Putting enough into pensions?

The pension auto-enrolment scheme started this month. It involves the biggest companies first. Employers and employees will have to contribute a minimum percentage of pay to a qualifying pension, unless the employee opts out. This means 1% each from employer and employee to start with, but contributions will rise in steps to 3% and 4%, respectively, within five years. If you take account of tax relief on the employee contribution, 8% of salary will be going in.

To achieve an acceptable retirement income from a defined contribution (money purchase) scheme, many experts think that a greater proportion of salary must be paid in. As it happens, there is already a voluntary scheme that requires a higher level, with 6% contributed by the employer towards a minimum of 10% overall. The Pension Quality Mark scheme (PQM) was started three years ago by the National Association of Pension Funds to lift confidence in defined contribution occupational pensions, as more generous final salary schemes were being closed.

The PQM emerged in the wake of Government action to assist defined contribution schemes through pension regulation changes. The 2006 regulations were made with the aim of increasing flexibility in the amounts contributed, variety of investment options, benefits provided and retirement age chosen. It nevertheless remains the case that defined contribution pensions put investment risk on the employee and make their eventual pension income rather less predictable than with a final salary scheme.

Considering the turmoil and uncertainty affecting many pensions, the big pension funds wished to boost belief in the capacity of defined contribution schemes to provide worthwhile pension income in retirement. They could not guarantee pension levels, which would be dictated mainly by long-term investment performance and future annuity rates, so the NAPF opted to set minimum contribution levels for PQM eligibility and demand high standards from those professionals engaged in setting up and operating occupational pensions.

The NAPF also wanted PQM to achieve the aim of making pensions easier to understand, to help individuals with the decisions they need to make. Some professional advisers were already taking steps in this direction, when individuals or companies sought their advice, but the NAPF wanted to go further. Thus, PQM demands clear and engaging communication with members concerning their scheme. External input is sometimes needed to aid communication on pension matters, as not all employers have the required capability in-house, so PQM encourages advisers to maintain high standards when assisting pension scheme development and employee communication on behalf of employers.

To sum up, the ‘8% of salary’ contribution under auto-enrolment is seen as an absolute minimum, with the 10% required under PQM as more realistic and something higher still as the goal.

If you need guidance on any of these issues, contact us.

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.

NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.

Public sector pensions get major reform

In a further erosion of the concept of global final salary pension provision, The UK Treasury has just announced their plans to drastically reduce the cost base for the provision of public sector pensions.

Their efforts to reduce by 50% the cost to the tax payer for this sectors pension provision will result in the government saving approximately £65bn over the next 50 years. This would account for a large proportion of the total savings hoped for by the Treasury of £430bn in the overall costs of those pensions.

The main thrust of the savings being proposed in ‘The Public Service Pensions Bill’ is the abolition of the concept of a final salary scheme for civil servants and this being replaced with a career average income pension scheme.  At the same time these civil servants will also be expected to work longer before receiving their pensions.  An exception here is being made for the armed forces, the police, and fire-fighters. Here their pensions will be linked to their normal state pension retirement date.

A buffer has also been included, however, for those who are currently within 10 years of retirement (to be calculated from April 1st 2012).  This group will see no change in their retirement age (or date) or any decrease in their presently anticipated pension amount.

Confirming that the present and future pension provision for civil servants is still amongst the best available in the UK, Danny Alexander, the Chief Secretary to the Treasury was quoted as saying about this bill that: “It will cut the cost to taxpayers by nearly a half, while ensuring that public sector workers, rightly, continue to receive pensions amongst the very best available.”

This action is seen to be a continuation of the erosion of final salary pension provision here in the UK, so careful forward planning must be undertaken by not only private sector workers but now public sector workers as well to ensure that a comfortable retirement income will be made available, when that time comes.

Contact us for guidance and assistance in this regard.

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.

NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.

Is the state going to guarantee your pension pot?

In an unexpected, but gratefully received, message from the pensions minister, Steve Webb, the Government announced an intended ground-breaking policy to protect future pensioners’ investment funds from falling equity prices.

His message was that pensioners, and those saving for their future pension, need certainty that they will have a guaranteed income when they come to retire.

He was quoted as saying: “People really don’t want to work for a year and get a pension statement showing their savings have gone down, not up.”

Ministers are concerned that unless such guarantees are made, then workers will be discouraged from saving for their retirement.

