The top three pension myths

Pension definition

After hundreds of consultations over the past 12 months we compiled a list of the three most frequent pension misconceptions.

Guaranteed final salary schemes

The most common myth about UK private pensions is that final salary (defined benefit) schemes are guaranteed.

The second most commonly held incorrect assumption was that final salary schemes always increase in value each year; and the third that final salary schemes automatically provide for spouses and dependants when the member dies.

It has become clear that there is a lot of misinformation and, in some cases, downright lies in the public domain about UK private pensions.

This must be addressed urgently as it could seriously compromise people's long-term financial planning strategies. The myths need to be busted.

The belief that final salary, or defined benefit, pensions are guaranteed is simply not true in the vast majority of cases.

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Defined benefit (DB) schemes are, by their very nature, reliant on the financial stability of the members' firm. The question someone, especially a younger worker, should ask themselves is ‘will my company still exist and be financially sound in three or four decades' time when I come to draw my pension?'

Also, it should be remembered that pension formulas can, and often do, change over time and such modifications can significantly alter how much a member accumulates in their pension fund.

DB pensions

Next there is the idea that DB pensions always annually increase in value. While the value on paper may indeed increase, what members need to bear in mind is the real return that is being achieved after inflation has been taken into account. The majority of pension schemes are now applying increases in line with CPI (consumer prices index) rather than RPI (retail prices index) and the government forecasts that CPI will be 1.2% less per annum than RPI over the long term.

Final salary pension

Finally, we have the belief that spouses and children will receive a member's final salary pension should that member die. In many cases a spouse will receive 50% of the income the pension member was receiving on death – but again, this is not guaranteed. Due to the increasing liabilities that pension schemes are facing, many are now changing the terms in which spousal benefits are paid.

Such changes include amending the amount of annual increases the spouse will receive annually on the pension, pension reductions for considerably younger spouses (more than 10 years), and declining spousal pensions if the spouse is a non-UK domicile and the marriage was not registered in the UK.

Nigel Green is founder and chief executive at deVere Group

This feature was written for our sister website Money Observer

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Your Comments

Another issue with final salary schemes is that, unlike personal pensions that can be accessed from age 55 without penalty except for the loss of potential future growth, final salary schemes often carry penalties for taking the benefits earlier than the agreed retirement date. For those who face career issues in their fifties this can be a real issue as they may not have the option of taking retirement benefits as early as they may want to without heavy penalties.

Does anyone know if the money paid into a pension is secure particularly Defined Contribution in a similar fashion to the savings and if so what is the maximum compensation - thanks