'Not got a pension? You will do in two years!' blog discussion

jamesd

Harvest Mouse, that means that you are currently in a defined benefit scheme (like final salary or 80ths or 60ths) where your employer is responsible for paying in enough or adjusting contributions to provide the specified level of benefits. These are so expensive, costing something like 25% of salary, that almost all of the private sector versions have now closed to new members and many are closing to existing members as well, though the benefits built up so far will remain if that happens.

In recent years the Pension Protection Fund has been set up to protect members of private sector schemes like yours. Government sector versions generally have theirs guaranteed by the government instead, though it varies a bit and some may be covered by the PPF instead.

You're in pretty much the best type of pension there is so be happy even if the costs to you go up. You'll still surely be getting a far better deal than most.

The alternative is defined contribution schemes (where you pick your own investments). Much cheaper for the employer but the employee ends up having to pay in more if they want the same level of benefit at the end. The result with these also depends on how well the investments the employee chooses perform.

jamesd

Honest_broker07 wrote: »

"That means people will be putting aside 8% of their salary to a pension – a pretty decent whack which should produce (if my memory from discussing this with pensions minister Angela Eagle a few months ago is right) an estimated 45% of final salary as a pension for most. My only problem with all this is the level of contribution is fixed for employees – either you put the whole 4% in or not at all."

so why the fuss about Local Government etc pensions

Because that 45% includes the basic and additional state pension which are expected to produce 30% of earnings. NEST itself is expected to provide 15% of earnings. As the Second Report of the Pensions Commission put it (page 7):

"this might secure the median earner a pension at the point of retirement of about 15% of median earnings on top of the 30% which state provision will deliver under our proposals. Many will want to secure a higher level of pension replacement. We therefore also recommend that voluntary contributions on top of the default level should be allowed, subject to a cap: for the median earner this would enable the individual and/or their employer to contribute in total about twice the default amount, accumulating a pension pot which would take them to a total combined replacement rate approaching the two-thirds that many say is their target"

Honest_broker07 wrote: »

Most staff are paying 6%-7% or more of salary in plus employer contributions ( so say 12% total ) to get 50%. yet people think a total payment of 8% to get 45% is OK for everyone else.

If your income is low enough for the basic and additional state pensions to pay you 30% of your salary then it's fine.

The problem is that the expected payout for the basic and additional state pensions is a maximum of around £7,000 once current plans are in place, so that would make 100% of your salary about £23,000.

If your salary is £23,000 or less you can be upset. If it's more, you're paying more to get more paid out than 8% from employer and employee combined plus the state pensions will pay out.

mjohnsonuk

I think everyone paying into a private pension is a great idea!
But i`d like to see a bit of a change - I think that when you are 18 a pension account is opened for you then once you start earning you opt to pay in a percentage of your choice (up to a pre-set max) then the company you work for then matches this payment (up to a pre-set max)
For Example:
Person A pays 10% of his wage (15% max)
Company A matches 8% (8% max)
This is fairly straight forward but the twist Person A leaves their job after 10 years - instead of their pension being frozen it moves with the employee (including all company contributions) then when Person A starts the new job with Company B, they then comtribute into the pension.
Therefore no more frozen pensions plus the companys can not dip into the pension scheme once the money is in there it is in there the pension continues to acrew interest for the full term (working life)
What do people think of this method? Fair?
I once worked for a company that when times were good dipped into the pension pot then when times were tough they said they couldnt afford to contrabute enough for the pot therefore putting peoples pensions at risk, also if that company A goes bust it means you dont lose your pension contribtions (I think this happened to Ford/Jaguar employees a couple of years ago!!)

When you die this money should transfer to your next of kin not half of it plus you should get a reduction in the NI contrabutions made eg opt out of the goverment state pension (why pay twice) and there should not be a minimum age for retirement calculations should be made based on you age to contrabutions then if you have contrabuted enough into YOUR scheme and feel you can suvive on the amount of money per month then you can retire - you should not be penilised for retiring at 55-60 or be forced to work until 65-70 - YOUR MONEY YOUR LIFE YOUR RULES

Tatt

National Employment Savings Trust - it's that word TRUST that gets me, because the government has already proven itself to be totally untrustworthy when it comes to leaving our hard-earned trustingly-invested state-pensions alone -
for any who don't know, the current government took £55 billion out of our very-well-funded national savings pot, £5 billion a year for 11 years, which is why we're all in this pensions crisis now.
So what's to stop them taking this new pension too?
(As for what they spent it on, well I guess that was keeping income-tax down to get re-elected, making us all to blame, except those of us who voted for other parties!)
So what would I do to fix the pension crisis?
I'd be tempted to advise people to save up in banks, carefully only putting £50,000 in each bank to make sure it's all guaranteed, until various governments possibly go bust - sorry to be pessimistic/realistic there!
I'd be tempted to advise people to invest in property & then sell or let it to fund their retirement, except that if everyone did that, property prices'd obviously fall & so that wouldn't necessarily work either.
So I'm one of the many who don't know any better than the government do what's the best way to handle this.
As for is it fair that those who opt out of the scheme are subdising those who stay in it because the government's 4% contribution comes out of tax paid by everyone? - no, I don't think it's fair - but I expect the government's contribution % will drop gradually to nil.

jamesd

mjohnsonuk, it's already possible to transfer defined contribution schemes into one consolidated scheme when you change employer. Also possible, but usually inadvisable, for defined benefit (final salary etc.) types. Frozen are the defined benefit types that haven't been transferred and it simply doesn't apply to the defined contribution types that are now the norm for new employees. When you die 100% of the money in a defined contribution scheme goes to your spouse unless you've bought an annuity. If the spouse dies then before age 75 there's a 35% tax charge and then the money goes to whoever you nominated. After 75 the tax charge increases. Buying an annuity or being in a defined benefit scheme is what limits this.

