Pension Advice

For those of us employed in the private sector, this can be a particularly worrying thought and stimulant to seek pension advice. After all, if your employer is the one paying into your pension, what happens if they run out of money to put into it?

Of course, the kind of pension you have with your company matters enormously. If you are on a “money purchase” or “defined contribution” pension, for instance, then you and your employer have been steadily building up your pension pot over the course of your employment.

This means that the money has already been set aside. So if your employer goes bust, you should still retain the pension pot you have been building up with your former employer’s contributions.

You would need to check, however, that your employer has actually paid contributions over to the provider of your DC scheme. From there, you could seek out new employment, and build up another pot with contributions from both you and your new employer.

If you are on a final salary scheme with your employer, however, then you will be in urgent need of pension advice if they become insolvent. Indeed, it would be a better idea to seek advice before that scenario can transpire, however unlikely it might seem.

Under a “final salary” (or “defined benefit”) scheme, your former employer promises to pay you an income throughout the course of your retirement. Typically, this income is based on factors such as your average earnings during your career, and the duration of your employment.

If you are on a scheme like this, and the company goes bust, then you certainly have bigger problems than someone who is on a defined contribution scheme. If the company that promises to pay you money in retirement is out of money, what are you to do?

Seeking independent pension advice now is a sound idea. It is likely that you will be able to work with your financial adviser to put risk-mitigating measures in place.

Or, it may actually turn out to be best to engage in a pension transfer to another scheme. One which protects the assets you have spent decades building up for your retirement. These are big questions, but worth working through with an experienced, independent specialist.

 

Protections For Pension Schemes

It is important to be aware of the important laws, organisations and regulations available to you when seeking out pension advice in the face of company insolvency.

One important body is the Pension Protection Fund, which pays compensation to pension scheme holders when an employer experiences a “qualifying insolvency event.”

One of the qualifying criteria for compensation, for instance, requires that the pension fund cannot meet its current and future liabilities. At this point, the PPF would get involved to make sure the pensions are still paid. It is, essentially, a kind of insurance scheme for DB / final salary pension holders.

However, be aware that there are presently caps on compensation payments. This means that you may now necessarily have all of your pension assets or income secured in the event your employer goes bust.

Since April 2015, the cap on compensation payments for those 65 years of age is £36,401.19. This assumes that members of the scheme have reached the agreed retirement age under the scheme. For those who have not reached retirement age, they can claim up to 90% compensation.

 

Should I Transfer To A Defined Contribution Scheme

Ultimately, this is a decision you should take only after seeking impartial, qualified independent pension advice. Everyone’s situation, financial needs and goals are different. What applies and is the right course of action for one person may not necessarily be so for you.

There are pros and cons to take into account. If, for instance, your final salary pension is worth £10,000 a year, then most of this is likely to be protected by the PPF. If however the figure is much higher, then you stand more to lose in the event your employer goes insolvent.

There is also the risk factor to consider. When you transfer from a DB/final salary scheme to a DC scheme, you essentially now bear the burden of responsibility for the investment risk. If your investments do well, then that’s great! If they do badly, however, then you might do worse under a DC scheme than you would have done under your DB scheme.

Another factor to consider is death benefits. Typically a final salary scheme will make provisions for a widow’s pension. If you are still working for your employer, they will also often receive a lump sum too. A DC pension, on the other hand, has a lot of flexibility and in many cases will pay your pension value, tax-free, to your beneficiaries.

The bottom line is, seek pension advice from an experienced, specialist financial adviser in pension transfers prior to making any decisions about a pension transfer.

 

Your expenditure and living costs are likely to be lower at retirement than at present.

However, it’s still vitally important to find out how much your pension is worth, and how much you are likely to need at retirement.

We’ll look at the latter further into this article. First, however, to find out how much your pension is worth, you will need:

• To figure out what your combined income, savings and investments will be when you combine your State Pension, workplace pension(s), as well as any personal pensions and other income sources (e.g. renting a property).
• To work out the tax you will likely have to pay when you retire.
• Establish what your living costs and expenses are likely to be.

