Pensions - What Should I Do ?

Moneyman asked:


Over the past few years, final salary pension schemes have witnessed volatility in equity markets and a retired workforce that is living longer. Add the two together, and what was once a healthy pension scheme became a huge liability, carrying significant deficits.

To reduce the liability, one by one, companies closed their final salary schemes to new members. The rules of some existing schemes were also amended to require higher contributions to be made.

This means that the number of employees retiring with a pension that pays around 50% of their final salary is forever reducing, and is a trend that will not be reversed. Granted, the number of people staying with the same firm to amass forty years of service to qualify for the maximum pension is also reducing. Greater movement in the labour market will also be a contributing factor in lower pensions at retirement.

So where does this leave employees? Companies that have moved away from final salary pension schemes have turned to offering defined contribution or money purchase pension schemes. Here the employer and employee pays contributions into the scheme, more than likely based on a percentage of current salary. The premiums are then invested in pension funds that can range from with profits to UK equities to Far East funds. At retirement the amount in the kitty depends on the level of contributions but also on how well the funds have performed, increasing the risk to the employee.

The big difference is the level of contributions paid into the respective schemes by the employer. A typical final salary scheme may have received 15% - 20% from the employer with employees paying 5% or 6%. The money purchase scheme will require the employee to contribute at a similar level but the employers premium may have reduced to 5% also, that is to match the employees contribution.

It gets worse still for the employees whose company now offers a stakeholder pension scheme, whereby the employer contribution may be in the range of 0% to 3%.

It’s not difficult to see the impact this has on the pension pot. With contributions to money purchase schemes at least 50% lower than final salary schemes the amount of income it generates will drop by a similar amount. This could be less than the amount required to live on.

So from having 100% of salary many people face the prospect of receiving one quarter of that amount. Where does this leave employees in this situation? Well, neither option is easy to swallow. First, you work longer, putting back your early retirement at 55 to a more realistic 65. Another ten years at work definitely doesn’t appeal. The second option is to save more. Not always doable with rising living costs such as mortgages, utility costs and petrol, but saving as much as possible will help. For those lucky enough to be just starting out at work, the best option is to start a pension (or savings plan) as soon as you can.



Mary Jo

Martin Bamford asked:


It is generally accepted that we have a retirement planning crisis in the UK. The recent stock market volatility is causing more pension problems, with £19bn wiped off the value of the top 200 defined benefit pension schemes in the first half of March alone. Around 25 million of us have defined contribution pension plans - either with their employer or as a private pension plan. The value of these plans are often closely linked to stock market performance.

Here are five questions to help you work out if your finances are in good shape or battered by the credit crunch.

Do you have a pension?

If your answer is yes, move on to Question 2. If no, the seriousness of your position depends on your age and whether you have any other savings that you could use in retirement. Readers under the age of 40 still have plenty of time to build up a reasonable pension fund. But if you are older, you need to start setting substantial amounts aside now.

What type of pension plan do you have?

Employees who have the option of joining a company pension scheme to which the employer makes contributions should grasp the opportunity with both hands. For those who don’t, a cheap stakeholder plan from Friends Provident or Clerical Medical is a good starter plan. If you want to make big contributions and have tight control over the investment of your money, you could consider a self-invested personal pension (Sipp) such as the one sold by Standard Life.

When did you last check the performance of your pension?

You need to keep an eye on where your money is invested and how it is performing to make up any shortfalls as and when they develop.

What are its charges?

Since April 2001, charges on some personal pension plans have been lowered but other plans still suffer from high charges that will eat away at the value of retirement benefits.

How much do you contribute?

Most people like to think they will retire on an income equivalent to two-thirds of their final salary, but few end up with that. Check how much you need to save according to your age, salary and expected retirement age at pensioncalculator.org.uk.



Enrik