Are private pensions safe?

[Treblebass]

Just that really. I’ve only just started paying into a pension at age 33, I’m on a decent wage now after a decade out of work raising (a good few kids ).

My brain is FRAZZLED trying to understand pensions. I work in the charity sector and I have a pension with the peoples pension.

Are private pensions generally safe? Or would I be better just opting out and saving the money each month? No employer contributions that way I know but peace of mind the money is actually mine.

I really want to get this clear in my mind as I’ve been stung once before massively financially so I’m hell bent on not letting that happen again. Really want to get my shit together.

Thanks in advance.

I think this is a "don't put all your eggs in one basket" thing.
There is a lot of regulation around pensions
But I also focus on other strategies too like savings/mortgage overpayments etc

I do save as well into my ISA, but I don’t trust my pension and I can’t really put my finger on why. Probably because i just can’t understand them.

I think it's best to set one up with a large well known provider. Perhaps that might be safest.

One of my previous employers used Now pensions and they're totally rubbish, terrible reviews across the Internet and the money immediately lost value.

Try to get some independent advice if you can.

I will thanks, mine is with the peoples pension.

Is your ISA a cash one or stocks & shares one? I assume you are familiar with the concept that an ISA is a specific tax wrapper around a savings or investment account, with certain rules.

That's pretty much the same for a pension. It's a tax wrapper that sits around a savings or investment account, with certain (sometimes more complex) rules. The tax advantages are meant to act as an incentive to encourage more long term saving, to ultimately provide an income in retirement.

The People's Pension is a well-established outfit with its roots in the construction industry, having come to prominence with auto-enrolment. They have a limited range of funds to choose from but adequate for most members. Take a closer look. As your pension pot grows over time there's no reason why you couldn't move some out to another provider if you wanted to spread your bets, but really the Financial Services Compensation Scheme has comprehensive safeguards that would cover you if anything happens to People's Pension.

@Sunseed

A cash one. I will take a look at the financial Services Compensation Scheme. Thank you.

There is a huge amount of regulation around pension providers now; it's nothing like in the past.

I don't know People's Pension in detail but it looks like a standard defined contribution workplace scheme. The way these work is fairly simple:
-you pay in your money every month, as does your employer. Your contribution is tax efficient (so it's paid in before tax is deducted)

• the provider will deduct a charge of some sort for managing your fund. Most commonly this is a percentage of the fund value per year, and normally the auto enrolment schemes are very cheap from this point of view.
• you should have some choice of investment - you can chose which of the available funds your money goes in to.
• at retirement you will have a "pot" of money. You will then be able to choose whether to buy an annuity (less common just now) or enter in to a drawdown arrangement where you draw money out gradually, but the rest stays invested.

There are two main sources of risk

1. investment performance. The value of investments can and will go up and down over time. The different investments offered will have different risk profiles, but you are still pretty young and you are saving for retirement which is a long term investment. It's really important to be aware that some years your pot value might decline; this is COMPLETELY NORMAL and to be expected but on average over time yuor money should grow, and it should do so at a better rate than it would do in a bank account or similar. Mine is in a fairly high risk fund as I'm in my 30s, the performance was fairly poor in 19/20 (covid crash) but bounced right back in 20/21.
2. risk of the provider failing - there have been so many changes to regulation over the years that the chance of this is pretty much non existent, and even if it happened your money will be safe for various reasons. I'd say it's no riskier in a good DC pension than in a bank account.

You would be daft to opt out for 2 reasons. 1) Employer contributions and 2) tax benefits. Even if you are on minimum contributions that's you paying 5% gross (so 4% net assuming 20% tax) so your contributions are effectively doubled compared to what you would be putting aside for the same cost if you opted out.

Brilliant, thanks for that.

You sound like me, quite cautious. If I were you, I’d go to an independent financial advisor (they don’t have to cost the Earth) and they can advise you. I would do that if I didn’t have my NHS pension.

I wouldn't disagree re an IFA - I'd be pretty shocked if a decent one would encourage you to not use the workplace scheme. Due to the employer top ups and given you seem pretty risk averse it is unlikely you'd do better by investing just your contribution in a different scheme - you might get higher returns but that would need to offset lower contributions and higher returns tends to mean higher risk/more volatile investments which you seem nervous of.

However, unless your employer offers to match increased contributions above the minimum then realistically you may want to look at additional provision anyway. You could do this by upping your contribution to the workplace scheme, but if your employer doesn't match/top up beyond the minimum then you could also consider doing this through a different provider who would probably offer a wider range of funds.

