Bank of England's chief economist admits: 'Even I can't make the remotest sense of pensions' and says experts and advisors 'have no clue' either

  • Economist Andy Haldane is one of the country’s top financial officials
  • He told industry peers he couldn't make the ‘remotest sense’ of pensions
  • He said experts and independent financial advisors 'have no clue' either 

If you’ve ever found yourself utterly baffled when grappling with your pension pot, you are not alone – the Bank of England’s chief economist does not understand his either.

Andy Haldane, one of the country’s top financial officials, told industry peers he could not make the ‘remotest sense’ of pensions and said complexities in personal finance breeds mistrust of the system.

Speaking at the New City Agenda annual dinner, he said: ‘To give a personal example, I consider myself moderately financially literate. Yet I confess to not being able to make the remotest sense of pensions.’

Andy Haldane, one of the country’s top financial officials, told industry peers he could not make the ‘remotest sense’ of pensions

Andy Haldane, one of the country’s top financial officials, told industry peers he could not make the ‘remotest sense’ of pensions

He added: ‘Conversations with countless experts and independent financial advisors have confirmed for me only one thing - that they have no clue either. That is a desperately poor basis for sound financial planning.’

He said the problem was worsening over time and that there had been a shift towards individuals bearing risks of financial decisions rather than companies.

His remarks follow a string of studies which found that pensions are leaving the general public confused, with six in ten people saying they don’t have enough information on how to save for retirement.

The Government set up the Pensions Advisory Service to give advice to help people decide how best to manage their money in retirement.

The Government set up the Pensions Advisory Service to give advice to help people decide how best to manage their money in retirement.

Pensions freedoms introduced last year gave individuals the right to access money in their pension pot, and removed the need to take their money as an annuity – a regular, sometimes paltry, income over time.

But fears arose that the new freedoms could leave consumers confused, or short of money to live off if they splurged their pension pot too quickly.

The Government set up the Pensions Advisory Service to give advice to help people decide how best to manage their money in retirement.

A report in March found that most people need to double the amount they save towards their pension pot to 15 per cent of their income.

Last month the Financial Conduct Authority announced it will review the risks facing pensioners who are unprepared for retirement or ill-informed on how best to manage their savings.

The watchdog will open a new advice unit to help firms set up ‘robo-advice’ which sees customers get assistance from a computer, rather than a person.

Mr Haldane’s comments were made as part of a speech warning of the lack of trust in the banking industry as a whole.

He said trust had been eroded by the closure of local bank branches, where customers could build relationships with their bank manager. He added that the financial crisis then undermined trust of financial services in general, leading to ‘blistering resentfulness’.

He said: ‘Trust in banking had, by turns, suffered a double-whammy: first a slow puncture of personalised trust as banks retreated from the high street, then a high-speed blow-out of generalised trust as the crisis broke.’

This is Money's quick guide to pensions

There are two main types of pension that you will hear mentioned, defined contribution and defined benefit schemes.

These names sound like jargon, but simply describe how each pension works. 

Defined benefit schemes pay you a set annual income in retirement. The name comes from the fact that the benefit you receive is defined. 

These are often called final salary schemes, as they typically paid an income based on your earnings at the end of your employment with a company. However, defined benefit pensions can also include career average schemes, or other methods of setting the income paid in retirement.

The crucial thing to remember about defined benefit pensions is the employer has promised to pay out a certain amount of income every year on retirement and must take responsibility for that.

Defined contribution schemes do not promise any set payouts in retirement. Instead you must invest to build up an investment pot that can eventually be used to provide an income. The name comes from the fact that it is your contributions that are defined.

With a work defined contribution pension, people are usually able to decide how much they want to pay in as a percentage of their salary and their employer will match some or all of the contributions.

The money saved into the pension is invested, typically into funds that hold shares or bonds, and grows over the years to deliver a retirement pot.

Tax relief on pension contributions means that all but the highest paid can effectively save into their pension out of untaxed income. Everyone gets basic rate tax relief of 20 per cent automatically; higher rate taxpayers must claim the rest of their 40 per cent relief themselves.

There is an annual allowance on pension contributions that qualify for this of £40,000 and a total lifetime allowance limit on pension pots of £1million.

DEFINED BENEFIT PENSION

A worker agrees to pay in a certain amount per month into their final salary pension, say 6 per cent of their earnings. 

In return, their employer will pay them a set chunk of their final salary for every year they have worked there, such as one-sixtieth.

Someone who has worked at the company and been a pension scheme member for 40 years would therefore retire on two-thirds of their final salary (40/60ths)

DEFINED CONTRIBUTION PENSION 

A worker agrees to pay in a set amount into their defined contribution pension scheme, say 5 per cent of their earnings.

Their employer will match this, so 10 per cent of their earnings goes into the pension each month. 

The money is invested in stock market funds and the pot grows over the years. On retirement the saver must take their pot and buy an income with it or draw on it for one. 

 

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