So, how do you find out how much your pension is worth? Read on.

 

Work Out How Much You’ll Need, First

There are some great resources to help you work out what your retirement expenses are likely to be. The MoneyAdviceService “Budget Planner” is a great one, for example.

The key first step is to work out what your living costs are at the moment. Add up, for instance, your car payments, mortgage payments, child expenses, food bills and holidays.

Once you have a comprehensive list of your expenditure, you’ll then need to consider how your living costs are likely to change in, and approaching, retirement.

For example, are you likely to travel more abroad? This is likely to significantly raise your yearly expenses. On the other hand, if you have children you might expect them to have left home by then. So that might off-set this added outgoing, somewhat.

Additionally, will your mortgage be paid off by that point? Will your monthly travel costs be lower, since you are no longer commuting to work?

But then, perhaps your energy and water bills are going to go up, since you’ll be spending more time at home? Are care costs likely to feature in your expenses?

Once you’ve gone through your list, outlining likely ways your living costs are going to change in retirement, you should have a much clearer idea of how much your pension should be worth in order to support your lifestyle.

 

Second, Work Out Your Retirement Income Sources

It is likely that your retirement income will derive from multiple sources. When working out how much your pension is worth, consider the following:

• Will you carry on working in some capacity after you retire? For instance, at the moment many retired people are home-sitting other people’s pets when they go on holiday!
• Will you receive any benefits in retirement, such as housing benefit, council tax reduction, or pension credit?
• Will you get any income from renting out properties you own?
• Will you receive any dividends from your investments?
• Are you likely to sell any of your assets, such as property?
• Will you have any interest? (E.g. From pensioner bonds or savings).

In most cases, UK retirees tend to receive pension income from their State Pension, their workplace pension, and possibly a personal pension.

To find out how much your pension is worth, make a comprehensive list of your retirement income sources. If you’re unsure about what kind of pensions you have, or what they mean, see our helpful guide on pension types here.

Then, it’s time to move to the next stage.

 

Then, Work Out How Much Your Pension Is Worth

This is where things can get a bit complicated. However, if you can figure out your retirement income, you will get a lot more out of working with a financial adviser. This is because they can make a more accurate assessment of your finances, and help you identify your goals.

First of all, check how much you’ve contributed to your pension pot. To do this, check the pension statement your provider sent you (they usually do this once a year).

Sometimes, providers allow you to access this information online via a personal profile on their website. If you really can’t find the information yourself, then you can try contacting your provider directly.

You will also need to factor in any other pension pots you have paid into. This might include pension pots with previous employers, for instance. Again, check your contributions and any employer contributions.

Make a note of the values you find. If you think you have lost a pension, then this government service can help you find a missing scheme.

Next, add these pension pot values to your State Pension. Make sure you check how much you are entitled to from the government (this is usually based on your age and national insurance contributions).

At this point, you should have a good idea of your pension income sources, and how much your pension is worth. From here, you should subtract the retirement expenses you identified earlier from your identified retirement income.

This should tell you whether you have enough to fund your lifestyle in retirement, or whether you are coming up short. You will also need to factor in the taxes you are likely to pay at retirement, and subtract this from your figures as well.

If you are coming up short, then you will need to make some important decisions about whether you are going to cut back on expenses, work out ways to increase your income at retirement, or both.

A financial adviser can help you work through your options here. The advisers we refer people to here at PensionAdvice.org are fully regulated by the FCA, and give independent, fee-based advice to their clients. The referral from us is free, and so is the initial consultation with the adviser.

Talking is free. Remember, you don’t lose anything by getting in touch.

 

Ways To Increase Retirement Income

There are a few options we can suggest here:

• Take your retirement income later. For instance, you could “defer” your State Pension.
• Put more into your retirement pot now, or start up another pot (e.g. a personal pension).
• Take money from your pension pot later.