Pension System Baffles Over Half Of UK Population

Over half of the UK population does not understand how pensions work, when they can access their money and how their money would be paid to them.

According to recent research by, 56% of the UK is unaware of how the pension system works at a time when people are paying in too little which will affect their quality of life after they retire.

The 2,500 people polled were unanimous (88%) in their opinion that the £129.20 weekly UK State Pension is not enough to live on in their old age with 46% concerned that it would not get anywhere close to covering their monthly outgoings.

Given the relative frequency of changes to the UK state pension age in recent years it was unsurprising that 68% of respondents were unaware of the age they would need to be to receive their pension and over half (51%) were not aware how the pension would be paid to them.

The public were also naive to how and when their money from a pension would be paid. A quarter of people thought their private pensions would be paid in a one-off lump sum whilst there was clear confusion as to the frequency of payments a person will receive.

22% thought the money would be paid monthly, 10% envisioned fortnightly payments, 20% considered state payments to be weekly whilst 19% thought payments were adhoc and made as and when a person needed them.

The research highlights a potential property difficulty many retirees are having because they have not contributed enough into their pension pot to cover some mortgages in later life.

According to Royal London research, hundreds of thousands of interest-only borrowers are coming to the end of their loan agreements within the next five years and do not have a clear and obvious way of paying off the capital balance.

The Financial Conduct Authority (FCA) found that 10% of all interest-only loans do not have a repayment plan with 50% of loanees likely to suffer a shortfall.

In December 2018, 550,000 borrowers over the age of 55 had taken out an interest-only loan; making up a third of the 1.66 million total.

Royal London suggest that this figure indicates 275,000 borrowers approaching retirement will struggle to acquire a retirement interest only (RIO) loan and will therefore face working beyond their intended retirement age, forced to downsize or consider equity release.

Royal London further speculated that an average UK earner will need to have accrued around £260,000 into their retirement pot. If the earner wishes to take out a RIO loan, an additional £118,256 will need to be paid into the pension scheme if they are to successfully service the debt until they die.

Over 12 million people are failing to save enough money to cover basic living costs during retirement, let alone pay enough in to help service the interest on a RIO loan. This will mean the majority will fail strict ‘affordability tests.’

Currently, tests are based on the total pension income once the main breadwinner dies as opposed to the joint income or higher earners income whilst the borrower is alive. This makes the criteria very different from most traditional mortgage affordability tests. Given the fact that pensions can depreciate once a person dies, the pension pot needs to ensure it can cover the debt, even in the case of the person’s death and the reduced income.

George Charles, spokesperson for said:

“When it comes to a workplace pension, you contribute and your employer contributes and then the government contributes with a separate state pension.

“No matter what your financial commitments are, or how comfortable you are financially right now, a workplace pension will be beneficial later on in life, and it’s now mandatory for all UK businesses to offer this to employees that are eligible for automatic enrolment.”

How important is a basic understanding of the pension system? Should the UK public be better informed about the importance of a pension in later life?

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