Pensions under threat as markets collapse

Published on Friday 6 March 2009 19:42

PENSION scheme members have been urged to review their investments after a massive fall in scheme values. More than 3.7 million UK workers currently pay into defined-contribution (DC) pensions, into which employers and, usually, employees pay fixed contributions, and, with final-salary schemes dying out, that number is rising. But stock market losses have wiped a third off the value of DC schemes since September 2007, according to Aon Consulting.

A 60-year old contributing 10 per cent of a 25,000 salary and hoping to retire at 65 would now get an annual retirement income of just 10,900, rather than the 17,100 expected prior to a 36 per cent fall in their projected pension pot.

The losses demonstrated why DC scheme members should take an active interest in their pension investments, said Helen Dowsey, principal at Aon Consulting. "For some workers, not making active investment decisions could mean they lose out on up to a third of the value of their pension," she said.

To get a handle on how your pension investments are faring, you need to find out where you stand right now. DC scheme members should receive a statement at least annually giving details of current holdings, the previous year's value, contributions received since then and projections of the value of benefits at retirement age. Most pension providers also list the funds they offer on their website, with fact sheets for each fund. Fund performance data are also available on websites including www.trustnet.com and www.iii.co.uk.

There are then two key questions to ask, said Paul Lothian, chartered financial planner at Verus Financial Planning. Are the funds you're invested in appropriate in terms of your attitude to risk and time horizon? And how well are those funds performing compared to their peers?

But there's a more fundamental question to ask: Are your contributions, including other savings and investments, likely to be enough to meet your retirement objectives?

"The majority of investors will be unable to answer these questions without the help of a professional adviser," Lothian said. "Most good IFAs will be happy to give bespoke advice to individual pension scheme members in return for an agreed fee for their time."

According to Hargreaves Lansdown, the average DC scheme member pays 10.3 per cent of their earnings into their pension, but this will secure an average pension of less than a quarter of their final salary. A pension paying 50 per cent of the final salary requires a funding rate of around 23 per cent of earnings over 40 years. For those starting contributions at age 40, the funding needed rises to over 40 per cent.

If you're likely to fall short of your desired retirement income, whether due to low contributions or market falls, one answer is to boost your pension sooner rather than later.

A good start is to ensure you take advantage of tax-efficient vehicles such as Individual Savings Accounts. Also find out if you can increase your pension contributions or take advantage of salary sacrifice, which offers tax relief on contributions. And it's not too late to boost your pension pot at retirement – see box for details.

But the biggest step you can take towards making sure your pension is on track is to take financial advice. To find an IFA near you, call 0800 085 3250 or visit www.unbiased.co.uk.