Currently millions of workers, who have diligently saved into their pension funds, have seen the value of their pension-pots diminishing in the last few months and years, due to the fall in equity markets, because of the global economic situation. Added to this are the actions of the Bank of England, who have continued to print money through their quantitative easing programme – in the hope of reviving the lagging UK economy – but reducing UK Gilt yields as a consequence and exacerbating the fragile investment climate.

Any such guarantee would probably take the form of a policy, to be provided by insurance companies, that would guarantee the workers that their pension fund at maturity would at least equal the total amount of their contributions, plus their employers’ contribution and the amount of tax relief that would have been gained during the lifetime of the pension plan.

Steve Webb plans to meet with pension providers, insurance companies and investment companies to thrash out the details of such a scheme.  Following these meetings, a consultation paper will be published later this year.

Motivated by the soon to be introduced automatic enrolment of workers into pension funds that will draw in another estimated 10 million people to pension schemes, the Government wants to reassure those workers and encourage them not to opt out of these schemes, safe in the knowledge that their funds will be protected.

The pensions minister went on to add: “As part of the options we offer people, we want greater certainty and guarantees or insurance to be on that list. Auto-enrolment is our best chance of getting people into saving and if they are put off by fear of risk, volatility and uncertainty, it is very hard to get them back again.”

“Some form of guarantee has an important part to play in the success of auto-enrolment.”

Reinforcing the need for such guarantees, the CEO of the National Association of Pension Funds, Joanne Segars, was reported as saying confidence in pensions “had never been lower”.  “Any fresh thinking that encourages savings is welcome.  People are understandably wary that their savings will be eaten away, so there may be appetite for pensions that carry a guarantee.”

The consultative paper will have to address the cost of such guarantees and how they will be funded.  Will it be a charge deducted directly from the savings, or by the insurers taking a dedicated percentage of the pension-pot? The industry working party will be discussing these options in detail with their meetings with the minister in the weeks and months to come.

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.
NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.

Pension measures are pieces in a jigsaw

Pension measures are pieces in a jigsaw

Perhaps the older generation should have worried the moment the Chancellor said his Budget would ‘reward work’, but they could not have known this excluded past work. That bombshell exploded later in his speech, when he revealed that age-related income tax allowances would be phased out – frozen at 2012-13 levels until the basic personal allowance overtook them, from which point allowances would be standardised.

It seems the Chancellor was expecting a benign attitude from the over-65s on this, because of the 5.2% inflation-linked rise in the State Pension. In fact, there were howls of protest at the impending loss of higher tax allowances for those above a certain age. As for future pensioners, they were hardly delighted by confirmation that State Pension Age will automatically link to life expectancy after reaching 67 for men and women under existing plans.

These measures are pieces in a larger pensions jigsaw. A population bulge and improved longevity that are already swelling the ranks of pensioners, increasing their numbers compared to the working population, meant that Government had to act. The imperatives were to contain the cost to the Exchequer and at the same time avoid pensioner poverty. The process started over a decade ago with the introduction of low-cost stakeholder pensions, which were never going to be a complete solution.

Another element in the Osborne Budget was a fundamental change, described as simplification, to the structure of the State Pension. There will be a reformed single-tier State Pension and, to aid its appeal, the Chancellor repeated the estimate of ‘around £140 per week’ already bandied about Westminster long before Budget Day. This new pension will apparently be contributions-based at an annual cost no greater than the present system. It was unclear how this would all link with the plan to merge income tax and National Insurance, which he said would be progressed.

So, considerable upheaval in prospect for the State Pension; what about personal pensions and the like? Much change there too, driven not just by Government but also by corporate decisions to abandon final salary schemes that can require huge amounts of cash – like the £2 billion that BT has just shovelled into its scheme to halve the deficit. Now, more and more employees in blue-chip companies have access only to money purchase (defined contribution) schemes that place investment risk on the employee. Meanwhile, in the public sector, pension changes are generating both anxiety and anger.

Things will also kick-off this year on yet another aspect of pensions reform; you could call it ‘son of stakeholder’. Starting in October with the largest companies first, the Government is phasing-
in auto-enrolment, an arrangement that means virtually every employee in the land must be enrolled into a pension plan, or alternatively the National Employment Savings Trust scheme

(NEST), albeit with the right to opt out. Employers will have to contribute alongside their employees.

No wonder many individuals and employers are now seeking professional advice on pension issues. Call us for guidance on these suggestions, as any decision should reflect individual circumstances.
Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.
NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.

