change of strategy due to DB scheme closing

Crystal_Pixie

The company I work for is in negotiation to stop contributions to our DB scheme in 2024 (the scheme has been closed to new employees since 2005). I have worked for the same company for 15 years and I have accumulated a good pot which I was planning to take at age 60 (I am still contributing to this scheme).

I am 47 now and a higher rate tax payer. I am contributing to a SIPP but only putting in 5% of my salary in this pot - the idea being that I would use this pot as a buffer just in case I wanted to retire a bit earlier. There is £140k in this pot at the moment.

I have no idea what the impact would be if the company stopped adding contributions (they are not being very forthcoming about details at the moment). However, seeing as I will be 53 when this happens it feels like I need to do something now as this will not only affect me but my husband as well (we work for the same company and we are both in the same scheme).

Two questions - should I start putting more money into my SIPP or start another pension? I appreciate that over the past few years the market has been good and my investing knowledge is still very much beginner.

I am presuming (again no information from the scheme yet) that if is wound down I could still draw my pension at 60 but it probably won't be as good as the statements I am getting at the moment? (the estimate I am getting from the scheme is £23k pa at 60).


A few of my older peers have transferred out of the scheme with very high amounts. However, I understand this might not be case when I want to retire.

I now max out my ISA allowance each year and use regular savers. However, this news has made me think that I might have change my savings strategy.

All suggestions welcome.

AnotherJoe

Why are you maxxing out your ISA but not putting more of that into your SIPP?
Each £100 into your SIPP costs you £60 and gets you £85 out.

Each £100 into the ISA costs you a £100 and gets you a £100 out.

Dunno about you but my maths says £85 for £60 is a far better deal than £100 for £100.



You asked "should I start putting more money into my SIPP or start another pension"
Whats wrong with the existing SIPP that makes you ask this ?



At some point most likely well before 2024 high rate tax relief on pensions is going to be abolished. Take it now whilst you can.

AlanP_2

What are they replacing the DB scheme with?

Presumably it will whatever the new starters since 2005 are in as a minimum so you should be able to find out details on that. They may offer DB scheme members some kind of "bonus" that new employees don't get to try and compensate in some way for DB removal.

As for what DB scheme will pay out at 60 you should be able to make a stab at calculating that based on your years of service up until 2024, accrual rate and salary.

Agree with Another Joe pension sounds a better option than ISAs given you are a HR taxpayer and HR relief MAY be removed at some stage.

Marcon

Crystal_Pixie wrote: »

The company I work for is in negotiation to stop contributions to our DB scheme in 2024 (the scheme has been closed to new employees since 2005). I presume you mean that future accrual (build up of benefits) will cease in 2024. Employers can't just stop their contributions, unless the scheme is so well funded that it can be 'bought out' with an insurer, safely securing all member benefits built up I have worked for the same company for 15 years and I have accumulated a good pot presume you mean pension - DB schemes don't have 'pots' as suchwhich I was planning to take at age 60 (I am still contributing to this scheme).

I have no idea what the impact would be if the company stopped adding contributions (they are not being very forthcoming about details at the moment). Two possibilities: this could trigger a wind up of the scheme, in which case the employer (not the members) will have to meet the full cost of transferring all the liabilities built up to an insurance company, who will take over responsibility for payment of pensions. Or the trustees might decide to run it as a fully closed scheme for a time. You'll be given more information nearer the time; much depends on the Trust Deed & Rules of the scheme, plus the funding position. However, seeing as I will be 53 when this happens it feels like I need to do something now as this will not only affect me but my husband as well (we work for the same company and we are both in the same scheme).

I am presuming (again no information from the scheme yet) that if is wound down I could still draw my pension at 60 but it probably won't be as good as the statements I am getting at the moment? (the estimate I am getting from the scheme is £23k pa at 60). If you aren't still contributing to your DB pension until you reach the ago of 60, you are correct - your pension will only reflect your actual period of membership, but it will be based on your salary at the time the scheme closes to future accrual


A few of my older peers have transferred out of the scheme with very high amounts. However, I understand this might not be case when I want to retire.Nobody can predict the future; it will depend on market factors as well as the trustees' decisions as to a suitable transfer value basis. They will be advised on this by the scheme actuary. You can transfer out before you want to retire, and indeed only have a statutory right to do so until one year before your scheme's Normal Retirement Age, so you might want to think about it before age 60

Hope the above helps.

tacpot12

Companies can and do take temporary 'holidays' from paying into their DB pensions when they determine that the scheme is over funded. Perhaps your employer has now determined that the scheme does not need any further contributions in order to meet all its future commitments - given the scheme stopped accepting new members in 2005, this could well be the case. In arriving at this conclusion, they should have assumed that all current members of the scheme will carry on working to the Normal Retirement Age of the scheme (or whatever else the trustees consider to be the worst case). So I would expect that you will still get the pension you expected to receive from the DB scheme - i.e. the company stopping their contributions should have no effect on the members of the scheme.

