HOW safe is your pension scheme? The question might never have crossed your
mind, but the collapse of Lehman Brothers with a potential black hole in its
final-salary pension fund shows that even gold-plated plans are far from
guaranteed.
It might have to call on the Pension Protection Fund (PPF), which caps
compensation at about £28,000 for those who have reached 65; less for those
who haven’t.
So high earners with seemingly generous final-salary schemes could stand to
lose tens of thousands of pounds per year if their company goes under.
Here, we look at what pension savers can do to ensure they achieve their
goals.
1 KNOW YOUR FINAL SALARY SCHEME
Payouts from public-sector final-salary schemes are cast-iron: the government
is unlikely to go bust. However, company-scheme sponsors such as
house-builder Taylor Wimpey are under particular pressure.
The deficit in the Taylor Woodrow pension scheme has risen by more than 150%
to £162.5m in the past three years, while the shortfall in its George Wimpey
scheme has risen by 45% to £215m.
Total deficits of the 200 largest final-salary schemes now stand at £22
billion, Aon Consulting said. Despite that, two-thirds of firms plan to
contribute less to pension funds next year.
Check your company’s annual report and accounts for its pension scheme’s
funding or write to the trustees for a summary.
2 KNOW YOUR PROTECTION
Members of final-salary, or “defined benefit”, schemes in the red when their
companies go under — as is possible with Lehman — stand to lose at least 10%
of their pension fund if they are still working or have retired early.
The PPF pays up to 100% of benefits to members over their scheme’s normal
retirement age, and 90% to those below that, including those who have taken
early retirement (unless for ill health).
However, this is subject to a maximum of almost £28,000 at 65. Compensation
falls with age, so if you are 50 when your employer fails, the most you will
get is about £21,000, at 55 £23,000 and at 60 £25,000.
Ros Altmann, a pensions consultant, said: “Of all the companies that have gone
into the PPF, Lehman is the most likely to have people affected by the cap.
There are several cases of people who’ve taken early retirement and thought
their benefits were safe, but face falls of up to three-quarters.”
If you are in a money-purchase occupational pension scheme — also known as
“defined contribution” plan — your funds are ring-fenced from your employer.
People with personal pensions, such as stakeholder and self-invested personal
pensions (Sipps), could claim for 100% of the first £2,000 and 90% of the
rest from the Financial Services Compensation Scheme (FSCS), if the insurer
were to go under.
3 CONSIDER UNLOCKING FINAL SALARY BENEFITS
If you have concerns about your employer’s likelihood of survival and its
final-salary scheme is poorly funded, you could think about transferring
your benefits out, especially if you’re hoping for pension payments of more
than the PPF compensation cap.
However, it’s not for everyone. Rashpal Bhabra at the consulting actuary
Watson Wyatt said: “Transferring to a personal pension policy means taking
on investment and other risks which would otherwise have to be borne by the
employer.
“It’s quite possible that by taking a transfer value, the proceeds will buy a
smaller pension at retirement than not only the scheme pension, but also the
pension that the PPF would provide.”
Those aged over 50, especially deferred members — those who have accrued
pension benefits, but no longer work for the company — could unlock their
entitlement to 25% of their fund as tax-free cash if they are worried their
employer will go bust.
4 DIVERSIFY PENSION ASSETS
You could contribute a lump sum or make regular payments into a personal
pension rather than a final-salary scheme. You can pay in as little as £25
or up to 100% of earnings, subject to a cap of £235,000 per year.
This cap includes benefits accruing in other pension pots, so ask your
occupational-scheme administrator for an assessment of the value of
contributions.
“The beauty of this is that it’s in your name and has nothing to do with your
employer,” said Malcolm Cuthbert at the financial-services firm Killik &
Co. Think, too, about building up other assets and making use of all tax
breaks. You can shelter up to £7,200 a year in Isas, £3,600 of which can be
in cash — £14,400 per couple.
“If you want a round-the-world cruise you have the flexibility to draw down
the money,” said Stefan Wissenbach at the financial planner Wissenbach
Group.
5 THINK LONG-TERM
When Lehman filed for bankruptcy, markets wiped £9 billion off the 200 largest
privately sponsored pension schemes. That might appear alarming, but if you
have 10 years or more until retirement, don’t panic. “Investments work in
cycles and losses will be recouped over time,” said Jerry McLoughlin at
Punter Southall Financial Management.
6 KNOW YOUR GOALS
Most retirees no longer have a mortgage or children’s education costs to meet
and often spend more on holidays and leisure pursuits. The first step in
retirement planning is deciding realistically what sort of lifestyle you
want, how much income you would need to fund it and how much you therefore
need to save (see table).
7 START SAVING EARLY
The figures in our table might look high, but compound interest — interest on
interest — means they are achievable if you start early. A 20-year-old
aiming for retirement at 60 would have to save £833 a month. Someone
starting saving 30 years later, at 50, would have to fork out eight times
more — £6,666 per month.
8 LET YOUR EMPLOYER PAY
Employers with defined-contribution schemes pay an average 6% of workers’
salaries into the fund.
Workers have to pay in a typical 4% of salary — £960 on an average salary of
£24,000 for a total contribution of £2,400, which makes the figures look
more achievable. Those who don’t join a company scheme could miss almost
£69,000 in company contributions over 43 years, Punter Southall said, buying
an annual income of £7,032.
9 GET GRANDPARENTS TO HELP
Up to £3,600 per year can be saved in a pension tax-free on behalf of
children. Stashing away the maximum every year from birth to 18 would yield
a pension fund of £1.31m at 60. That is almost twice as much as the £659,000
pension pot that would accrue if you saved £3,600 per year for 42 years from
age 18 to 60, said Axa Sun Life.
10 MAXIMISE CONTRIBUTIONS
If your savings do not come up to scratch, the solution is to save more, said
financial planner Towry Law. Most company money-purchase schemes offer the
chance to make additional voluntary contributions.
These are mostly cheaper than a separate personal pension and can help to
build valuable pension guarantees. Many AVC funds are ring-fenced from
insolvency.
The pay-off
The Pension Protection Fund pays up to 100% of benefits after retirement. For
those yet to retire, or in early retirement (except for ill health), it pays
up to 90% with a cap of nearly £28,000 at 65. If 50 when an employer goes
under, the most you get is around £21,000.
I retired early from T&N on a pension 50% of my final salary years before the PPF was invented. When T&N entered PPF assessment I and 32 colleages had our pensions reduced overnight by more than 50%. We are the only group to have pension in payment reduced. Those who reach NRA get 100% from PPF.
Fred Heaton, Walsall,
Does Government bail out investors in Northern Rock because it was not the investors who made bad decisions. Well in the case of lost pensions the ombudsman says it was maladministration by government. Despite the PPF the early retired have lost the majority of their pensions
Fred Heaton, Walsall,
The only people who have platinum pensions are government employees and ministers. Their pensions are underwritten by the tax payer but those who retired before the PPF was even invented still lose the majority of their pension when the firm they worked for goes bust. I know I lost most of mine.
Fred Heaton, Walsall,
This article correctly says today you can take steps to avoid the PPF cap should your pension scheme go bust in the future. But those who retired early and before the PPF became law lose the majority of their pension. They had no chance to avoid the retrospective effect of the compensation cap
Fred Heaton, Walsall,
Question - Whats the difference between investing in a bank and a pension scheme whent hey go bust
Answer - In one the government underwrites 100% no matter how old you are. In the other the government lifeboat PPF pays 100% if you are over 65 but you lose 50% plus if you retired early.
Fred Heaton, Walsall,