Huge numbers of over-60s in Scotland face a pension shock at retirement because they don’t know what their savings are worth.
Engagement with pension savings remains alarmingly low even as responsibility for retirement funding shifts increasingly towards individuals, according to research from financial services group Sanlam.
It found that 45 per cent of people in Scotland aged over 60 but who have not yet retired have no idea how much is in their pension pot. Another one in four said they didn’t know about pension reforms that took effect last April, while 17 per cent couldn’t envisage being able to retire until they’re in their seventies.
Three in ten over-60s in Scotland expect their retirement to be phased in over a number of years.
The Sanlam report, Which way forward?, warned that a fixed-age retirement is now unrealistic for most people currently in work.
David Dunn, pensions specialist and author of the report, said: “The face of retirement planning is changing. The contrast between decisions made by those who have recently retired and now those approaching retirement clearly shows that a seminal change is taking place.”
The launch of the so-called pension freedoms last year gave savers greater flexibility when it comes to accessing and using their pension pots. But that also brings added responsibility and complications, said Sarah Tory, financial adviser at Shepherd and Wedderburn Financial.
“Pensions aren’t appealing, they are complex and all too often the reality of what is needed compared to what is there is disappointing. In these instances is it not surprising that heads are buried in the proverbial sand,” she said.
The pension freedoms could further widen the gulf between the haves and have-nots, with the more affluent and financially literate more likely to have a good understanding of what’s in their pension and so be well-placed to take advantage of the increased flexibility.
“There will also be those who, for their own reasons, are looking to gather assets in cash, perhaps to pay off debts. They, too, will have a decent idea of what is theirs. The larger group in the middle are most probably far less aware of their lifelong savings,” she said.
There is some evidence that more people are taking an interest in their pension savings, however. Edinburgh-based Aegon’s annual Retirement Readiness survey, published last week, found that 24 per cent of workers have checked the performance of their pension savings over the past six months, up from 19 per cent a year ago.
But while the number of people on track for retirement has edged up since last April, 88 per cent of workers are on course to fall short of the pension income they want.
Many won’t realise that until they retire. With most savers opening several different pensions during their working lives, it’s becoming increasingly difficult to keep tabs on the various pots and understand how much they’re worth.
“Most people will move roles and companies a number of times during their lifetime and are unable to track or locate old pension policies from previous employers,” said Scott Sneddon, chartered financial planner at Cornerstone Asset Management. “If you don’t review and monitor your pension arrangements to ensure that they are competitive and are on track to meet your retirement goals you could fall well short of them.”
But the biggest issue, believes Sneddon, is the complexity of pensions and the opaque statements sent out by pension providers.
“It can be impossible for someone to ascertain what their pension fund is and what it can provide. This problem can also be compounded if you have a number of different pension benefits and any information you do receive comes through at different times of the year.”
And without knowing what kind of pension to expect, how do you know when you can afford to retire?
Taking a bit of time to work out what your pension savings will be worth at retirement could pay a handsome dividend, said Tory.
“I have had a number clients be pleasantly surprised that they can in fact retire earlier than they thought. Others have been able to take advantage of pension freedoms and build a retirement strategy meaning they have more in the active earlier retirement phase with the knowledge that they make have to make tighter sacrifices in later retirement.”
There’s another very good reason to get a rounded view of your pension savings before it’s too late – some contracts may well contain valuable features that could make a big difference to your retirement income.
“This could be an underlying guaranteed rate of income or minimum fund value which could provide a larger pension than expected or, on the flip side, a contract may have hidden or excessive charges applied which will reduce your income,” said Sneddon.
Knowing what to expect applies to the state pension too (especially as many people retiring over the coming years will not qualify for the full single-tier pension).
Around one in seven people will rely entirely on the state pension in retirement, Prudential’s Class of 2016 study found. But those receiving the full rate of £155.65 a week and no other pension income will still be getting £27.33 a week less than the Joseph Rowntree Foundation’s minimum income standard for a single pensioner.
“We are in the midst of some once-in-a-generation changes to pension rules – change that the state pension has not been immune to,” said Vince Smith-Hughes, retirement income expert at Prudential.
“Most of this year’s retirees will be eligible for the state pension under one of two very different arrangements depending on their retirement date. It is very important that they understand what this means for their total income after they give up work.”
For more information: State pension forecast – www.gov.uk/state-pension-statement or call 0345 3000 168. Tracking down lost workplace or personal pensions – www.gov.uk/find-lost-pension or call 0845 6002 537