Auto-enrolment and the pension freedoms introduced by the coalition government in 2015 have largely been a success, however there is a but. The freedoms meant you didn’t have to buy an annuity (providing you with an income for life), instead you could oversee and spend your own pension money.
However they were dreamt up in a world of never-ending stock market growth and low inflation. Any fool could invest and persuade themselves they were Warren Buffett.
That is not where we are now. Inflation has meant not only that you need more money to retire on, but the accompanying stock market volatility we’ve experienced in the last two years has made it harder to come by. Both through changing pension regulations and the death of the final salary pension, the risk of our retirement income has been transferred from our employers to you and I.
If you have a defined contribution pension (rather than a final salary one), how much money you end up with depends not just on how much you put in but how your investments fare. There is also the fact that far fewer of us have annuities, which will pay you an income for the rest of your days.
Annuities are not perfect – and depending on the rate you have to have a lot of money to get a decent annual amount – but at least they were predictable and you knew where you stood.
Many people now don’t know where they stand, and whether they have enough. The main risk is people not knowing if their pension will last them through retirement.
They may not even know that they need more: calculations by Interactive Investor have shown that you now need to have £14,000 a year even for a basic retirement – back in April 2022 it was just £12,800.
Now is not the time to stick your head in your sand and avoid thinking about pensions because you don’t think you will understand them. You will.
So speak to your pensions department at work and ask how much you have saved and if you’re on track for the retirement you want. Keep asking questions until you understand. It’s not rocket science, it’s just a little bit boring, but boring is good when it’s going to pay for a holiday in retirement.