With final salary pensions declining, the government says a new ‘defined ambition’ pension could help split the risks.
If you’re in a salary related pension (such as one that’s linked to your final salary or to an average salary), you’re doing well. Many people are only given the option of signing up to a ‘defined contribution’ workplace pension, which means that the amount you get at retirement depends entirely on how much you and your employer pay in and how well the stock market does. Now, Steve Webb, the Pensions Minister, says it’s time for a new workplace pension that shares the risks.
What is a ‘defined ambition’ pension?
Steve Webb says that there are several options that could be considered:
• A cash balance scheme. Here the employer would promise to their employee a certain amount in their pension pot in retirement (based on the amount that the employee paid in and how long they worked at the company). As an employee, you’d then take on the risk of how much that pension pot would buy you when you retired.
SAVVY TIP: At the moment, the amount you get at retirement (assuming you’re not in a salary-related pension) depends on how old you are when you convert your pension into an income, how healthy you are and – crucially – whether or not you shop around.
• Better information for employees. Another option would be that employees are told how much their pension could be worth when they’re young and as they get older they’re given more accurate estimates of its final value.
What’s wrong with existing workplace pensions?
Final salary pensions (or those linked to your salary) are the best option for employees because you have some certainty about how much you'll receive. However, these pensions are expensive for employers to provide and very few companies in the private sector now offer them.
Consumer groups and organisations have criticised so-called 'defined contribution' pensions for putting too much risk on the employee. The National Association of Pension Funds, describes existing workplace pensions as ‘flawed’ (you can read a press release about it here and read my article about it here).
Their main criticism is that there are too many pension schemes in existence (there are over 40,000 pension schemes that aren’t linked to someone’s salary, many with less than 20 people in them), that charges are too high and that information isn’t clear.
What a defined ambition pension may do
A defined ambition pension – from what we know at this stage – wouldn’t offer any guarantees about how much you’d actually get each month to live on once you retire.
• The most it would do is tell you (or possibly give some guarantees about) what you would generate by way of a pension pot while you’re at work.
• But most people don’t think about their pension in terms of how big their ‘pot’ is, they think of how much they will have each week or month to live on.
Will a new pension help?
Not everyone is convinced that a ‘defined ambition’ pension is the answer:
• Tom McPhail from Hargreaves Lansdown says that, rather than inventing a new type of pension, policymakers should tell people to save more. “If you don’t pay enough in, you won’t get enough out,” is the key message, he says.
• Malcolm McLean from Barnett Waddingham says that encouragement from the government for companies to offer risk sharing schemes is to be welcomed, but he believes that: “Many employers who have had a bad experience with their final salary schemes will now be reluctant to offer any sort of guarantees on pension entitlements.”
What do you think?
Would you save more into your workplace pension (or join the scheme, if you haven’t already) if you were offered some guarantee about the amount you’d receive at retirement?
If you’re not saving through your employer’s pension scheme, why is this? Leave a comment below.
You can read the article Steve Webb has written in the Telegraph, setting out his plans for a defined ambition pension.
Should you leave your pension if you're offered a cash payment?
Joining your employer's pension scheme
If you smoke or have an illness you could get a higher income for life
SavvyWoman email newsletters: If you found this information useful why not sign up now to receive free fortnightly email newsletters with money saving tips and help? You can sign up at the top of any page on the website and your details won’t be passed to any other company for marketing purposes.
SAVVY HELP: Why not ask Savvywoman's panel of experts a question about your finances by clicking here? The answer will be displayed on the website but your surname will never be used.