 
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Pension measures are pieces in a jigsaw

Perhaps the older generation should have worried the moment the Chancellor said his Budget would ‘reward work’, but they could not have known this excluded past work. That bombshell exploded later in his speech, when he revealed that age-related income tax allowances would be phased out – frozen at 2012-13 levels until the basic personal allowance overtook them, from which point allowances would be standardised.

It seems the Chancellor was expecting a benign attitude from the over-65s on this, because of the 5.2% inflation-linked rise in the State Pension. In fact, there were howls of protest at the impending loss of higher tax allowances for those above a certain age. As for future pensioners, they were hardly delighted by confirmation that State Pension Age will automatically link to life expectancy after reaching 67 for men and women under existing plans.

These measures are pieces in a larger pensions jigsaw. A population bulge and improved longevity that are already swelling the ranks of pensioners, increasing their numbers compared to the working population, meant that Government had to act. The imperatives were to contain the cost to the Exchequer and at the same time avoid pensioner poverty. The process started over a decade ago with the introduction of low-cost stakeholder pensions, which were never going to be a complete solution.

That £140 carrot

Another element in the Osborne Budget was a fundamental change, described as simplification, to the structure of the State Pension. There will be a reformed single-tier State Pension and, to aid its appeal, the Chancellor repeated the estimate of ‘around £140 per week’ already bandied about Westminster long before Budget Day. This new pension will apparently be contributions-based at an annual cost no greater then the present system. It was unclear how this would all link with the plan to merge income tax and National Insurance, which he said would be progressed.

So, considerable upheaval in prospect for the State Pension; what about personal pensions and the like? Much change there too, driven not just by Government but also by corporate decisions to abandon final salary schemes that can require huge amounts of cash – like the £2 billion that BT has just shovelled into its scheme to halve the deficit. Now, more and more employees in blue-chip companies have access only to money purchase (defined contribution) schemes that place investment risk on the employee. Meanwhile, in the public sector, pension changes are generating both anxiety and anger.

Things will also kick-off this year on yet another aspect of pensions reform; you could call it ‘son of stakeholder’. Starting in October with the largest companies first, the Government is phasing-in auto-enrolment, an arrangement that means virtually every employee in the land must be enrolled into a pension plan, or alternatively the National Employment Savings Trust scheme (NEST), albeit with the right to opt out. Employers will have to contribute alongside their employees.

No wonder many individuals and employers are now seeking professional advice on pension issues. 
Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.
NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.

Final salary pensions – set to become history?

Final salary pensions – set to become history?
 

Final salary pensions are heading for extinction, with further proof this January when it was announced that Shell would stop its scheme for new joiners. From 2013, they will be offered a new defined contribution scheme.

Shell was the last FTSE 100 company to stop its final salary pension scheme and said it was taking the step to “reflect market trends in the UK”. Some employers, including non-UK-listed firms such as BMW, do offer final salary plans, but they are now the exception, which has resulted in many people having concerns that their retirements are not going to be as comfortable as they had hoped.

With these pensions, workers accrue a chunk of pension entitlement for every year they work at a particular company. This is typically the equivalent of 1/60th of their salary when they leave the company or retire. Someone in such a scheme who worked for 40 years would get a pension entitlement of 40/60ths, two-thirds, of their final salary.

But, longer life expectancy, low inflation, weaker stock markets and increased regulation, mean these schemes are becoming too expensive to run and to fund.

Some private sector firms have even been threatened with industrial unrest if a final salary scheme is withdrawn. This also happened in the public sector, when workers took strike action last June over planned pensions changes.

As alternatives in the run-up to pension auto-enrolment, most organisations are moving to a defined contribution scheme, to which employees pay in part of their salary each month and the employer makes a contribution on top.

This places a greater burden on employees to save for their retirement. Another option is to offer a defined benefit pension scheme based on their “career average” salary rather than salary at the time of retirement – an option mooted for the public sector.

Career average revalued earnings offer retirees an average salary income in retirement as opposed to a final salary. This can be better than a money purchase scheme as the income is guaranteed, but less rewarding than a final salary pension scheme.

Those few firms who still offer final salary pensions may find it is worth doing so as it helps them recruit and retain their best people. Experts say a pension is unlikely to be the main reason someone chooses a job, but if they have two offers on the table it could be a key reason to select one over the other.

While pension planning is complex, your financial adviser can help you identify and adopt the most appropriate strategy for your retirement.  

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.
NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.