Pensions are complicated. At least that is what most people in the street would say about pensions, and to be fair, many experts would agree.
In fact, even HM Revenue & Customs (HMRC) has had its share of problems with pensions. It had to remove its pensions tax calculator for updates after Royal London pointed out that it was giving people the wrong information about how much they could put into their pensions.
So, if the taxman is struggling to do his pension sums, it is not hard to see why the man on the street is having trouble keeping up. Part of the problem is the number and frequency of changes made to pensions legislation.
What is more, the laughably named ‘pensions simplification’ rules, which were introduced back in 2006, did little to simplify anything. The Pension Freedoms Act, which was introduced in 2015, went some way towards helping the layman understand how pensions worked, but only from the perspective of how and when they could take their retirement fund. The idea that you can take what you want, when you want from age 55 and that 25 per cent of the money was tax free, and the remaining 75 per cent would be taxed at your marginal rate, is easier to grasp.
Getting the young to save
But what about understanding how you build your pension pot up in the first place? The introduction of auto-enrolment will help those who would not ordinarily choose a pension to have a better chance of improving their retirement prospects.
The Department for Work & Pensions produced an Automatic Enrolment Review at the end of 2017, which showed that 78 per cent of eligible workers have been auto-enrolled into a company pension scheme since the roll out of the new rules, compared to just 55 per cent of eligible employees in 2012.
However, there is still the opportunity to opt out of auto-enrolment if you want to. Around 9 per cent of employees decide to leave their company pension. There could be many reasons for this, including having another pension elsewhere or keeping all of their salary for now. But it is vital that anyone choosing to opt out of a pension where their employer is obliged to pay money into the pot, realises they are losing out.
They may not see it this way; after all they will keep more of their own salary today than they would if they were in the scheme. Employees are obliged to pay 2.4 per cent of their salary into a pension when auto-enrolled, and it might be that the 9 per cent who opt out, do so because they need that money now more than they think they will when they retire.
When you are in your early 20s or 30s, retirement at 55 seems a very long way away – another lifetime for many. But employers are obliged to pay in 2 per cent of their salary, so choosing not to stay in the scheme is like volunteering for a pay cut, and the amount lost will rise to 3 per cent from 6 April 2019.
The fact that so many of us now move from job-to-job over our working lives can also create difficulties when it comes to our retirement, as corralling our various pension pots from different employers is not easy.
Remembering to update changes of address for former employers does not even cross the minds of most people, so when retirement comes it can be easy to miss out on pension entitlements you are due, especially if you have spent any time working abroad.
The idea that your pension pot would follow you wherever you go, rather than you having to chase it down at some point in the future, made perfect sense.
Yet the government has scrapped that to focus instead on the ongoing rollout of auto-enrolment, even though it is hard to see why the two have to be mutually exclusive.
Will the dashboard make a difference?
You can use the DWP’s Pension Tracing service and the new pensions dashboard which should allow you to see all of your pensions in one place. It will also go some way to helping people keep track of what they are due and from where. This is scheduled to launch next year. The plan is sensible, as you should be able to see all of your pots from different employers in one place. But surely it would be far easier just to have the one pension pot that each employer pays into?
Logistically, it would seem easier and given the already stated problem of people finding pensions complicated, having a number of them in various places may risk complicating things even further.
Steve Webb was the architect of the pension pot that followed the employee, and he now works for Royal London. It is unlikely to be a coincidence that it was this company that pointed out the problems with the pensions calculator to HMRC.
Only when the pensions dashboard makes an appearance next year will we know for sure whether it would have been better if his original idea was followed through.
Alison Steed is a freelance journalist
