Thursday, September 05, 2013

Why most Company Personal Pensions schemes are so rubbish

If you want to know why Defined Contributions (DC) Pension Schemes are usually so rubbish compared to Defined Benefit (DB) then this Office for National Statistics (ONS) chart will give you a clue.

Not only are all non trust based UK DC schemes lacking in governance they all have uncertain outcomes,  are often expensive and most will simply not deliver for their  members.

Many of whom will have to work until they drop or retire into and then die in poverty.

While Defined Benefits schemes are nearly always better for employees than any alternatives, the main reason they are so is employer contribution levels. Average DB employer contribution is 14.2% (not at all an unrealistic level in my view) while in a DC it is an inadequate 6.6%.

I would guess that under auto-enrolment (a good thing but employer contribution only has to be 3%) will bring the average DC contribution level even further down. The current rock bottom annuity rates are making things even worse.

An old rule of thumb in pensions is that you need to be putting in at least 15-20% of your wages (employee and employer contributions combined) for 40 years to aim for a pension of 50% and a lump sum.

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