Would you pay redundancy into a Final Salary pension ?

milocoon

Hi I`ll try and make this as simple as possible. I`m being made redundant soon and have £62,000 redundancy coming to me.
I intend to keep the first £30,000 as thats tax free and put it somewhere relatively safe (BS or Bank )
I`m very fortunate not to have a mortgage now and at age 48 I have a reasonable sized pension which will be deferred until I`m 55 when if I wish I can draw 80% of its value or wait until 60 and draw 100% of it`s value.
My company Rhodia UK Ltd has an underfunded pension fund and is a contributing member of the Pension Protection Fund, in 2006 it was 74% fully funded and agreed with the pension trustees to make up the shortfall by making 15 yearly payments starting with £12.8 million and increasing each year by 3.25%. To my knowledge they have made two of these payments so far. They have been selling off factories and closing some (like mine) in the UK and opening factories in China so their UK presence will be about 370 employees. I think they will eventually leave the UK but I think that even if they did they would still be liable for the shortfall ?

At age 48 I have been told that £32,000 from my redundancy is taxable at 40% but If I pay it into the Final Salary Scheme it will augment my existing pension by £3010 a year now and in future it will increase by RPI or 5% whichever is less. This is an illustration and obviously future growth is not guaranteed but I think its a good buy.

What do members think of this idea ?

If Rhodia do fulfill their obligations it`s a win win situation !

The only drawback I can think of is that Rhodia go bust and don`t top up the fund, then provided the PPF has enough money it tops up the fund and I get 90% of the value at 65.

My deferred pension is at risk anyway and at worst if the £3010 pa has zero growth and I only get 90% back I think it would still be better than an annuity from a SIPP

Thanks for any advice on this !

:beer::T

sdooley

Will the additional voluntary contribution be on a defined benefit or money purchase basis? i.e. would you just get investment return or do you get a fixed return?

My instinct is to say 'don't throw good money after bad' but it's really up to you. The calculations are horrendous and you will have to pay an adviser a couple of hundred pounds to go through the detail with you - but it will be worth it as the difference could be thousands. Don't forget if you are over 50 (55 from 2010) you could put the £32,000 into a SIPP and draw 25% tax-free immediately.

Another thing to think about is whether, if you are likely to take any means-tested benefits over the next few years, you might lose out on these because the payment into the pension is treated as 'deprivation of assets'.

If you still have a mortgage I'd be tempted to say take at least some of the money (with the tax hit at least to the top of your 20% band) and pay down the debt. Plus keep yourself a float for whilst you're looking for a job.

All the very best, sounds like you had what was once 'one of the good jobs' - a shame this country doesn't look after companies in the middle-ground of the economy.

vivatifosi

Hi milocoon,

Interesting question, and I'm only going to look at one part of it if that's ok, ie- what will their liability be if they leave the country? I'm a scheme trustee and ask my scheme actuaries this question at least twice a year. Every time I get the same answer - this area of legislation hasn't been tested - yet.

The company scheme I'm a trustee of is also defined benefits and they are also in deficits, thought they are also making payments into the scheme to reduce the deficit.
The parent of the company that my company is owned by is American. This makes the whole funding issue a bit of a grey area, hence my regular questions!

If they were registered in the EU there wouldn't be a problem we are told. My understanding is that Rhodia would still be liable under EU law, but in our case if they withdrew from the UK how could we guarantee future funding?

Rhodia seems to be in a better situation in that it is, I understand, registered and listed in France, so you would probably be in a better situation than me. I would be inclined to ask the question of your scheme trustees and see what answer you get. It will test how on the ball they are with current legislation, that's for sure, and only they are really in a position to know how this will affect the pension.

milocoon

Hi Sdooley, thanks for your reply, yes its defined benefits 1/55 for each year of service and as i understand it I buy additional pension worth £3,010 pa at todays figures rather than an AVC from the £32,000.