Tatt, the reason for this change and the increase in retirement age is the increasing percentage of the population that will be retired as the baby boomer generation retires. That will increase the need to pay pension benefits while decreasing the number of people paying NI and general taxes to pay out those benefits. NEST is a key part of this plan because it helps to put many people above the income level where they would qualify for means tested benefits. The national savings pot doesn't exist except on paper, the money is spent as soon as it's taken in. You're correct that one possible result of the baby boomers retiring and looking to sell property is a decrease in property prices, or at least a slowing of increases. The same may also happen in the UK stock market as that generation shifts from being overall buyers to overall sellers of shares. It's one of the reasons why log term investing outside the UK may produce better long term results than in the UK. Just don't pick Japan, which is already well along this course...

stebiz

madkitty wrote: »

Thats what I was thinking too - so does that mean the last 20 years of my NI is worthless and I paid a certain percentage for nothing?

Yes I we'll carry on paying this AND the new pension trick. Sums this government up!!

RHB

Errr no. NI provides for the state pension, nigh on the most mediocre in Europe, and NEST will basically provide a top-up for this to give a higher level of income. Would expect it to cut costs marginally though as higher incomes might mean less people qualify for benefits.

treborg

Does jamesd work for the government or a pension company or some other reputable company? I have never yet met anyone whose surviving partner or spouse or childrenhas inherited all of the pension and 35 % tax sound a trifling heavy to me!

drc

What about those people who have never worked and live on benefits? Will they get their pensions paid for them by the taxpayer? How will their pensions be funded? Will they have a percentage taken off their benefits to be put into a pension fund?

jamesd

drc, if you've never worked a day in your life you'll get means tested Pension Credit of £130 a week plus possibly other means tested benefits like housing benefit/local housing allowance, if you pass the means tests. One of the purposes of the NEST scheme is to help to raise the pension incomes of the lower half of earners so that they will no longer qualify for pension credit. Because pension credit is to increase with earnings it was predicted by the Pensions Commission that by 2050 most pensioners would qualify for pension credit if nothing was done to change the situation. Other changes include decreasing the S2P (formerly SERPS) income-related pension for those earning average and higher wages, with the money being transferred to those on lower incomes. Also the increase in retirement age so you pay taxes for longer and are retired for a shorter time. And the elimination of the ability to contract out.

Taxation, including National Insurance income, is used to pay for these benefits.

treborg, I don't work in the financial services industry, nor for the government but I do try to correct people's misunderstandings about what they can do with pensions and help more people to know that they are more flexible than is often thought, particularly since the new rules came in in 2006.

Sorry that you don't know anyone who used the available options to let their pension capital survive death better. Yes, 35% is fairly high but it does beat 100% that you lose if you buy a typical annuity instead of using income drawdown (unsecured pension before age 75, alternatively secured pension from 75 on). Here's a HMRC example explaining how it works:

Short version: Andrew hadn't started taking pension income [hadn't crystallised benefits] from £103,000 worth so all that is passed as a lump sum to his son Mark, who he'd nominated to get it. He nominated his wife Emily to receive the benefits from money where he's already started taking income and she received £206,000 that has to be used to provide an income for her.

"Andrew dies aged 74 on 1 January 2007. When he died, Andrew was drawing an unsecured pension from a money purchase arrangement. There was £200,000 in the unsecured pension fund on his death. Andrew also had £100,000 uncrystallised funds in the arrangement when he died.

Andrew left one dependant, his wife Emily, aged 76 when Andrew died. He also has a son, Mark, who is not a dependant of Andrew.

Andrew had nominated that any uncrystallised funds remaining on his death should be paid as a lump sum to Mark. The uncrystallised funds lump sum death benefit is not paid to Mark until 1 June 2007. By this time, the uncrystallised funds are worth £103,000 and this is what is paid to Mark.

This payment triggers a lifetime allowance test through BCE 7 against Andrew’s available lifetime allowance at the point of death. The payment has no consequences as far as Mark’s lifetime allowance is concerned.

Andrew had nominated that any unsecured pension fund remaining on his death should be used to provide Emily with death benefits. The scheme rules give Emily a choice over how she may draw benefits. Emily decides to use the £200,000 unsecured pension fund to provide her with a pension through income withdrawals. As she is over 75 the funds are designated to provide her with a dependants’ alternatively secured pension.

By the time Emily has decided how to take benefits from the scheme six months have elapsed. The date on which funds are designated to provide Emily with a dependants’ alternatively secured pension is 1 June 2007. The level of funds designated under the arrangement to provide Emily with a dependants’ alternatively secured pension is the actual value of Andrew’s remaining unsecured pension fund on the date of payment. On 1 June 2007 this is worth £206,000."