For many, a pension plan seems like a great way to pay for retirement.
Unlike a 401K, both you and your employer contribute to a pension. Most companies will pay in between 3 and 10% of your annual salary every year. It’s recommended that your own contributions should round this up to 15% of your salary to make sure you have the best retirement plan.
Pensions can also guarantee a certain amount of monthly income in retirement, and the investment risk is on the plan provider. With a 401K, there are no guaranteed benefits.
Knowing all that, it might seem like a pension is your best retirement plan option. Think again.
You don’t control your money.
Surveys from the National Employment Savings Trust (Nest) found that consumers wanted reliable pensions, but associated the industry with corruption and incompetence. And they’re absolutely right.
Pension scandals happen all the time, with devastating results. Remember Robert Maxwell? He was the owner of Mirror Group, and famously plundered £440m from his employees’ pension funds. This affected 30,000 people. Most of the money was refunded by Mirror Group. The consequences for those involved? A veritable slap on the wrist.
Just a few years ago, and long after Maxwell’s death, Mirror decided to cut pension contributions to repay debts owed to American bondholders. Pension trustees approved the deal, because there was no other option, resulting in a £300m pension deficit.
The bottom line? You’re not in charge of your money when it’s in a pension. Whether or not they pay out depends on the whims of the company you work for, how much debt they have, and how corrupt the executives are. In other words, it’s out of your control.
How long do you plan to live?
Most pensions can be a great way to fund your retirement, as long as you plan to live well into your eighties.
The Association of British Insurers (ABI) did a survey and revealed what an ugly deal some pensions can be if you kick the bucket early. Take Scottish Windows/Clerical Medical for example. For the average worker, they would pay out £16,790.40 over the course of 20 years. That’s more than £1,000 less than the person gave to the company in the first place. The Guardian did the math, and that would mean a 65-year-old pensioner would have to be nearly 87 before even getting their money back.
All pension plans are based on life expectancy. So if you never smoked, have no heart disease or other indicators of early demise, you’ll probably need to live a very long time before you start getting any real payoff from pension funds. If you’re a lifelong smoker in surprisingly good health, you’re bound to get a better deal.
The writing on the wall.
Thanks to legislation that led to Pension Benefit Guaranty Corporation (PBGC), you’re supposed to be protected from pension failures. Almost all private pension plans are required to participate in PBGC by paying per-worker annual premiums that insures pensions into insolvency.
But by assuming high interest rates and low life expectancies, many pension plans promise more money than they can pay. In turn, PBGC is guaranteeing more than it can insure.
The problem has one of two solutions:
- Drastic pension cuts, or
- Massive taxpayer bailout
The writing on the wall: The legislators want to have you covered, but don’t. And you don’t want to wait around and see if your pension fails or not.
I know you’re wondering: If I shouldn’t trust my pension, then what’s the best retirement plan for me? Check out some other blog posts and resources on this site to learn more.
Ian Bond is a private banking senior executive with over three decades of experience in wealth and asset management with Goldman Sachs, Credit Suisse, and Citigroup. He has built major businesses on four continents.
Despite his professional responsibility for assets over $100B and revenues over $1B, after the 2008 crash Ian was personally going broke. Within five years he destroyed his debt, became an expat in 2014, and built multiple streams of income to fund his imminent retirement. Ian is also the founder of MyRetirementRehab.me created to help other executives and professionals rehabilitate their finances and make a prosperous, enduring retirement a reality.