I was at a cocktail party last night and inevitably the conversation turned to "what do you do?" I'm a pensions lawyer, I replied, thinking that, as I wasn't in a cab, I was on safe territory. Big mistake. "Oh, maybe you can help me; do you think I should get a pension?" I told her I thought she should, hoping we could move swiftly on to sex, drugs and rock and roll. However, the lady was in earnest; "I'm worried, I think I probably should have one, but I just don't know what to do".
I said I thought there were three good reasons why she should consider a pension. First of all, if she starts now (she was a 35 year old lawyer) then in 30 years' time small monthly payments can become significant sums of money later on (little acorns and all that). Second, there are good tax relief reasons why she should contribute to a pension and finally her employer might be prepared to contribute something.
"Oh", she said, "Yes, my employer will match my contributions; I've been with them for ten years, but have never bothered". I nearly fell over. What on earth was this person doing?! She had essentially missed out on free money from her employer for ten years simply because she couldn't, in her own words, "be bothered". Affordability wasn't an issue. She said that she just never planned to stay with her employer that long and she didn't want to contribute to a scheme which she couldn't leave. I was horrified. There is still so much people don't know. I told her she could leave at any time and take her pension with her.
Pensions are still regarded as incredibly complicated, scary and boring. We need to dispel the myth that investing in a pension scheme is hard work. For the woman at the party, the advantages of receiving valuable matching contributions from her employer had not got through. She had lost out on 10 years' free money between the ages of 25 to 35.
However, this kind of ignorance and confusion can result in far more heart-breaking outcomes. The Pensions Regulator's recent updated material, which now describes so-called pensions liberation as "scams", highlights stories of a much darker nature. One particular case struck me as desperately sad. It was not your typical scam involving a 40 year old trying to cash in their pension before the statutory minimum age of 55, but a 60 year old member.
The member was suffering financial hardship and thought he had to wait until age 65 before he could start drawing his pension. In fact he could have asked to draw his pension early from age 60, subject to a small reduction in the amount he would receive each month (because it would have to cover a longer period). However, he didn't know this and was persuaded to hand over his entire pension pot to a fraudster (and was also hit with hefty income tax charges for breaking HMRC's rules).
The younger generation find pensions particularly mystifying and continue to put saving off, thereby missing out on valuable years of investment growth. Some people who have a pension just switch off, don't know their rights and are happier speaking to someone who has sent them an unsolicited text, rather than ask the professionals who actually look after their pension scheme for information about their options.
A huge amount of education is needed at the most basic level. The advantage of investing in a pension, particular for young people, needs to be spelled out. Once they have a pension, the portability of the pension and how they can manage it, needs to be reinforced. The attraction of investing in property, which is a more tangible asset, will always be attractive to young people. However, when an employer offers to match your pension contributions, it is almost criminal not to take the opportunity.
This area is going to become even more complicated with the new pension freedoms are introduced in April 2015. I have already been through two waves of mis-selling and see this as another danger area. Preliminary research shows a large number of members plan to take their entire pensions pot as a cash lump sum at retirement when the changes come into effect. I wonder if they know about the tax charges that are going to be applied when they do this. Do they realise they will lose an index linked (inflation proofed) form of income? With only five months to go, the pensions industry has a responsibility to ensure the information people receive about their retirement options is simple and in plain English, otherwise we are going to take an enormous step backwards.
Katherine Dandy is a partner at Sacker & Partners LLP