Messing about with pensions

Some years ago, a new accounting standard was introduced for companies that required them to reflect any deficit in their pension scheme on their balance sheet. The immediate impact of this was to make many of them look worth less than before – over the longer term it was just one more nail in the coffin of defined benefit pensions.

Pensions under attack again …

Unfortunately, the International Accounting Standards Board have been at it again; this time suggesting that, instead of being able to account for pensions on the basis that a certain level of investment income could be expected each year, it can only be accounted for when actually received.

This may sound very technical, but it is the sponsoring companies that suffer, not the pension funds. According to The Times (30/4/10) this could mean, for a company like BA, a loss of £1.19 billion on their accounts – which could make them technically insolvent; and it is illegal to trade while insolvent.

Can ‘final salary’ pension schemes survive?
Final salary, or defined benefit, pension schemes are the gold standard for pensions. They offer employees a more or less guaranteed income for life and, should the employer become insolvent while the scheme is in deficit, there is the Pension Protection Fund (PPF) standing by to provide a significant level of back-up.

The problem is that quite a lot of pension schemes could find their way into the PPF over the next few years, increasing the strain on its resources and making contributions from the surviving funds even higher. This could become a downwards spiral that sees the eventual demise of all final salary pension schemes except those offered by the government, which the tax payer has no alternative but to carry on paying for.

What can you do?
Those who are fortunate enough to be members of such schemes should not panic; in all probability, those that have made it so far should be OK; but there are no guarantees that the benefits will not have to be cut back for future service and many schemes (including some government ones) are considering the alternative of switching to what is called ‘career average’, rather than ‘final salary’ as the basis for benefits. Many other schemes are now closed to new entrants and others are closed to future accruals.

… so save what you can yourself

It is now more important than ever, that people seek professional independent financial advice in respect of their pensions. Few of us can any longer rely on an employer sponsored scheme to provide the standard of living in retirement that we want.

Taking personal control and making additional pension contributions is not just an option any more, it is essential. Remember that the government knows how bad the problem is and allows you to invest as much as your entire income into a pension each year (provided you do not exceed the annual allowance of £255,000), although special rules apply to those earning £130,000 a year or more.

The point is that if you suddenly find yourself with a lump of cash, you can consider putting that into your pension, as well as your regular contributions. To find out how much you might contribute, consult your independent financial adviser.

It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact SDB Strategic Planners Ltd. The value of investments is not guaranteed; you may get back less than you put in.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND. 

<back

Please register for regular financial news and to recommend a friend:

Register with us

 

These documents require Adobe Acrobat. Downloads may not work with older versions, please download the latest Adobe Acrobat Reader version 9 free of charge and follow steps 1, 2 & 3