Should we give up on pensions?

24th July 2012

There are plenty of reasons to think so. The fees and commissions levied on retirement planning has long been one of the causes of concern for many investors. Recently this prompted the Royal Society of Arts to commission a report from pension analyst David Pitt Watson, which accused pension providers of charging double the fees levied in some other countries.

Trust in pensions at all-time low

Meanwhile, younger generations face a bleak economic landscape and four-year squeeze on living standards, with few focused on slotting away sums for later years. And the situation with jitters over property values and soaring life expectancy.

Add to mix a legacy of miss-selling and over-charging and it's a toxic cocktail of mistrust – it's simple to see why people have lost trust in pensions.

Yet a massive new government scheme is about the launch at a time when the traditional retirement option isn't considered a vehicle to be relied upon.

The rise of auto-enrolment

So does auto-enrolment for 10 million workers into the government-sponsored Nest scheme offer a solution?

Action needs to be taken as, according to the Office for National Statistics, only 3 million people in the private sector are saving for their retirement; 600,000 fewer than in 2008. Some surveys show three times as many self employed professionals, part-time workers and full-time staff have turned their backs on pensions.

However, for many, while auto-enrolment will be a welcome boost for their retirement, for hard-pressed low earners – who will see their take-home pay reduced – it may be a step too far, stresses the Guardian.

Under the scheme both the worker and their employer will pay in, with each contributing – to start with – 1% of gross earnings. By late 2018, the total minimum contribution will have risen to 8%, of which the worker will be expected to put in 4%.

It will be a legal obligation for companies to enrol staff into workplace pension schemes, and everyone aged over 22 and earning more than £8,105 will be automatically enrolled, with a contribution from their employer. Staff earning less than this may also ask to save into a workplace pension scheme and, depending on their earnings, may also get a contribution from their employer.

The reaction

You can opt out, but by doing so many stress that you are effectively giving up your right to extra pay from your employer. But many view this new scheme as just another government con.

Inconsolable comments on a Guardian report: "Don't expect ANY payouts – I fully expect that over the next few years, there will be a creeping move to make people understand that this is INSTEAD of the state pension, not in addition."

Boydungood adds: "The commentators above are correct, this is a subsidy for a rotten pensions industry, that for years has been characterised by high opaque fees, miss-selling, and low returns."

And previous schemes have failed, as demonstrated by the launch of stakeholder pensions in 2001. Someone who invested £100 a month between the launch in April 2001 and the end of March 2012 would have contributed £13,300 of their own cash, but would be sitting on a fund worth just £14,600 after charges, according to figures from pensions firm MetLife.

And it's not like many of us are hoping for hefty returns anytime soon. A report by Lloyds TSB Private Banking, reports the Guardian, found that asset values fell over the last year for the first time since the economic downturn in 2009. The average return, combining shares, bonds, property and commodities was only down 0.1%.

Add to this that thousands of companies coping coping with their final salary pension commitments can expect to go bankrupt from soaring pension costs and be plunged into the Pension Protection Fund (PPF).

So are pensions a burden on people – and the economy for that matter, when they should be beneficial for our financial futures? Will auto-enrolment help pump some life back into the pensions industry, or prove a damp squib? After all, for those already in a workplace scheme, it won't make any difference.

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