(Photo: Reuters)
(Photo: Reuters)

The most common myth about UK private pensions is that final salary defined benefit schemes are guaranteed.

After 368 consultations over the last 12 months with potential and new clients, we compiled a list of the three most frequent pension misconceptions.

The second most commonly held incorrect assumption was that final salary schemes always increase in value each year.

The third that final salary schemes automatically provide for spouses and dependants when the member dies.

From our consultants' and advisers' conversations with potential and new clients it has become clear that there is a lot of misinformation and, in some cases, downright lies in the public domain about UK private pensions.

This must be addressed urgently as it could seriously compromise people's long-term financial planning strategies.

The myths need to be busted.

Will Your Company Exist in 10 Years' Time?

Of the erroneous understanding that final salary, or defined benefit, pensions are guaranteed, this is simply not true in the vast majority of cases.

Defined benefit (DB) schemes are, by their very nature, reliant on the financial stability of the members' firm. The question someone, especially a younger worker, should ask themselves is 'will my company still exist and be financially sound in three or four decades' time when I come to draw my pension?'

Also, it should be remembered that pension formulas can, and often do, change over time and such modifications can significantly alter how much a member accumulates in their pension fund.

Truth About Value

Of the second most common myth is that DB pensions always annually increase in value.

Our senior technical advisor, Reece Fallaize, says that 'while the value on paper may indeed increase, what members need to bear in mind is the real return that is being achieved after inflation has been taken into account."

"The majority of pension schemes are now applying increases in line with consumer prices index (CPI) rather than retail prices index (RPI) and the government forecasts that CPI will be 1.2% less per annum than RPI over the long term."

What Will Happen If You Die?

And thirdly, of the belief that spouses and children will receive a member's final salary pension should that member die.

In many cases a spouse will receive 50% of the income the pension member was receiving on death - but again, this is not guaranteed.

Due to the increasing liabilities that pension schemes are facing, many are now changing the terms in which spousal benefits are paid.

Such changes include amending the amount of annual increases the spouse will receive annually on the pension, pension reductions for considerably younger spouses (more than 10 years), and declining spousal pensions if the spouse is a non-UK domicile and the marriage was not registered in the UK.

Nigel Green is the CEO at The deVere Group, which is the world's largest independent international financial consultancy group.

Within excess of $9bn of funds under administration and management, deVere has more than 70,000 clients in over 100 countries.