I`m 48 so have to wait till I`m 55 as my 50th birthday is in September 2010. Mortgage is paid for (scottish widows 25 year low cost endowment last year made its target plus £1500 extra, I was one of the lucky ones)

You were dead right about my job being one of the good ones and each day I`m looking for a replacement it does remind me.

I`m OK till October 31st but need to decide about this £32,000 payment into the pension by the end of september. I`ve got some savings and the £30,000 tax free to live on so I am very fortunate.

milocoon

Hi vivatifosi, do you support ferrari ? I like F1 myself.
I`ll ask the trustees that question about the foreign arm of Rhodia, I did come across a story that might interest you. It appears that Sea Containers UK went insolvent and the US part tried it on. Heres the news report I read

News Release
6 February, 2008 For Immediate Release


426079_1


SEA CONTAINERS – FIRST EVER FINANCIAL SUPPORT DIRECTION

Today sees the announcement that, following the withdrawal of its appeal, the first ever Financial
Support Direction (FSD) has been imposed on Sea Containers Ltd. The Pensions Regulator
determined to issue the FSD last June as a way of bolstering the financial condition of Sea
Containers Ltd’s two UK defined benefit schemes. But until now, the process had been
suspended pending the outcome of the appeal.

The FSD power is part of a range of anti-avoidance measures given to the Pensions Regulator
almost three years ago but this is the first time one has been imposed.

Sea Containers Ltd is in Chapter 11 bankruptcy proceedings in the US. The FSD will ensure that
the pension schemes are treated as creditors in the US Chapter 11 proceedings.

Sacker & Partners LLP, the UK’s leading specialist pension law firm, advised the trustees of the
larger (1983) pension scheme. The team consisted of Nick Couldrey, Peter Murphy and David
Saunders – all specialists in the pensions field.

Nick Couldrey, partner, Sacker & Partners LLP, commented:

“This is excellent news for the members of the Scheme. The Schemes are now creditors of Sea
Containers Ltd and will share in its assets. We expect a substantial contribution to the deficiency
in the Schemes which means better benefits for members. It also means that the likelihood of
needing to make a call on the Pension Protection Fund will be reduced. It is also a vindication of
Parliament’s decision to give the Regulator power to impose an FSD in order to protect members’
pensions and the interests of the Pension Protection Fund.

MikeJones_2

Hi milocoon,

milocoon wrote: »

The only drawback I can think of is that Rhodia go bust and don`t top up the fund, then provided the PPF has enough money it tops up the fund and I get 90% of the value at 65.

Unfortunately, what you have said in your quoted comment is not true - but it's what many people in your situation think is true (specifically, the part you say 'I get 90% of the value at age 65').

The Pension Protection Fund website has worked examples of what happens to members of different classes (e.g. active, preserved and pensioner members).

To the 'untrained eye' it might appear that you get 90% of your pension benefit, but in reality (and especially if you are more than a few years away from your Normal Retirement Date) the way that the PPF works will provide you with much less security than you appear to believe it will.

The PPF is better than nothing, but it is not the panacea that many people believe it to be.

If I get time, I'll revisit this thread with more specifics, but suggest you take a look at the details from the link I've provided above.

There are other issues about redundancy which you should consider and I alluded to one about pensionable service in this thread recently (which might be applicable to you too). For other useful free Factsheets, see Redundancy and Pensions here.

I'm sorry to hear of your redundancy and hope you find employment soon.

Mike Jones

I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

Debt_Free_Chick

As a general rule, never make decisions about pension contributions based purely on the perceived tax saving. Firstly, you'll pay the tax on the pension when you receive it - OK, that might be at the basic rate, rather than the higher rate and you could take 25% of it as a lump sum, currently tax free ... but ...

Don't view a pension as a tax-haven as it's not.

