The pensions knowledge gap that could harm your retirement plans

How much do you have in your pension? Do you even know where all your pensions are? And most importantly of all, are you certain you’ll have enough to live on when you retire?

These were some of the questions EQi asked when it surveyed over 2,000 people about their retirement plans and their understanding of pensions. The results were surprising and quite worrying!

More than a third of the people EQi spoke to (35%) said they had never reviewed their pensions or retirement plans. The survey was a nationally representative sample of people undertaken for EQi by the Centre for Economic and Business Research (Cebr), so when you extrapolate that percentage out to the whole of the UK, that is equal to 18 million who have no idea how much they will have to live on when they retire.

The good news is that more people are saving for their retirement than ever before, primarily because of the introduction of workplace pensions that mean that most workers will be automatically enrolled into a plan by their employer. According to the government, the total value held in British pensions rose from £2.9 trillion to £6.1 trillion over the last decade. That’s more wealth than in savings and investments combined, physical assets like art and antiques, and even more than the value of property privately owned in the UK, which totals just over £5 trillion.

But it seems the increase in the number of pension holders brought about by the introduction of auto enrolment has not resulted in people taking more of an interest in what’s in their pension pots or indeed their retirement plans. EQi’s research found that, of the people surveyed who said they had a pension, over a third (35%) did not know how much they actually had in their pension pots. That’s equal to about 12 million people in the UK.

It’s no surprise then that EQi found that a total of 29% of people surveyed, which is equal to 11.1 million people in the UK, were either fairly confident (16%) or very confident (13%) that they would not be able to save enough money for their retirement.

This picture is exacerbated by the fact there is no longer such a thing as a career for life and most final salary pensions schemes have vanished as well. It is estimated that British workers will have 11 different jobs in their career on average, which could be more than 50 years long if you’re just starting out at work. Each of those jobs is likely to come with a workplace pension, so many people will accumulate a string of legacy pensions that they no longer contribute to.

They are also unlikely to be reviewing them on a regular basis, as EQi’s research shows, to see how their investments are performing, or how much they’re paying in fees. And because these fees are replicated over several different pensions and providers, probably all changing a different amount, the costs of having multiple pension pots could really mount up.

In fact when EQi asked pension holders about the fees they were paying, more than two out of five (42%) said they don’t know how much they were paying in pension fees, which is equal to around 14.8 million people in the UK. Only 4% of pension holders surveyed said they review or switch their pensions at least once a year, which is around 1.4 million people. By comparison, EQi’s research found that people are 17 times more likely to review car insurance costs annually than their pensions.

EQi found that:

• 73% of car insurance customers, around 24.4 million people, review their car insurance costs annually
• 61% of home policy holders, or 19.3 million people in the UK, review their home insurance yearly
• More than half (52%) of people surveyed said they review their energy contracts each year, equal to 17.5 million people
• 17% of savers review their interest rates annually, which is equal to around 5.7 million people
• And one in ten (10%) of the mortgage customers EQi spoke to review their home loans every year, which is equal to around 1.4 million people in the UK

Of course, reviewing your financial products on a regularly basis makes absolute sense and many of us have become used to checking the cost of our insurance cover and energy bills each year and shopping around for a better deal each year. The same is true of mortgages, with many people fixing their rate for a few years and then re-mortgaging to the best deal when the old one finishes. And despite record low interest rates, most of us will always be on the lookout for the best rates for our cash savings.

So it is worrying that so many people don’t review their pensions on a more regularly basis, considering how much wealth is tied up in pension plans and how important retirement planning is in helping to prepare our finances for later life. While consumers can save tens of pounds by switching other financial products like insurance cover, the savings they could make by reviewing their pensions could be more significant.

Clearly one of the drawbacks of an auto enrolment workplace pensions is that is seems many employees almost forget they have one, probably because the onus is on their employer to set it up and manage it on their behalf. All the employee has to do is agree to the level of contribution taken from their salary, particularly if they don’t want to add more than the minimum basic contribution. EQi’s research found that just 14% of employees said they knew exactly how much was saved across all of their pension pots.

However, EQi found that self-employed workers and business owners are much more active in managing their pensions, with almost a quarter (24%) of self-employed people EQi surveyed saying they knew how much was in their pension pots. This is because they won’t have an auto enrolment workplace pension and will have to make their own provision, so they are likely to take more interest in choosing the right pension plan, how much they contribute and how it is performing.

If you have a number of different pension pots that have become difficult to keep track of, one option is to look at combining them into a SIPP – a Self-Invested Pension Plan. A SIPP is a great way of getting a single view of your retirement savings in one place and taking control of how you invest your money, with more choice of investment options such as shares and funds, as well as a clear picture of how those investments are performing. And because it is a single pension plan, you will know exactly how much you are spending on fees and will probably be able to save money compared to the cost of paying individual fees on lots of different legacy pensions.

SIPPs aren’t suitable for everyone or indeed every type of pension. Some retirement plans come with additional benefits that you might lose if you consolidate them into a SIPP. SIPPs are also not recommended for people with a final salary or defined benefit workplace pension, because these plans provide you with a guaranteed annual income for life based on your final or average salary that you are likely to lose if you transferred it to a SIPP. If you’re not sure about your existing pensions, you should always talk to a financial adviser first before making any decisions.

As EQi’s research shows, there is an awful lot of people in who are in the dark around how much they have in retirement savings and whether that will be enough to give them the life they want when they stop working. Opening a SIPP could be just the thing they need to get a better handle on how much they already have in their pension and help them save more towards the retirement they want.

EQi’s research was carried out by the Centre for Economic and Business Research (Cebr), including a survey of more than 2,000 adults by YouGov.