Closure of Final Salary scheme

[Tempi1]

Dear Fools

My employer has just announced consultation of the closure of its Final Salary scheme to future contributions. So I'm being switched to its defined contributions scheme.

Other than the information I will be given and any .gov resources I can access, have any Fools got any advice as to the process/amounts I need to go through, or calculate, to understand the shortfall in my pension position. I'm 10-15 years away from retirement.

Many thanks

[tjh290633]

Presumably you know the amount of preserved pension you will get when you reach pensionable age?

What you need to do in your DC or SIPP is to build up a flow of income, reinvested to compound the effect until you retire. Set a target for that and work towards it. You may find log-linear graph paper useful.

TJH

[mearnsfool]

The numbers work something like this but you have to put your own numbers in.

I assume you company pension starts at 65 years of age.

I assume the company gives you 1/60 of your salary for each year worked.

I now take a rather large guess and say you earn £40,000 a year.

The company take 8% of your salary from your before tax as your contribution.

The pension would give you £40,000/60 for each year worked. Say £660 a year

To get a cpi annunity at 65 years of age to pay you £660 a year will be say 30 times that figure, if you are lucky but a bit less if you smoke, have high Blood Pressure and you are a good bit over weight. Let's say a gross figure of £20,000 a year before tax.

On £40,000 a year you pay before tax £3,200 a year contributions.

That suggests to me the company are puting in circa £16,800 a year above your contribution now you see why they want out of that game.

At best the new money purchase scheme will be say 8% salary from you and 8% salary from them.

That amounts to 16% of £40,000 or £6,400 a year paid into the new scheme where now it is nearer £20,000.

You are talking at best of say 30% of the benifit of the old scheme going forward for future years.

There is a shortfall of £13,600 a year before tax or £10,900 after tax if you a re a 20% tax payer.

Not a good bit of news.

If you are not good with numbers just post your numbers and I will recalculate the shortfall

[Alaric]

That amounts to 16% of £40,000 or £6,400 a year paid into the new scheme where now it is nearer £20,000.

The upside is that with the removal of the guarantee, the invested contributions can give a higher if less secure return. So rather than lend money to the UK government and get 1.5% to 2%, it can be invested in shares or property to attempt a 6% return.

[mearnsfool]

When I worked for a large oil company in 1998 a number of people were TUPE transferred out to Anderson Consulting.

The company gave them a pension transfer plus 25% to go into Andersen Consultings Pension scheme that was a money purchase scheme.

The company paid for the tranferred people to talk to a financial adviser and the advice was to take the transfer and every one did.

The advice was also that you may make more if the market is strong than keeping your funds in the final salary scheme!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1

I was not transfered out and I now recieve a very nice occupational pension from the oil company.

The money purchase scheme my friends went into tanked and I mean went very well down in value.

[Dod101]

That amounts to 16% of £40,000 or £6,400 a year paid into the new scheme where now it is nearer £20,000.

The upside is that with the removal of the guarantee, the invested contributions can give a higher if less secure return. So rather than lend money to the UK government and get 1.5% to 2%, it can be invested in shares or property to attempt a 6% return.

True but it must be very unsettling to be removed from a Final Salary Scheme to a money purchase nevertheless and financial advisers are not much use in that situation, see the post by mearnsfool. Taking the funds in a money purchase scheme and investing them conservatively (say in a HYP?) would seem sensible. And leave the accumulated benefits in the Final Salary Scheme come what may!

Dod

[Tempi1]

Many thanks to you all. Mearnsfool, I will have a play with numbers based on your figures, many thanks.

I've not yet got my Preserved Pension figure. I assume this is based on all current details, salary Etc. I realise there is no change to this figure going forwards by way of contributions Etc but does it every change/increase by way of inflation between now and when I start receiving the pension?

I'm trying to look on this as having some benefit, in that a money purchase scheme is more flexible for me as I'm unmarried with no dependants, and will offer me drawdown (depending on legislation at my pension age!), whilst my Final Salary scheme will stay as it is.

There will be an enhanced contribution period of a few years in the money purchase scheme, as compensation for loss of future Final Salary.

I'm a higher rate tax payer, is there still tax relief on contributions for higher rate tax payers?

I won't be anywhere near the annual cap on contributions(?£50k?), and I assume my Final Salary won't count towards lifetime allowance (Not that I'll be near that either).

Again, many thanks for your help

[Alaric]

I've not yet got my Preserved Pension figure. I assume this is based on all current details, salary Etc. I realise there is no change to this figure going forwards by way of contributions Etc but does it every change/increase by way of inflation between now and when I start receiving the pension?

It should be revalued upwards, exactly how will depend on the small print in the scheme rules. It's also likely to continue to increase once it comes into payment. Think CPI as the most likely index to be applied.

