Fed up with underperforming pensions?
There is a huge amount of media coverage about how dreadful pensions are. You may be surprised to learn that we agree with much of the criticism. However there are some misunderstandings. There are basically two types of pension.
1. Occupational Pension/ Final Salary Schemes
These are based upon your membership of an employer’s scheme. Typically these are 1/60th or 1/80th schemes. If you work for the employer for say 10 years, you would build up 10/80ths of service. When you leave the employer – to retire or change job, this is “locked in” for you. Suppose your salary was £50,000 and you have 10 years in the scheme. You would be entitled to a pension of 10/80ths of £50,000 which is £6,250. This would be paid each year from the scheme’s normal retirement date. The locked in pension is normally inflation protected, but the rules on this are currently being altered.
So how much you contribute (if anything) towards the scheme is largely irrelevant. It is all about your service and salary. This said, clearly the company needs to be making provision for your pension (and those of other employees). So they need to fund the pension scheme. Many of the problems covered in the media recently have been due to employers failing to properly fund the scheme – or actually going bust. Finally the Government has been forced to protect pensions like this. Employers now have to provide scheme members with a report about the funding levels of the pension, so you should have a clear idea about its security.
2. Investment-Based Pensions
Most employers find that Occupational Final Salary Schemes are too expensive to provide, so since the 1980’s investment-based pensions have been widely available. In simple terms, you gradually build up a fund of money and hopefully by the time you wish to retire there is enough in the pot to provide you with the income that you need. So the size of the “pot” is therefore rather vital: how your pension investments perform make all the difference to your retirement. Most people have at least one or two old pensions. The investment strategy used has probably not been reviewed since completing the application form and most people have no idea if the pension will provide enough income. So many people are literally gambling with their pensions.
We will provide clarity. We will review your old pensions, which often have high charges and low performance. We will advise you what to do with your old pensions and get you on-track or alternatively at least improve the situation and help you prepare for your retirement.
The only really good thing about pensions is the tax-relief available. The Government (of any persuasion) needs to encourage us to make our own provision for retirement as the strain on the State system is not sustainable. At the moment, tax-relief is automatically provided to everyone under the age of 75 that lives in the UK – even babies! –so for every £80 you invest, the Government automatically pays £20. Higher rate taxpayers can also reclaim a further 20% via self-assessment tax returns.
There have been massive changes and improvements to pensions. We now view a pension as an investment portfolio with a special tax allowance. As a consequence of new technology we can create a pension portfolio using the top investment funds available that will reflect your attitude towards investment risk.