Will New Government Proposals to Final Salary Pensions Hurt Savers?
People relying on a Final Salary pension are at risk of losing out on thousands of pounds due to new government proposals created to ease the pressure on employers.
A Defined Benefit green paper published by the Government back in February suggested changes that would allow employers to award less generous inflation rises to Final Salary pensioners, and some to pay nothing at all.
This new proposal was one of the most divisive in the large green paper created to incite conversation on the future of the UK’s 6,000 Final Salary schemes, which currently have 11 million members.
What is the Government proposing?
Defined Benefit pensions – or Final Salary schemes – guarantee to pay an income for life during retirement, based on salary and length of service. Generally, this increases year by year in line with inflation.
The cost of these schemes to employers has risen extensively as life expectancy has increased.
To lessen the financial burden on businesses, the Government proposed some changes that would allow “strained” employers to decrease or even stop the “gold-plated” indexation element in these pensions.
The green paper suggested options such as allowing employers to change from linking inflation increases not to the Retail Prices Index, but alternatively to the generally slower-rising Consumer Prices Index.
This proposal would save businesses around £90 billion but would mean pensioners losing around £20,000 of their income over their life, according to the green paper.
The Government also suggested allowing the least funded schemes to temporarily stop inflation rises altogether.
How big is the problem and are businesses close to being unable to fund pension schemes?
Despite most of the UK’s 6,000 private sector Defined Benefit schemes suffering from a funding deficit, the Government said there was little evidence to suggest there was an affordability crisis amongst most employers. “There is also little evidence that funding deficits are driving companies to insolvency,” the paper said. “Deficits are likely to shrink if employers continue to pay at current levels.”
How are scheme members affected?
The green paper is still only a point of conversation, and the Government is still undecided on how it’ll proceed.
Despite this, the Government has strongly hinted that any decision to allow schemes to dilute their pension promises would be firmly dealt with, and would probably be aimed at businesses that are in financial trouble.
It’s worth remembering that if your employer goes into administration or becomes bankrupt now, you can expect to see a dent to your Final Salary pension of at least 10% if payment of your pension switched to the pensions lifeboat fund.
Some in the pension industry have suggested that keeping an employer buoyant by accepting a reduced indexation potentially could help avoid deeper cuts to pensions if a company collapses.
Does this mean transferring out?
The news of potential pension cuts will be a cause for concern for those relying on a Final Salary pension for their retirement income. But cashing in your Final Salary pension is a huge decision, and one not to be taken lightly. Your decision should be based on a whole range of factors: from the cash deal on offer and your wider asset base, not only the security of your employer. A suitably qualified and regulated financial planner can help you consider all aspects of your potential transfer and any pitfalls you could encounter.
When are these changes due to happen?
Presently, the government is far from making any decision as it has only suggested the plans rather than set out clear proposals. Consultations are due to close in May, after which it may publish a white paper, stating clear plans, which would still be subject to change after more discussions.
But any plans to allow schemes to change from RPI to CPI without members’ permission is likely to face severe opposition. Unite, the UK’s largest union, recently requested the Government rule out any such plans, saying it would be akin to “legalised theft” of pensioners’ incomes.
Planning your retirement can be confusing, but our financial planners have the expertise to make it simple. If you would like to arrange a meeting with a member of our experienced, professional and friendly team, contact us today on 01992 500261, or online.
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This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions. Investments can go down as well as up and you may get back less than you invested.