I'm a higher rate tax payer, is there still tax relief on contributions for higher rate tax payers?

It should continue to work in exactly the same way, presumably through your tax code.

I won't be anywhere near the annual cap on contributions(?£50k?), and I assume my Final Salary won't count towards lifetime allowance (Not that I'll be near that either).

Final Salary schemes count towards the Lifetime Allowance at 20* the annual income.

[XFool]

That amounts to 16% of £40,000 or £6,400 a year paid into the new scheme where now it is nearer £20,000.

The upside is that with the removal of the guarantee, the invested contributions can give a higher if less secure return. So rather than lend money to the UK government and get 1.5% to 2%, it can be invested in shares or property to attempt a 6% return.

And yet, once upon a time, this was exactly what all (DB) pension schemes did with their invested money! (Some still do.)

But we have been here before...

[ursaminortaur]

Many thanks to you all. Mearnsfool, I will have a play with numbers based on your figures, many thanks.

I've not yet got my Preserved Pension figure. I assume this is based on all current details, salary Etc. I realise there is no change to this figure going forwards by way of contributions Etc but does it every change/increase by way of inflation between now and when I start receiving the pension?

I'm trying to look on this as having some benefit, in that a money purchase scheme is more flexible for me as I'm unmarried with no dependants, and will offer me drawdown (depending on legislation at my pension age!), whilst my Final Salary scheme will stay as it is.

There will be an enhanced contribution period of a few years in the money purchase scheme, as compensation for loss of future Final Salary.

I'm a higher rate tax payer, is there still tax relief on contributions for higher rate tax payers?

I won't be anywhere near the annual cap on contributions(?£50k?), and I assume my Final Salary won't count towards lifetime allowance (Not that I'll be near that either).

Again, many thanks for your help

The annual allowance limit for pension contributions is now £40,000 though this may be decreased if you earn more than £110,000 see

https://www.aegon.co.uk/support/faq/pension-technical/tapered-annual-allowance.html

[genou]

I assume my Final Salary won't count towards lifetime allowance (Not that I'll be near that either).

Just for completeness - it will count. Its value in the calculation is pension payable * 20 .

[ursaminortaur]

I assume my Final Salary won't count towards lifetime allowance (Not that I'll be near that either).

Just for completeness - it will count. Its value in the calculation is pension payable * 20 .

(20 * annual pension paid) + any tax free lump sum.

[mearnsfool]

As the final salary pension may well be increased by CPI, that increase each year if that is the case, will be multiplied by 20 and added to the lifetime allowance. it will also reduce the annual allowance the that can be invested in a pension.

[pochisoldi]

I assume my Final Salary won't count towards lifetime allowance (Not that I'll be near that either).

Just for completeness - it will count. Its value in the calculation is pension payable * 20 .

(20 * annual pension paid) + any tax free lump sum.

There's a hint here - when you come to take the DB benefits (which triggers an LTA check), assuming the DB scheme permits a tax free lump sum+reduced pension, you may consume less of your LTA, leaving more for LTA for growth/additional contribs in other pensions.

Put another way:
Tax free lump sum from DB scheme = reduce the amount of DB annual pension liable to the 25% charge+income tax AND/OR increase the amount of LTA available to cover other pension schemes/savings.

PochiSoldi

[Alaric]

when you come to take the DB benefits

If Lifetime Allowance is a potential problem, taking the DB Benefits as early retirement can contribute to a solution. The pension income is reduced thus reducing the amount of Lifetime Allowance used up.

[ursaminortaur]

Just for completeness - it will count. Its value in the calculation is pension payable * 20 .

(20 * annual pension paid) + any tax free lump sum.

There's a hint here - when you come to take the DB benefits (which triggers an LTA check), assuming the DB scheme permits a tax free lump sum+reduced pension, you may consume less of your LTA, leaving more for LTA for growth/additional contribs in other pensions.

Put another way:
Tax free lump sum from DB scheme = reduce the amount of DB annual pension liable to the 25% charge+income tax AND/OR increase the amount of LTA available to cover other pension schemes/savings.

PochiSoldi

I was thinking more of the fact that a lot of especially older DB schemes automatically came with a lump sum of some multiple of yearly earnings though this was often less than the 25% you can take now. To follow PochiSoldi's suggestion and deliberately take more tax free lump sum - potentially upto the 25% - would need to be looked at very carefully. The amount of extra tax free lump sum gained for each pound of annual pension given up is known as the commutation factor and this tends to be very poor value for money - hence you could well end up worse off than paying the LTA excess charge.

Alaric's suggestion of taking the DB pension early might be a better solution provided of course you want to either give up work or cut down on hours thus cutting your earnings - otherwise you risk pushing yourself into a higher tax band.

[flyer61]

Can I ask the OP what the funding situation of the scheme is?