The good, the ugly, and the future of pensions (part two)

March 15, 2018

Last week, In part one of this two part article, I outlined some of the key events that have contributed to negative perceptions of pension saving. But, to create some balance, there are some very logical benefits to contributing to pension schemes. We have a responsibility to educate and ensure people are fully aware of the benefits.

The introduction of workplace pensions has been a really positive step.  When the legislation was brought in, research showed up to 30% of employees would opt out.   I always felt it would be a lot less.   From experience I know that “if you rely on people to join a pension they won’t — And if you rely on them to opt out they won’t.”   This is because most individuals are quite apathetic with their finances.  Currently, opt outs of workplace pensions are approximately 9-11% of individuals.

At CB Benefits, on average our clients’ encounter around 5% of employees opting out.  We like to believe our percentages on this are low because of how we engage our clients’ employees.


Our six great tips to improve your pension communications


1. Feel the fear but join anyway

In the world of work place pensions, this is obviously not as relevant nowadays. But individuals are still able to opt out so we shouldn’t underestimate people’s fears and perceptions.   We’re regularly asked during seminars if it is ‘possible to lose my pension?’ or ‘are my pensions protected?’ and ‘what percentage of ‘interest’ will I receive?’

We cannot provide the answer that many individuals want to hear because the cold facts are that pension values will go up and down, and because pensions are invested into a range of assets, there is never this beautiful straight line of growth that individuals would like to see.  However, there are some key factors that individuals should take into account:


  • There is risk to every investment – Even if you put all of your money into a low interest savings account, your money may be at risk of capital deflation. In simple terms, this means, £100 today will not be worth as much in 20 years’ time, In fact, most experts agree that investing your long term investments in this way is normally more damaging than accepting the level of risk the markets expose you to.
  • You’ll miss out on the company contribution – There are no other investments your employer will contribute to before tax. Even if the markets do take a tumble, they’ll need to drop a long way before they are at a level of cancelling out the company contributions.
  • If you’re thinking of opting out don’t. Join and move your funds to low risk- Everybody’s attitude to risk is different but typically in your younger years, you are able to expose yourself to more risk than in your later years. In the later years, it is common to concentrate on capital protection.  If you’re seriously thinking of opting out or not joining a pension because you cannot bear the thought of your investment going down as well as up, then we would recommend you definitely remain in and choose lower risk funds. 
  • Data – You’ve heard it many times before — ‘Investments can go up as well as down,’ and ‘past performance is not a guarantee of future performance.’ This is very true and we absolutely feel all individuals should have a good understanding on this.  However; just to create some balance, it is interesting to know that a) the markets have gone up, 70% of their lifetime and b) There have been fourteen bear markets in the US S&P Index 500 since World War Two.  When the bear market has reached its bottom point, eight of these fourteen times, the markets have bounced back fully within a 12 months period, to their pre bear market levels.  


2. Register for online access

All individuals should register for online access so they can see how much is invested in their pension at any time.  One of the biggest mistakes individuals make with their personal finances is that they don’t get engaged from a young age.  Pensions are no exception.  We often encounter individuals that don’t take an active interest on what is in their pension until their later years.  Even the annual pension statements that are sent in the post are filed or destroyed without a second glance.    It’s only in later years that individuals often realise they will not have enough for retirement.  By this time, they’re playing catch-up.  To avoid this common mistake, we recommend individuals register as early as possible so they can follow their contributions and fund value, and make the relevant adjustments as early as possible.


3. Understand that pensions are the most tax efficient investment available

Pensions are the most tax efficient investment you can contribute into in the UK.  Employee contributions will normally be made via relief at source, or salary sacrifice.  More details can be found in our group pension section  but to summarise, you’ll have at least a 20% uplift in comparison to most other investments.  This is because you most other investments are made after you’re earnings have been taxed.  When you start drawing your pension, you can also access 25% of the fund as a tax free lump sum.  Llastly, pensions have death benefits attached where you can use them as part of your Inheritance planning.


4. The power of compound

Compound is basically earning interest on interest or growth on growth.  In simple terms, the earlier you start saving the better it’ll be for you.  To provide an example of this:


Simon is 45 and receives a bonus of £12,000.  Simon sacrifices his bonus and pays it into his pension before tax.  If this grows at a rate of 6% year on year, and Simon doesn’t pay anything else into his pension, by the age of 65 his pension will be worth £38,485.



pensions Compound growth example
Over double the amount for the same level of contributions



However, using the power of compound growth, if Simon had started contributing £40.00 a month at age 20, (which is the equivalent of £12,000 contributions) and this had grown year on year at a rate of 6%, by the age of 45 this would be worth £27,183.  And if he doesn’t pay any more into his pension, by 65 it would be worth £87,179


Over double the amount for the same level of contributions!



5. How much is enough?

Most individuals do not understand how much they’ll need in retirement.  Straight away this causes a problem because individuals do not really understand how much they need in retirement and therefore, do not save the required amounts.  Seeking financial advice off a Financial Planner such as CB Benefits can be very valuable because using cash flow modelling, we will establish what level of income you will need in retirement to live the lifestyle you wish to live.

However, we recognise seeking advice is not achievable for all.  As a rough guide to get employees started, we recommend individuals create a detailed budget plan outlining what they earn and what they spend.  This creates the foundation of what lifestyle the individual is living.  Once they have done this, they can use one of the many pension projection tools available to establish what they need to save for their retirement. A Financial Advisor such as ourselves will undertake this exercise much more comprehensively.  We will look at inflation, goals, income expectations, performance, other savings and investments, assets and liabilities, and inheritance expectations.  However, our recommended approach will at least provide individuals with a basic guide.  As Yogi Berra said “If you don’t know where you’re going, you’ll end up someplace else.”


6. Don’t rely on the state

This is probably one of the most important messages to grasp.  If you have contributed 35 years full National Insurance contributions, the state pension will current pay you around £8,000 a year.  For most this is not enough to live on so it shows how important it is to have personal provisions.  Of course there’s many provisions such as property, cash deposits, bonds etc.  However, being that a large proportion of the UK has their capital tied up in the property their living in, having decent pension provision is the ideal scenario for most.



By 2055 it is projected that there will be double the amount of people in retirement to working.  This is a ticking time bomb so the more and more engaged individuals can become, the better chance we have as a nation of averting the looming crisis.

I’m really pleased that workplace pensions has been introduced.  In reality, the introduction of the legislation should have happened 30 years ago but at least we’re now moving in the right direction.  There’s still a long way to go but I’m a big believer that, for all the scandals, for all the mismanagement, and for all the myths that surround pensions, the largest contributor to the looming crisis is a lack of education and understanding and a general apathy when it comes to people saving.  I believe Financial Education should be part of the National Curriculum.   Unfortunately, we are where we are, and it is often left to employers to pick up the pieces.    I’m passionate that with the right engagement, companies can have an important influence in people’s lives and futures.   The more engaged employers become with their duties, the better chance they have of retaining and recruiting key staff. Also, with more and more employees admitting that financial difficulties have affected their work performance, there is a real opportunity to improve the performance of your overall productivity.


We know we can make a real difference to your employees Financial Wellbeing.  If you think some of the areas we’ve shared in this article are of interest, we would be happy to discuss your objectives and share some of our insights with you.


For further advice or information, please call 01483 881111 or email