Welcome to the UK pensions saving casino

Picture a shabby casino whose lights are grubby and dim, making it tricky to get a clear view of what’s going on. There’s a sordid air about it, a palpable sense of despair at repeatedly handing over piles of cash only to end up empty-handed. A weary resignation pervades that, in reality, only the House ever wins.

This isn’t any old seedy rundown joint, though, it’s the UK pensions saving casino where most of its millions of working citizens must play if they want to build a lump sum big enough to provide a private pension in retirement.

Given the slow-burning national unease about inadequate pension provision, it might seem faintly ludicrous that the majority of today’s savers – bar those in final salary schemes – must take such a huge gamble with their money. Yet most investment in a so-called ‘money purchase’ pension fund – whether occupational or personal – to build a pension pot lump sum worth swapping for an annual income, or annuity, for life is precisely this.

Let’s line up the three worst bets where, frankly, the odds look terrible.

First, put uber-bluntly, you can lose a great chunk of it in a flash: the old adage about investing in shares being “a good thing” over the long-term can be chewed up and spat out in an instant.

According to the latest Barclays Equity/Gilt study, an august annual report on the comparative value of long-term returns, equities put in an annual 4.6% return in the 20 years to 2009.

Yet gilts, paying out interest on government bonds, pipped them with an annual 5.4%.

Take the horribly recent example, when the staggering stock market slump early last year saw the FTSE-100 sink towards a six-year low of 3,600 after previous freakish 10% daily drops, many whose ordinary pension fund was invested in equities took a searingly painful hit.

In particular, for those in the latter stages of their pension saving – and especially those who fretted and moved their pension money into cash to protect their nest-egg, missing out on the eye-popping rally that followed – years of returns were obliterated at a stroke.

Second, the fees and other charges can make mincemeat of your returns – in some cases of up to 40%.

Typically, a saver who manages to stash a monthly £200 for an impressive four decades of work – a total of £96,000 – might amass a £497,000 pension pot with a generous annual growth assumption of 7%.

Yet the insurer’s management fees of more than 1.5%, including arcane administration charges, could eat up more than £150,000 of this – a giant sum.

And thirdly, annuity rates can make a mockery of your hard-sweated cash.

Using comparison tables from the Financial Services Authority, the City regulator, a non-smoking woman retiring at 60 with a not inconsiderable £150,000 pension pot could today expect a maximum £695 a month.

If she were to fireproof it against inflation, the same provider would offer her £458 a month instead – barely £100 a week.

Pull these three giant fruit machine levers together, and your pension payout can be badly damaged.

It’s no better for those in no financial position to save into a private pension.
Means-testing on pension benefits remains fraught with hideous financial complexity and confusion, with the unwelcome consequence that many don’t claim for what’s due to them.

Worse, its application to the planned National Employment Savings Trust (Nest) – the new semi-compulsory pension scheme aimed at coercing lower earners into private pension saving – could end up leaving some retirement savers worse off, since they may have been financially better off spending instead of saving.

And that’s not even starting on how much saving would be needed to close the gap of £25 to £30/week between the basic state pension and the minimum income triggering government benefit payments.

A lament for the final salary – an expensive patrician solution that has sadly had its day – would be wrong given its unsustainability but its hasty demise has left a harrowing hole.

Few savers properly grasp how every ounce of pensions risk now lies squarely on their shoulders, and are ill-equipped to scrutinise opaque pension schemes, legalese and obscure pension fund performance charts.

No wonder that pension planning for many has begun to slide out of focus and slip into ever wilder gambles such as hopes for an inheritance then used to buy an annuity, or reliance on a string of cash ISAs built up over decades.

Success at the pensions casino continues to elude all except the very wealthy who can afford to keep on slotting extra coins into the machines, and expand into property, bonds, shares and other investments alongside their pension fund.

Of course, it’s early days for the new Con-Lib coalition – the latest political incarnation to try and get a handle on pensions – and more of the same appears set to be served up.

Yet a ground-breaking review of the way UK pensions are provided is desperately needed – similar to the Retail Distribution Review for independent advice – one that uses consensus to analyse historical success (or otherwise) in other nations for guidance to thrash out a new template.

Our retirement is simply worth more than a throw of the dice.

For more on penions please click here

Sam Dunn is a freelance consumer journalist who writes on all aspects of personal finance for national news websites, newspapers and magazines. A former Personal Finance editor of The Independent on Sunday, he was named ABI Freelance Financial Journalist of the Year in 2008. In 2006, won the Headlinemoney Consumer Journalist of the Year award and in 2005, scooped the Harold Wincott Foundation Personal Finance Journalist of the Year honour.