Published on February 19th, 2015 | by Pete1
John Lewis to axe final salary pensions – bad news or good news for retirees?
The news broke earlier this month that John Lewis Partnership were to axe their generous final salary pensions that were previously offered to all John Lewis and Waitrose employees. While they are not moving to an exclusive contribution-based pension scheme, but a combination of final salary and contribution-based, many still feel this is a blow to future workers.
In order to get an expert perspective on the matter, we spoke with Gary Singh of Sigma Wealth Limited, an experienced, independent financial advisor about what this meant for workers in the future:
“Virtually every firm is moving away from final salary pensions. We’re living longer and working a lot longer, so schemes are becoming more and more expensive to run”
It’s no surprise that companies are moving their employees away from final salary pensions. Many are typically paid at 1/60th of your final salary, multiplied by your years in the scheme. With life expectancy on the rise, employers are struggling to keep up the payments to their retired employees.
Supermarket giant Morrisons, who also axed their final salary pensions recently expect to save between £5 million and £10 million per year by moving their employees into defined contribution schemes.
“The onus is now on the individual to make their own provisions so seek professional advice. Before you never had to worry about your pension but that’s no longer the case.”
Final salary pension schemes were extremely common in the past. Now they are 10 times more likely to be found within the public sector.
It’s worth investigating what sort of annuity rate you could receive, or researching more into income drawdown options for retirement rather than relying on a final salary pension these days.
“Invariably you will be worse off as you’ll have to contribute more for your returns.”
You will have to start making your own contributions to build up your pension fund. In order to boost your savings, the government has introduced the workplace pension scheme. As well as rolling out auto-enrolment across the country’s workforce, whenever your pay into your pension, your boss and the government will also have to pay in too. It’s akin to a pay rise, but without access until you turn 55, when you should have built up a health nest egg.
“Come April, once you retire, you’ll have access to your entire pension fund, rather than relying on a company to pay out your pension.”
Here’s where the demise of final salary pensions gets interesting. Final salary schemes held many similarities with annuity products: you received a set income for life, paid in regular instalments, at a rate based on your pension’s value.
The new rules coming into effect on 6 April 2015 will allow retirees to access their whole fund via a method called income drawdown. Unfortunately, those in final salary pensions won’t be able to take advantage of this. Fortunately, many companies are now offering incentives to transfer out of their schemes, into a defined contribution scheme – meaning you can take advantage of the reforms.
“We’ve seen people being offered between 20 and 25% on top of their pension fund value as an incentive to leave the scheme. I know of somebody who was offered £18,000 at the age of 62 to transfer out of their final salary pension scheme.”
Cash incentives like this aren’t uncommon. While transferring to a defined contribution scheme will see you hit with fees, if you are going to be losing value from your pension fund it is worth raising the idea with your employer. Because you could be reducing their risk and long terms costs they may offer some sort of incentive as a compromise.
“With a final salary pension, if you die your heirs may not fully benefit from your scheme – a spouse may be offered half of its value. But once they die, the money cannot be paid out to any other heirs. By transferring out, your money is available to pass on as you wish when you die.”
Another benefit of transferring out of your final salary pension scheme following the pension reforms. Income drawdown leaves you responsible for your pension fund; if you die, it can be passed on to whoever you desire, without substantial loss for your family and loved ones.
“Be more pro-active when it comes to your pension and even expand your own knowledge by seeking professional advice, especially with the changes coming into effect.”
Pensions are one of the biggest financial concerns you are likely to have in your lifetime. While there is a wealth of guidance online, nothing compares to professional advice from an IFA. All advice will be personal to you and your situation, and any legal pitfalls can be avoided with the services of a trusted advisor.
Ryan Smith is one of the content writers at Compare Annuity, working with a carefully selected network of annuity specialists offering retirees free, no-obligation quotes and advice on annuities. Gary Singh is an advisor at Sigma Wealth Management in the West Midlands.