The negotiations are between the company and the trustees (and possibly the unions). The trustees will have professional advisors who are responsible for making sure the scheme has all the funds it needs. The trustees should not be taking any risks wih your pensions - there should be an employee member of the trustees who you could contact if you have any concerns.

If they are proposing that you will not earn future entitle to benefits within the DB scheme after 2024, then this is something that the unions would negation on. As has been suggested, if you stop earning benefits in the DB scheme, you should start earning them on the DC scheme offered to new employees after 2005.

All in all, I don't think you need to change your strategy much, apart from as suggested by AnotherJoe.

Albermarle

In simple terms a DB scheme has liabilities , which are the payments to current pensioners, and payments to future pensioners like your self . To pay for these there is a fund which you and the company pay into .However the pension payments are fixed by a formula relating to your salary and are not directly related to how much is in the fund .
So in theory whatever the company or fund does , you are still owed the same pension. It can't just be reduced by say 50% for example.
In case of a crisis with the fund or the employer , the governement guarantees to pay 90% of it in any case.

Dox

tacpot12 wrote: »

Perhaps your employer has now determined that the scheme does not need any further contributions in order to meet all its future commitments - given the scheme stopped accepting new members in 2005, this could well be the case.

Not for the company to decide, unless they are prepared to trigger a wind up and could then be on the hook for however many millions it would take to buy out the benefits. The sponsoring employer is responsible for ensuring that the scheme has sufficient funds to meet its liabilities as they fall due. What looks like a strong funding position now could be a deficit come the next triennial valuation - and triennial time is when the schedule of contributions is set for the next 3 years.

If the company has announced it is going to 'stop contributions', I wonder if they mean stop members making further contributions, thus terminating future accrual?

OP - whatever the company is intending, they are giving you excellent notice of the fact that in 6 years' time, you will not be building up future DB benefits. Given you are already 53, if you have a retirement age of 60 it isn't going to make a huge difference to the benefits you will have built up.

Brynsam

tacpot12 wrote: »

Companies can and do take temporary 'holidays' from paying into their DB pensions when they determine that the scheme is over funded.

The company can't make that decision. Depends what is agreed at the most recent triennial valuation, which is carried by the actuary appointed by the scheme's trustees.

FatherAbraham

Crystal_Pixie wrote: »

I have no idea what the impact would be if the company stopped adding contributions (they are not being very forthcoming about details at the moment). However, seeing as I will be 53 when this happens it feels like I need to do something now as this will not only affect me but my husband as well (we work for the same company and we are both in the same scheme).

A change to your defined-benefit pension arrangement would be of interest to your husband even if he were not on his own account a member of the same scheme, because your scheme almost certainly offers spousal benefits.

FatherAbraham

Albermarle wrote: »

In simple terms a DB scheme has liabilities , which are the payments to current pensioners, and payments to future pensioners like your self . To pay for these there is a fund which you and the company pay into .However the pension payments are fixed by a formula relating to your salary and are not directly related to how much is in the fund .
So in theory whatever the company or fund does , you are still owed the same pension. It can't just be reduced by say 50% for example.
In case of a crisis with the fund or the employer , the governement guarantees to pay 90% of it in any case.

I think you're overstating the protection that DB schemes enjoy.

The PPF pays to rescue schemes which meet their liabilities, and caps can be applied.

If the PPF itself is underfunded, is unclear what would happen. If the state had meant to underwrite all DB schemes in all circumstances, then presumably it wouldn't have bothered to create a specific PPF entity funded by levies on active schemes.

Crystal_Pixie

AnotherJoe wrote: »

Why are you maxxing out your ISA but not putting more of that into your SIPP?

I would like to have some savings I could draw upon before 55 - 8 years in this climate is a long time. I am in an industry that would be very high risk after Brexit.