Page last updated at 12:30 GMT, Thursday, 25 June 2009 13:30 UK

Your pensions questions answered

Malcolm McLean
Malcolm McLean is from the Pensions Advisory Service

The future of final-salary pensions has prompted strong debate following a survey exposing threats to the schemes.

Accountancy firm PricewaterhouseCoopers asked 1,000 companies about the future of their schemes. Of the 157 who replied, 55 intended to freeze their final-salary pension scheme for existing members within the next five years.

The report led to a series of questions from BBC News website readers which have been answered by Malcolm McLean, of the Pensions Advisory Service.

Click on a question to see the answer to that particular query, or scroll down the page to read them all.



Q. Is it legal to change the terms of final-salary pension schemes after an individual may have made a career choice decision based on the supply of this scheme by a company? Mark, Crewe

Yes, it is legally permissible for an employer to close a final-salary scheme to future accrual (build-up) of pension benefits providing there is consultation about the planned changes with "as many affected members as is reasonably practicable" in the circumstances.

The consultation period must be not less than 60 days and could well be longer dependent on the quantity and complexity of what is being proposed. The employer must provide as much information as is necessary to enable those affected to understand the reasons for and the implications of the decisions being made.

The Pensions Regulator has the power to impose a financial penalty (up to £50,000) for breaches of the employer consultation requirements.

Q. I was employed with my current company 35 years ago with a final-salary pension scheme as part of the benefits offered. For 30 years money was taken from my pay to pay for the scheme and each year the final salary scheme was stated as being part of my package. Three years ago the scheme was frozen and the published early retirement factors reduced (to make early retirement unaffordable). Is this a breach of my contract of employment and am entitled to compensation? Anon

I would be very surprised if you were able to rely on your contract of employment to make out a case for compensation in the way you are suggesting.

For that to be effective your contract would have to specifically say in terms that you had an on-going guaranteed right to the membership and benefits of a final salary scheme and, in relation to early retirement, specific percentage reduction rates were fixed and could not be altered.

Such terminology in my experience would rarely if ever be used. Most contracts refer only briefly to the pension scheme availability and cross reference you to the Staff Handbook or Manual for details of the rules and what is allowable. Furthermore, it is quite usual for scheme rules to be amended for the future as long as benefits to the date of the scheme are not reduced.

Q. Are the frozen final salary schemes safe? I am 53 and wonder if it is best to draw the pension now and invest it myself or wait until I am much closer to retirement. Which would give me the best return and which would be the best safeguard for my pension? Andrew, Windsor

In a frozen final salary scheme your pension benefits are normally preserved for you within the scheme until such a time as you reach the scheme's normal pension age (usually 60 or 65) and claim your pension. The pension will have been calculated based on your length of service and level of earnings at the point the scheme was closed (or when you left the scheme if earlier) and increased in part at least to allow for inflation movements subsequently.

It may be possible to draw your pension at an earlier date in certain circumstances but there could be cost implications for you in doing so and you need to establish precisely what these are before taking final decisions as to your best way forward.

Your employer might be prepared to grant you the pension as an early retirement pension with an appropriate reduction for paying it to you in advance of your normal pension age - perhaps reduced by as much as 6% per year for each year of early payment. The other possibility would be to take a transfer from the employer's scheme into a personal or stakeholder pension plan from which you could then purchase a pension annuity, the value of which would depend on prevailing rates (not particularly good at the moment) as well as your age. If you are considering doing this you should probably consult an Independent Financial Adviser before proceeding.

In terms of security you should bear in mind that there is now a Pension Protection Fund for final salary schemes should the employer become insolvent and be unable to meet all the pension liabilities. This aims to provide compensation awards where necessary to a 100% level for scheme members who have reached their scheme's pension age or are entitled to a pension on ill-health grounds and at 90% for other members subject to a cap of approximately £28,000 a year.

Q. I am sick to the back teeth of my pension pot taking a hammering every time the stock exchange nosedives. As a prudent saver, I am suffering a double whammy with the low interest rates. Now appears to be a good time to get into property but to do so needs the release of equity currently held in pension pots. Is there some form of scheme available that allows you to purchase houses and rent out in lieu of any pension scheme? If so can I transfer the pensions savings into such a scheme? Iain Henderson, Dunfermline

I am afraid that under current pension and tax legislation it is not permissible to use your pension pot to purchase property and derive rental income from it in the way you have described.

Q. Would you advise anyone today to bother saving for a pension? Ian Cox, Newton Abbot

I would certainly advise everyone at almost any age to have some kind of savings or investment plan to provide for themselves in their later years.

As a nation we are living longer and future generations can expect to have many more years in retirement than previously. If you aspire to maintain an above average standard of living throughout those years it will be necessary to have an income above and beyond what the state pension will give you.

Pensions are not the only method of saving - property and ISAs can be good alternatives. But one clear advantage a pension plan offers is the tax concessions on your contribution payments. Also if you do have access to a company pension scheme you should seriously consider joining it as the employer as well as yourself will be putting money in. Not to join in those circumstances is the equivalent of turning down a pay award.

Q. What is likely to be the situation or effect upon 'closure' in these company schemes for deferred members, i.e. those who have an accumulated pension pot but are not of pensionable age yet, and no longer contribute as they most likely now work for another employer? S Brown, Fleet

Exactly the same as those still in employment but no longer "active members" of the scheme.

Your pension will be held for you within the scheme until such a time as you reach the age when you can start to draw it or alternatively you can take a transfer into an alternative pension scheme or plan you have now joined.

Q. Many seem to forget that during the boom years many companies stopped paying into their final salary pension schemes on the grounds they were adequately or overfunded. Where is that money now? Andrew, London

These were what were known as "contribution holidays" and many employers took advantage of them.

I am sure those employers who did so will tell you that the money was well spent but it is now a past event and is not available at this stage to be recouped.

All employers with final salary schemes have an ongoing responsibility to provide the necessary funding to support them and in the event of the scheme being wound-up meet any outstanding shortfall to buy-out all the liabilities in full.

Q. Are there any chances that final salary pension well be replaced with some other kind of arrangement? Haresh, Reading

Yes, some are now being replaced by either average salary schemes or so-called money purchase schemes. An average salary arrangement is where the pension is calculated not on the final salary but on an average of salaries over a much longer period. A money purchase scheme is one where you have your own individual pot which is invested often in the stock market and the level of your eventual pension depends on the investment returns you achieve.

By and large for most people neither of these alternatives delivers a better pension than that normally produced under a final salary arrangement.

Q. I am in my early 20s and currently in a DC scheme. I can't help but think whichever way I look at it that I, as a taxpayer, will throughout my life subsidise the pensions of my parent's generation. I am not suggesting that my parents' generation do not deserve pension provision that they have worked hard for. However there is something within me that can't help but resent the fact that I will ultimately pay for it in the longer term. Anon

There could well be an inter-generational problem in relation to pension provision in the future.

This is a massive issue to which further attention will no doubt have to be given in due course - particularly if the new national pensions scheme (currently dubbed personal accounts) does not deliver the anticipated extra pension saving as the government hopes it will when it starts to be rolled out from 2012.


The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.



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