The minimum 8% contributions - whilst they do help and are definitely better than nothing - probably aren't going to give you a big enough income boost in retirement to live comfortably so if you can invest more it's a good idea to do so. An IFA could help with this, as well as with any non pension options like better ISAs.

With your employer pension, you should get the tax added each month

Why do you think the pension scheme may be somehow unsafe?

It’s just a savings account that your employer also pays into. The difference between it and your ISA is that with the pension you’re saving untaxed income (to be taxed later when you draw upon it) rather than saving taxed income (which won’t be taxed again).

How you invest the funds (whether in your pension or your ISA) is up to you. That carries a level of risk, but you need to take some risk to make the money grow.

It’s worth learning about fund options and what is a suitable home for your pension savings - based on how long left you have until retirement. Because the pension company doesn’t do this for you - their default fund will be low risk, low return - which might suit someone looking to cash in their pension in 5 years time, but not so good if you have 35+ years to go.

I’ve seen various comments from people on social media saying they lost all their pension and it was worth next to nothing etc.

I am just in the process of learning about all of these things. I’ve worked hard studying for my degrees part time whilst raising my kids now I’m finally at a good point career wise and the only way is up.

Just getting everything in order.

"I’ve seen various comments from people on social media saying they lost all their pension and it was worth next to nothing etc."

Without knowing a lot more it's hard to know what has happened to these people. These could be covering a variety of different (mostly historical issues); poor investment returns, unrealistic projections (so people expected to get much better returns than they did), people who have only saved very small amounts and been surprised it isn't worth much, low annuity rates (these have plummeted), old style schemes which failed...

Many older pensions had guaranteed benefits - so the investor put in money with some guarantee of what they would get back, often in the form of a guaranteed annuity rate they would be offered at retirement. As the financial environment changed these guarantees became incredibly expensive for the companies to fund - and in the case of Equitable (often the source of these stories) the company couldn't keep paying and people lost money. There were also other types of complex product, things like with-profits, some of which were badly sold and badly managed..

This happened over 20 years ago, and pension/insurer/financial services regulation is massively different now. It's much more stringent, and companies don't offer as many guarantees now because wherever they have committeed to a specific future payment to a client they have to show that they will be able to meet that payment even under pretty dire circumstances. I'm simplifying (I work in this area!) but it is hugely more strict than it was.

The sort of pension you are looking at doesn't have these sort of issues anyway - it's a defined contribution scheme so there is no guaranteed return. What you get at the end depends on how your investments perform; it's actually a pretty simple product by comparison to some of the older ones.

There is always a risk associated with investment performance; your fund will be in shares, bonds etc and their value goes up and down so some years will be great and others not so good but over the length of time you are saving those bumps should average out and your money should grow in real terms over the time you are saving. If you put your money in a bank account or a cash ISA you won't ever see its value decline in monetary terms, but the returns will be so poor just now that the value will decline in real terms. The best buy cash ISA just now is paying about 1.5%, but inflation is running at 3% so your money will grow at a lower rate than your costs. Imagine the impact of that over 30 years...

I hope that makes sense - please feel free to ask if it doesn't!

@StatisticallyChallenged

That makes perfect sense. Thank you for your reply it was really helpful.

The change to defined contribution schemes has put the responsibility for retirement saving firmly on the individual. Unfortunately, society hasn’t really caught up with this change. So there are a lot of people out there who have paid in the bare minimum to their pension, left it in the default fund profile, and assumed it would all be taken care of - much like their parents’ defined contribution pension was. They have then reached retirement and found that their pension savings have earned them the grand sum of fuck all.

For me, the key learning for pension investments is that - age 20-50 - you cannot afford to be prudent or risk adverse. If you keep your savings in cash or bonds, you will probably retire with less money in real terms than you accumulated. You need your money to grow - and that means investing in equities (shares in companies). The value of your pension pot going down is no reflection on the pension provider - it’s just what’s happening in the market in which you’re invested.

parents defined benefit* pension was.

Surely not fuck all?

I appreciate what you’re saying but some people really can’t afford to put away lots in a pension depending on their career choice etc.
I’ve already accepted I’ll be working for a very long time.

To my mind, if the big private pension funds go down, everything goes down!

Pay into your pension. Your employer gives you a chunk extra and then the government tops it up for you.

Then, it earns better interest than any other standard savings account.

And when it has earned loads of interest over the years, you can get 25% of it back, tax free, even though a high percentage was money the government gave you back from your tax in the first place!