A report from the National Audit Office has revealed that those paying into a pension could potentially lose a fifth of the money they put in before they have even reached retirement. They’ve gone as far as to say that workers who don’t pay anything into pension funds and manage their own nest egg instead will be 17% better off when they retire.
So where does the money go? The NAO has warned that unscrupulous pension fund managers are the problem. With management charges of 1% not uncommon, workers will find that a significant chunk of their retirement fund could be gone before they even get their hands on it.
A typical annual contribution of £1000 with a 1% management fee will lose £10 each year, a figure which quickly adds up and can be particularly noticeable if workers increase their contributions as their earnings increase.
This hasn’t been a problem previously as many companies used final-salary arrangements, which resulted in people being paid a percentage of their final salary each year when they retired, unrelated to their own contributions. Now, defined contribution pensions are becoming the norm.
Under these schemes, workers build up a pot as they pay in. The pension fund manages these and invests them in ways they believe will result in a profit. They then give each member a share based on their own contributions. However, these schemes have no guarantee made about the amount a worker will receive when they do retire.
In addition to this, workers could see their entire pensions contributions wiped out if a company is poorly managed or makes bad investments. It’s a very real risk, and one that the NAO and leading pension advisors are warning people to take seriously.
With news emerging in recent years of pension and savings companies going bust, giving their members a tiny portion of what they paid in as compensation, people are rapidly losing faith in these pension schemes. Now, only a third of private sector employees pay pension contributions.