The decision should be needs based - what is your greater need? More income in retirement, with no access to the capital invested before then? Or an increase in savings/investments which could be accessed at any time should the need arise?

milocoon

Thanks MikeJones, that pdf did surprise me, as regards pensionable service I have 11 years after 1997 and 13 years before 1997 so if the worse came to the worse it looks like just over half the pension would`nt be increasing in value between the scheme going bust and me retiring. So if it went bust shortly then in 17 years time the value would be a lot less than I thought.
Fingers crossed it stays solvent. I don`t have the worry of earning a £75,000 a year pension and finding after the fund went bust I`d only get a mere £25,000 as one of the examples on that pdf showed.

Anyone in a similar situation please read the pdf Mike Jones mentioned in his post earlier.

For Pensionable Service, my pension fund calculates in Years and Months so thats not a worry for me finishing part way through the year.

Its odd that in theory if my pension fund stays solvent in 7 years time I can take an early pension and tax free lum sum which I`m defenitely going to try to take but if it goes bust I`ve got to wait another 10 years. I`ll be sweating for the next 7 years now and won`t be able to sleep the night before the 7 years is up.

Question for anyone

Do you think that Rhodia France would be liable for any shortfall in a pension fund run by Rhodia UK if Rhodia UK went insolvent ?

Thanks :beer::A

milocoon

Thanks Debt_Free_Chick, my needs are quite straight forward in this case, any future job I take won`t have a Final Salary Scheme so it will be very expensive to boost my pension. I`m mortgage free with no debts, have some savings and should be able to survive for about 3 years if I don`t get a job. So the £32,000 which is spare from my redundancy would be worth around £20,000 as the majority is going to be taxed at 40%, I might get some back at the end of the tax year.

If I put it in my pension fund it gets me an extra £3,010 pension per year which will grow at (5% or RPI whichever is less) and I`ve already been told that that increase can change if the trustees deem it necessary (downwards to 3% for example) but what could you do with £20,000 after tax to generate an income later in life like this ?

If the worse came to the worse and the fund went bust then I think the PPF would pay me 90% of the £3010 I was due to get ?

Thanks :beer::A

Unclepetey

I wanted to reply to some of the comments on here that I think are potentially quite misleading. In particular in relation to a company's obligation to fund a defined benefit scheme. I'm a solicitor in the City specialising in occupational pension schemes so I know my stuff here!

Ordinarily the only legal obligation to fund pension schemes rests with those companies that participate in the scheme - by participate I mean those that employ members in the scheme or formerly employed members.

In English company law, limited liability companies are just that - limited liability. This means that other companies in the same group of a limited company are not responsible for any of its financial or other obligations. In a pensions context this means that there is no automatic legal obligation on, for example, an overseas parent company to fund a pension scheme in which it does not participate (even though its subsidiary companies may participate in it). Of course, there is nothing to stop overseas parent companies (or UK parent companies) from offering and providing funding guarantees to a UK pension scheme - any many companies have done this.

So the answer to the question - would a French company be responsible for meeting the pension funding obligations of an insolvent UK company, is no UNLESS:

(a) the French company has entered into a funding arrangement with the pension scheme trustees which provides for it to be responsible for funding the pension scheme if the UK company is insolvent; or

(b) the Pensions Regulator makes an order (known as either a contribution notice or financial support direction) against the French company.

The Regulator's powers and legislation behind them is complex and about to change, so a detailed analysis of it is well beyond the scope of this email. The uncertainty (which one poster referred to below) relates to how easy it would be to enforce an order from the Pensions Regulator in a foreign jurisdiction. The commonly-held view is that enforcing in the EU or a Commonwealth jurisdiction is likely to be possible. However, enforcement in other jurisidictions is very uncertain and has never been tested.

I hope this helps! Sorry for such a long email.

MikeJones_2

Hi Unclepetey

Unclepetey wrote: »

I wanted to reply to some of the comments on here that I think are potentially quite misleading.

I agree entirely with your reply.

However, for clarity, can you specify (by extracting the quotes as I have done with yours) which comments are potentially quite misleading as this would assist viewers of this thread.

Mike