Seniors Network - Money Channel

The outlook is worsened by signs that the amounts being saved into occupational pensions are falling. Research from the TUC shows that the number of workers in the best kind of occupational pension - known as "final salary" or "defined benefit" schemes - has fallen by almost two million in the last ten years.

In these schemes the member of staff knows the pension they will get at retirement, which can be up to two thirds of their salary depending on their length of service. A host of factors has caused increasing numbers of employers to abandon these schemes for inferior ones.

In the increasingly common schemes, known as "money purchase" or "defined contribution" schemes, the employee knows nothing of what they will get out at retirement. Instead they know only what is paid in.

Many employers, including some of Britain’s top firms, are switching to new schemes which are often riskier.

Here we explain what is happening and what you can do about it.

What is happening to occupational or company pension schemes?

Defined benefits ditched? - Many companies are moving away from traditional schemes where they put money aside to pay employees a pension. These schemes are known as “defined benefit” or “final salary” schemes, where your pension is based on your salary at retirement and how long you have worked for your employer. Instead, companies are adopting schemes where they will still put money towards their employees’ pensions — but where the employee must also chip in. In these increasingly common schemes, known as "money purchase" or "defined contribution" schemes, the employee knows nothing of what they will get out at retirement. Instead they know only what is paid in.

Here your pension depends on how much you and your employer have paid in and, crucially, on how well the stock market has performed.

Why is that considered a problem?

Firstly, because companies are paying less towards their employees’ pensions, the employee must pay more. And not enough are doing that. Actuaries calculate that the average Briton in the new schemes will have to carry on working until the age of 67 72* to afford the same retirement as someone on the traditional schemes.
(*An analysis by the Pensions Policy Institute shows that unless the younger half of the working population saves more for retirement they will be forced into an awkward choice: either they can retire at 65 and accept a dramatic cut in their income, or they must continue working for another seven years).
Secondly, while returns from the stock market have been mainly good during the last decade, apart from the last two years, this may not be the case in the longer term. Some investment experts predict long-term returns from the stock market will be worse during the next 30 years. That again means we will all have to save harder.

NOTE: Last year 46 companies decided they could no longer afford the superior "defined benefit" pensions for all their staff. They closed their schemes to new staff, who were offered "defined contribution" schemes. In many cases, companies would contribute much less to the new schemes than they had to the old.

Why are companies making these changes?

Old-style pensions are no longer appropriate to modern life because most of us will change employers at least once. Money-purchase schemes are more easily switched from employer to employer.
Because many of us are living longer, companies which have kept traditional schemes are having to put more money aside for pensions — which is very expensive.
New rules to blame? the Government has introduced a new rule, called FRS17, which orders companies to come clean over the strength of their pension scheme instead of disguising it in the accounts and smoothing out any weaknesses over time. This hits profits and has prompted many companies to make the change before the new rule comes in.

Which companies have made these changes?

BT, Ernst & Young, Marks & Spencer, Iceland, Sainsbury’s, Legal & General, Lattice, Lloyds TSB and Barclays have all recently closed their traditional pension schemes. It means new employees must join the new ones.

They are far from being the first to do so. Last year, 21 British companies ditched their defined benefit pensions not only for new staff, but for existing employees too.

Why do I need a company pension scheme? Is the State Pension adequate?

At present the State Pension is well below living requirements and is means tested. The value of the state pension has been eroded to the point where it can only provide the most basic of incomes. And, 20 years from now, it has been suggested, the state pension may no longer even exist.

So what is the Government doing about all this?

It has made matters worse. In 1997, Chancellor Gordon Brown removed a valuable tax break from company pension funds which cost them an extra £5billion a year. He has also consistently refused to change the rule forcing people to buy an annuity, a type of insurance, when they retire.

These products give you a fixed payment every year depending on how much you have saved but are linked to interest rates.

Because interest rates are currently low, so are annuities, which makes it harder to get a decent income from them — even if you have saved a large chunk of money.

Calculate your pension payments - How much do you need to contribute to earn your desired pension value.

How much to save to get
a pension of 60% of salary at 65

age 25 - 10-15%

Age 30 - 12-17%

Age 35 - 15-20%

Age 40 - 17-24%

Age 45 - 23-3-%

Age 50 - 32-45%

Age 55 - 50-70%

When you die, the insurance company keeps any money left over instead of passing it to your loved ones. (Grand Theft!!!!)

What should I do if my employer changes their pension scheme to the new system?

It depends on what your employer does to the existing scheme. In some cases, employers are continuing them for existing staff, though not for new ones, in which case you will be OK.
In other cases, employers are freezing contributions in the existing scheme — with the money put aside for you continuing to earn interest. In those circumstances, you will probably be offered the chance to switch to an alternative money-purchase scheme and to switch your existing payments into it.

In most cases, experts say you should leave your money where it is, while beginning payments into your new pension scheme. Above all, though, try to save more towards your pension.

The message for us all, as far as our pensions goes, is that each individual must look after themselves! However it is becoming even more obvious that future generations will need a basic pension buffer - We believe that it is imperative that the State Pension is retained.

CHECK LIST FOR DEFINED BENEFIT SCHEME MEMBERS

If you are in a defined benefit scheme and your company is proposing to change your company pension:

Ask if the change applies to existing staff as well as new staff
If it applies to existing staff, ask if employer contributions are likely to be lower under the new scheme than under the old
Determine if it represents a change to the original terms and conditions of your employment
If it does, check with a lawyer and/or union representative to determine if further action is appropriate.

The best pension advice we can offer anyone is to:

Become a Member of Parliament
Then you can increase your pension when you feel like it ! Did you know that it is index linked? To Earnings?
see article below by Ken Lacey of Weston Super Mare Senior Citizens Forum

It is not surprising that when an MP gets to Westminster he, or she, loses touch with reality.

With a salary for a back bencher of £60,000 plus £120,000 expenses I would imagine life does take on a different dimension, particularly if they havent been too successful in private life.

Add to that a pension pot of £140,000 after five years service if you are there for twenty years your pension pot swells to £670,000. The Prime Minister, of course, receives an £85,000 pension the day he leaves office.

I dont have a problem with that. However, I do have a problem with the fact that they consider that we, the pensioners, are THE PROBLEM because we are living too long and, therefore, it is extremely difficult to give us an adequate pension to cover the essential ever increasing necessities of life. This is the most outrageous statement I have ever heard, they are actually blaming us for their own inadequacies and incompetence.

Pensions have been ignored by Governments in the past. Now the day of reckoning has dawned on them. Many are finding their hard earned cash put aside for their golden years in private pension funds is not going to meet their expectations and the endowments they took out are not going to cover their mortgage