If I mentioned ‘pensions’, it’s likely that your mind will go blank, or you might start thinking about what you will have for lunch/dinner/snack on instead. But even if you try to think about pensions, it’s not clear that you will be able to make much progress. Pensions, over the past decade or so, have really become much more complicated and this means it is hard to keep track of what the situation is. There is complexity across many different dimensions and the overall result is that there are many choices to make and lots of uncertainty implicit within those choices.
Crudely, pensions were about paying money in and then getting a regular set sum back again once you had retired at some point in your early sixties. But this is no longer the case. For a start, you won’t be able to get your State Pension until you are 67 (well, I won’t!). And, as we have all been told many times, you really shouldn’t think that you can rely on the State Pension to survive in old age, unless you are very keen on leading a minimalist lifestyle.
So you need to set something up additional. This is where the questions and uncertainty kick in. You go for some private pension provision and most this is probably done through work – but how do you know what is best? And what if you have changed jobs and have an existing pension with another employer in another scheme? Can you remember who that is with? And should you consolidate them? How do you work out which offers best value? Do you know the charges? What about returns? What about other costs that are hidden away?
And, thinking about this additional pension provision, you won’t get a set amount (a proportion of your final salary) at the end. The times of Defined Benefit pensions are over. I am not going to go into all the background of why (perhaps for another time), but now the majority of schemes set up are Defined Benefit (where you put a set amount in but what you get at the end is far less certain).
And now for more decisions and choices. When you retire, you don’t simply get some money, you need to work out what you will do with the big lump of money you have carefully saved up. Before most people would buy an annuity, which gives someone a guaranteed sum paid out each month. Now you can take a substantial cash sum out in one go, but then again, you need to be careful as you might start paying a lot of tax on that if you take out too much as this is taxable income.
But if you took some out, you don’t want to put it in a bank as it will effectively lose money with interest rates so low. So instead you might decide to do something more sophisticated, such as keep some money invested so that it carries on making better returns, but will your current provider let you do this? And then perhaps you could take a regular small sum from that for current expenses. But do you know how to split up the amount saved – how much to invest and how much to take out?
And then another element to consider is how to get financial security for your final years, for example some kind of annuity. But the challenge here is to second guess when would be the right moment for this, and then what sort of amount would you need to live on? Most people tend to overestimate how much they will need at this stage and die with unspent funds.
I’m just hope that by the time it comes for me to grapple with all this, that the perfect product has been launched and I can live happily after thanks to it.
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