of people and there will be some that say yes, some that disagree but mostly people will have no idea.
If you think pensions are a good idea then you'll save into one, but if you don't you'll make the effort (hopefully) to save in another way. Having no idea about whether pension are good or not is the most dangerous camp to be in because ignorance breeds apathy.
The government is trying to capitalise on that apathy with the introduction of auto-enrolment and that people will be too apathetic to leave their pension scheme after being automatically opted in.
For those whose interest in pensions is sparked by auto-enrolment, they may have some help in deciding whether the scheme they have been opted into is worth it or not.
The Office of Fair Trading (OFT) has decided to launch a study to determine whether company pensions are good value and how much workers can expect to retire on.
It has decided to look at workplace pensions because of auto-enrolment, which will see the numbers of people saving into pensions swell from four million to between six and nine million. The OFT expects the new savers to save an extra £11 billion a year into pensions in five years' time.
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It's going to look at a number of factors, including how the market develops competitively, whether there is enough pressure on pension providers to keep charges low, how much information about charges is available, and whether smaller firms are making the right decisions for their employees.
This is all very worthy, and all these questions need answering. Of course you can only make a judgement on the market once it's up and running but surely some of these concerns should have been pre-empted.
Why hasn't the OFT looked into pension charges already? Surely it's always been important for pensions to be good value and to deliver enough to pensioners in retirement no matter how they save, not just through auto-enrolment.
The OFT plans to finish its consultation in August 2013, by then hundreds of thousands of people will be auto-enrolled. If their schemes are found wanting, what happens then? Will they be removed from schemes or will the schemes be forced to change their charging structure?
Competition is important but the OFT knew auto-enrolment was coming, it should have laid out to consumers, employers and most importantly the pensions industry, what it expects.
- 1. No savings
Figures from charity Age UK show that 29% of those over 60 feel uncertain or negative about their current financial situation - with millions facing poverty and hardship. Even though saving for retirement is not much fun, the message is therefore that having to rely on dwindling state benefits in retirement is even less so. To avoid ending up in this situation, adviser Hargreaves Lansdown recommends saving a proportion of your salary equal to half your age at the time of starting a pension. In other words, if you are 30 when you start a pension, you should put in 15% throughout your working life. If you start at 24, saving 12% of your salary a year should produce a similar return.</p>
- 3. Mortgage debts
Recent research from <a href="http://globalcare.aviva.co.uk/">Aviva</a> found that 17% of over-55s are still paying off a mortgage, with an average of £63,555 left to clear. And figures from equity release lender More 2 Life suggest that more than 100,000 over-65s are still struggling to pay off their mortgages. The pre-recession popularity of interest-only mortgages and the poor performance of linked investment vehicles, as well as the average age of a first-time buyer rising to 35, are among the reasons why. But meeting monthly mortgage repayments during retirement can have a big impact on day-to-day living costs such as food and household bills. Ways to avoid being caught out include taking out a mortgage over a shorter term that leaves you well clear by retirement age and overpaying on your mortgage when you can. If it is too late for that, downsizing could be an option, while equity release plans could also be worth a look.</p>
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- 4. Deal with default notices
<p>A default notice is note that a lender puts on your credit file if you fall behind with your payments. It is a warning sign to future lenders about your reliability to repay credit and could mean that they will be less likely to lend to you or will increase the interest rate.</p>
<p>If the default notice is incorrect, perhaps because you have repaid the loan in full or did not take out the credit and suspect that you have fallen victim to fraud, you can apply to have a default notice removed. A default notices will only be removed if it is factually incorrect – not simply because you are embarrassed by it.</p>
- 4. Huge care costs
The cost of a room in a care home in many parts of the country is now over £30,000 a year, according to figures from Prestige Nursing and Care. So even if the prime minister announces a cap on care costs - last year the economist Andrew Dilnot called for a new system of funding which would mean that no one would pay more than £35,000 for lifetime care - families will still face huge accommodation costs. Ways to cut this cost include opting for home care rather than a care home. Jonathan Bruce, managing director of Prestige Nursing and Care, said: "For older people who may need care in the shorter term, home care is an option which allows people to maintain their independence for longer while living in their own home and should be included in the cap." However, the only other answer is to save more while you can.</p>
- 5. Fraud
Older Britons are often targeted by unscrupulous criminals - especially if they have a bit of money put away. For example, many over 50s were victims of the so-called courier scam that tricked into keying their pin numbers into their phones and handing their cards to "couriers" who visited their homes. It parted consumers from £1.5 million in under two years. Detective Chief Inspector Paul Barnard, head of the bank sponsored dedicated cheque and plastic crime unit (DCPCU), said: "Many of us feel confident that we can spot fraudsters, but this type of crime can be sophisticated and could happen to anyone." The same is true of boiler room scams that target wealthier Britons with money to invest, offering "once-in-a-lifetime" opportunities to snap up shares at bargain prices. Tactics to watch out for include cold calling, putting you under pressure to pay up or lose the opportunity for good, and claiming to have insider information that they are prepared to share with you.</p>
- 6. Unpaid taxes
The average UK pensioner household faces a £111,400 tax bill in retirement as increasing longevity means pensioners are living on average up to 19 years past the age of 65, according to figures from MetLife. And every year in retirement adds an extra £5864 in direct and indirect taxes based on current tax rates to the costs for the average pensioner household. You can be forced to go bankrupt if you fail to pay your taxes, so it is vital to factor these costs into your retirement planning.It is also important to check that you are receiving all the benefits and tax breaks you are entitled to if you want to make the most of your retirement cash.</p>
- 7. Rule changes
Even the best laid plans can be derailed should the government change pension rules - especially for those already in retirement. Take income drawdown. About 400,000 individuals have set up their pensions on this basis that allows them to keep their fund intact while drawing an income, rather than buying a poor value annuity. The income they can take is therefore linked to the 'GAD rate' – set by the Government Actuary's Department and determined by the prevailing yield from a 15-year Government bond (gilt). But despite 15-year gilt yields falling sharply, the government last year slashed the maximum income that could be drawn down from 120% to 100% of the GAD rate due to fears that savers were depleting their pension pots too quickly. Many pensioners have seen their incomes plunge by more than 50% as a result - and there is very little they can do about it.</p>