The John Lewis Partnership (that includes Waitrose) are to axe their generous final salary pensions for employees, as British business moves one step closer to the eradication of the out-dated schemes.
With the help of Gary Singh, independent financial advisor at Sigma Wealth Management, we took a look at the demise of the final salary pension to see just what this means for retirees moving forward.
Final salary pensions are a continued income paid to a company’s employees on retirement. Usually it is calculated as one-sixtieth of your final salary, multiplied by the number of years you have been part of the scheme. “Virtually every firm is moving away from final salary pensions” explains Gary. “We’re living longer and working a lot longer, so schemes are becoming more and more expensive to run”.
The idea behind final salary pension schemes is that, rather than having to contribute to your own private pension scheme each month before purchasing an annuity in retirement, your employer continues to pay you once you’ve retired from the company.
With all the risk lying with the employer, combined with rising mortality rates and falling stock markets, final salary pensions have become too much of a financial burden for most companies.
Gary Singh spoke to us about the responsibility that retirees have now business are moving away from these schemes, and told us that “The onus is now on the individual to make their own provisions so seek professional advice. Before you never had to worry about your pension but that’s no longer the case.”
It isn’t surprising that UK companies are moving away from final salary schemes for their employees. Supermarket giant Morrisons, who announced they were changing their scheme a few months ago stated that they expected to save between £5 million and £10 million per year. And as many of the remaining final salary pensions in the UK are found in the public sector (final salary pensions are 10 times more common in the public sector), the government’s recent announcement of restructures to their pension scheme have been met with contention by employees despite the fact it should save an estimated £430 billion of tax payer’s money.
But where does the axing of final salary pensions leave workers who were expecting this generous pension income? “Invariably you will be worse off as you’ll have to contribute more for your returns,” states Gary. But he does believe that it isn’t all doom and gloom, and moving away from these schemes will have many benefits for workers, particularly following his year’s pension reforms.
“Come April, once you retire, you’ll have access to your entire pension fund, rather than relying on a company to pay out your pension.”
Retirees will be able to access their entire pension funds, with 25% of this tax-free. Because final salary pensions are paid on retirement as a regular income (not dissimilar to an annuity), they aren’t flexible. The new rules will allow greater flexibility and the added benefit for those in retirement to access their pension funds as they desire.
We are also seeing many employees taking steps to alleviate their risk of being tied into pension payments: “We’ve seen people being offered between 20 and 25% on top of their pension fund value as an incentive to leave the scheme. I know of somebody who was offered £18,000 at the age of 62 to transfer out of their final salary pension scheme.”
Transferring out of your final salary pension scheme also has additional benefits for your family and loved ones. While your employees final salary scheme may have only offered a spouse 50% of your funds value once you die (and nothing for additional heirs once they are gone), the new rules will allow you to do as you wish with your pension savings. “With a final salary pension, if you die your heirs may not fully benefit from your scheme – a spouse may be offered half of its value. But once they die, the money cannot be paid out to any other heirs. By transferring out, your money is available to pass on as you wish when you die.”
So while the national press may outline only the negatives of the demise of final salary pension schemes, along with this year’s pension reforms UK workers can actually expect even greater flexibility from their pension funds – even though in the long run it may be slightly undervalued compared to a final salary scheme. As always, we would recommend you seek final advice from an independent advisor before transferring your pension scheme to a defined contribution option, or if you have any concerns about your current financial situation in retirement. As Gary Singh signs off: “Be more pro-active when it comes to your pension and expand your own knowledge by seeking professional advice”.
Ryan Smith is part of the content development team at Compare Annuity, working with a carefully selected network of annuity specialists offering retirees free, no-obligation quotes and advice on annuities. Gary Singh is an advisor at Sigma Wealth Management in the West Midlands.