Page last updated at 23:51 GMT, Monday, 8 March 2010

Pension scheme closures: your questions answered

TUC General Secretary Brendan Barber
The TUC General Secretary, Brendan Barber answers your questions

Every month brings news of another big employer which is planning to close its pension scheme.

The most recent example has been the construction firm Taylor Wimpey, which intends to shut its George Wimpey final-salary scheme to the current members.

It is just the latest in a long line which, in the past year, has included firms such as Trinity Mirror, Pirelli, Fujitsu, Barclays, Morrisons, Vodafone, BMI, Dairy Crest, IBM and Costain.

It is not just new recruits who are being locked out of these schemes.

The crucial feature is that existing members are also being told they can no longer build up further pension benefits under the current arrangements.

Can you do anything about it? Should you take any evasive action?

Brendan Barber, general secretary of the TUC, answers your questions.

Q1. I am recently redundant and have a deferred pension, now with Lloyds bank (I was previously at HBOS). Am I safe to leave it there? What would happen to deferred pensions such as mine if the bank were to go bust? Kim Metcalf, Hebden Bridge.

It must be thought unlikely that any government would allow a major bank like Lloyds to go bust.

You are therefore in a safer position than many other people with a deferred pension from a previous employer.

But if a company goes bust and takes the pension scheme down with it, the Pension Protection Fund (PPF) will step in.

Final-salary pension schemes promise to pay a retirement income based on a percentage of your salary every year for the rest of your life
The amount you get depends on how long you have spent working for your employer and how much you were earning at the time you gave up work - your final salary
The sum is typically between a half and a third of your salary
Revenue and Customs rules allow members to build up a pension equivalent to two-thirds their final salary

This is a relatively new body set up after a long campaign by unions which acts like a kind of insurance scheme for defined benefit pensions.

Every scheme pays an annual levy, and if a scheme goes bust it will take over its responsibilities for paying pensions.

However the PPF does not take on every pension commitment.

For those who have not yet retired it will generally pay 90% of what you would have got from the Lloyds scheme when you first draw your pension.

In later years it might not go up at quite the same rate.

It is also capped, so that if you were one of the very few people looking forward to a pension of more than £28,000 a year then you might lose some of this.

See the PPF website here for more details.

But it is very unlikely that you would get a better deal by taking your money out of the Lloyds scheme and using it get a private pension.

The Pension Protection Fund means that you do not have to worry about losing all your pension.

Q2. I have worked 35 years out of a required 40 years of my defined benefits pension, which is still open, although closed to new employees. I work for a UK limited company which is part of an American Fortune 500 Corporation. With the Readers Digest going into receivership I am concerned that my company could leave me without a pension when I retire in five years. What guarantees do I have for my retirement that I will in fact receive the pension I have worked so hard for? Chris West, Peterhead, Aberdeenshire.

If you employer goes bust then the Pensions Protection Fund (PPF) will step in.

(See the answer to the last question for some back ground on this.)

You would not get exactly the same, but you would still get most of the pension you have built up.

If your employer goes down after you have started drawing your pension the PPF will carry on paying all your current pension - though again it may not go up in future in the same way.

This does mean that you would do better from the PPF if your employer collapses if you have already retired.

But of course if you retire earlier then you will get a smaller pension. That is a judgement call that only you can make.

Q3. I am a 23 year old graduate in a final-salary pension scheme. It is clear that the pension scheme is top heavy and the level of contribution is set to increase to 40% (including employer contributions) in the next year. As I am so young, I fear that by the time I come to retirement, my pension will be a much inferior alternative. I am considering dropping out and investing the money elsewhere. Also, I think it is highly unlikely I will remain with the company for the next 40-50 years. Brian Mackay, York.

It is very hard to look that far forward, but it is never too young to start thinking about pensions.

Fujitsu workers were leafletting outside Marks and Spencers
Members of Unite protest in Belfast about Fujitsu's plans

If you save money when you start work there is every chance that it can build up significantly before you retire, so it is a mistake to assume that you should not think about pensions when you first start work.

If you stay in the pension scheme then you will also be getting the benefit of a very substantial employer contribution.

Even if you are paying 10% (which is higher than average) then every pound you save will trigger three pounds from your employer.

If you leave the pension scheme then it would cost you four pounds to save the same amount.

You also get full tax relief on contributions to a pension so that it effectively costs you 80p to contribute a pound (assuming you are a standard rate taxpayer).

A pension is easily the most tax-efficient way of saving.

Even if you are not a member of your employer's scheme until you retire you can still build up a useful amount of pension.

The fact that it is a final salary scheme means that your benefits are underwritten by your employer rather than depending on whether investments go up or down.

Your pension looks like a pretty good deal, but it does of course tie your money up until you retire.

Q4. I have been in the BTPS (BT pension scheme) for 37 years and I was wondering what to do. Should I take my pension now or do you think it is safe enough to let it run the full 40 years? John Redmond, Liverpool.

