Employers’ negotiating skills could prevent a cut in pension income

Employers’ negotiations could counteract poor pension choices, increasing an employee’s retirement income by 17%, according to research by the National Association of Pension Funds (NAPF) and the Pensions Policy Institute (PPI).

The report looked at how decisions made by employees could affect the pension of an average earner due to retire in 2055 at the age of 68.

Factors included paying more into a pension, starting saving earlier, and working longer.

The report found that poor choices, such as high charges and the wrong choice of annuity could cut an employee’s pension income by a quarter and mean they would have to spend years longer at work.

However, charges for stakeholder pensions are capped by law at 1.5% for the first ten years, then 1% thereafter.

By an employer negotiating a pension with the long-term 0.3% rate offered by some major providers, an employee could increase their retirement income by 17%.

People who stayed with the higher charges would need to work three years longer to get the same pension as those who benefited from a pension with charges of 0.3%.

The report also showed that converting a pension pot into an income using the lowest rate quoted on open market tables rather than the ‘best buy’ could reduce pension income by 12%.

To make up for this loss people would have to retire two years later than if they had picked the best rate.

The report found that saving into a pension from an early age, paying more into it, and working longer could significantly improve an income in retirement.

Through a series of positive choices and factors, an average earner could expect an annual retirement income of £2,200 to be more than tripled to £7,710, in 2011 earnings terms, on reaching state pension age (68) in 2055. The seven factors and the amount of annual pension income they can add to this scenario are:

  • A lower charging pension scheme: £630 more
  • Purchasing the best annuity: £850
  • Opting into a pension from the age of 30 instead of 40: £990
  • Paying 1% more in employee pension contributions: £390
  • Increasing employer contributions by 1%: £390
  • Working one year after State Pension Age: £550
  • Annuitising the whole pension pot instead of taking a lump sum: £1,710

Joanne Segars, chief executive of the NAPF, said: “People are not powerless when it comes to their pension. By making the right moves they can get a lot more for their money without having to pay any more in.

“High charges can eat away at a savings pot and both workers and employers should try to keep them down.

“The annuity system can seem complicated but savers can help themselves by shopping around to get the best possible rate.

“People who do not get the best out of their pension could end up stuck at work for years longer than they planned. Getting a good deal on charges and annuities can mean the difference between enjoying retirement and spending years more at the desk.”

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