I see no reason why you should not stay in the scheme for another three years.

BT is a successful company and is likely to be around for many more years.

Even if closes your pension scheme, it still has to honour the benefits that you have built up over the last 37 years.

Q5. I work for Boots The Chemist, and they say they are planning to close their final-salary pension. I am not yet in the scheme but does this mean it is closed to new members but will still be final-salary to those in the scheme? Or does this mean it will be closed to all, even those in the scheme already, with accrued value banked? Stewart, Scotland.

Alliance-Boots is one of the latest companies to announce that it is closing its defined benefit scheme, not just to new members but also to new contributions from existing members.

Occupational scheme - one organised by an employer
Active member - a worker making contributions
Final-salary scheme - guaranteed pension based on earnings at end of career and length of service
Defined contribution scheme - investment fund, determined by contributions and investment returns, used to buy an annual pension. Also called a money purchase scheme

This is a very worrying trend. While employers usually replace closed schemes with new arrangements they generally have lower employer contributions and put all the risks on the individual worker leading to not just a lower, but much more uncertain, level of pension in retirement.

When a scheme is closed to new contributions in this way people are basically treated in the same way as if they had left their employer for another job.

They keep the benefits they have already built up, but their pension will be based on their years of service and their salary when the scheme closed.

Your management does have a duty to consult and explain the impact of their plans, but if you are not already a member of a union now looks like a pretty good time to join.

Q6. I am almost 57 years old, I retire at age 65. My company will close down our final salary pension scheme in July. Will it be worth my while joining the firm's other stakeholder pension plan or should I just put my money into a savings account?Tina Harrison, London.

This is a hard question to answer without knowing all the circumstances.

The first question is whether your employer will also contribute to the stakeholder pension plan if you choose to save this way.

If your contributions are topped up then that looks like a very good reason to choose the stakeholder.

If your employer does not contribute then there are still tax reasons to look favourably on a stakeholder pension.

Assuming that you pay income tax but are not one of those earning over £150,000 a year who were hit by last year's budget, then any contributions you put into a pension will get full tax relief.

This means in effect that it costs you 80p to save £1 in a pension.

Higher rate taxpayers do even better as it costs them 60p to save a pound.

ISAs get much less generous tax help - mainly that you do not have to pay income tax on the interest you earn.

You are also old enough to withdraw money from your pensions savings as part of the tax free lump-sum you are allowed to take.

While this is not as straightforward as using a cash ISA for savings and withdrawals, it does not mean all your money is tied up in the same way as if you were younger.

You might find it helpful to talk through your situation with an independent financial adviser who will be able to look at all the details of your circumstances.

Q7. I am a police officer with 12 years service. I have paid into the pension scheme at 11% since I first joined. I am concerned that the government can and will alter the terms of my pension before I retire in 18 years time. Can they alter the terms of my pension under any circumstances? Christian Gresswell, Bristol.

If any future government tried to reduce the benefits that you have already built up then I am sure the Police Federation would see them in court.

Workers picket at the Grangemouth oil refinery as they strike over a pension dispute April 28, 2008
Some workers have gone on strike over threatened pension closures

Indeed unions across the public sector would immediately take legal action if retrospective cuts were made to what pensions experts call 'accrued benefits' as these are contractual rights.

It is technically possible for a future government to try and undo these rights, but even if this could not be challenged in the courts, all parties have said that they would honour accrued benefits.

This is not a reason to stop saving in what is a quality pension scheme.

But this does not mean that there cannot be scheme changes from time to time that alter how you build up future benefits.

There were changes to the police scheme made a few years ago so you will already have benefits built up both before and after these changes.

Either your scheme or the Police federation will be able to tell you more.

Q8. My final salary pension has been in payment for the past two years. What will happen to pensions in payment if a scheme is closed?Rod Sharp, Welwyn, Herts.

If your employer closes the scheme for future accruals or to new members it should make absolutely no difference to pensions in payment.

They still have to honour the pensions promises that have been made to you.

If your former employer goes bust, then the PPF will take over paying your pension.

They will continue to pay your pension at the same rate but it will probably not go up at the same rate that you are used to.

Q9. I am 63 years old and due to retire in November 2011. I can take my company final pension one year early in November 2010 without penalty. However, my company is currently planning to close the final pension plan and are soon to send out letters to the employees with their proposals. I know that in the end they will close the plan but are going through the motions. All I can do is hope that the plan is not closed before Nov 2010 and I can lift my pension. I believe that once the pension payments commence they cannot be touched. Any suggestions would be helpful. Alan Hancox, Bangor, Northern Ireland.

Even if your employer closes the scheme they cannot take away the benefits that you have already built up.

All they can do is stop people building up future benefits.

However they may be able to make changes to the deal that allows you to take your pension early without penalty, but it is hard to answer that without knowing all the circumstances.

Your employer will need to consult before making changes, and if you are represented by a union they will be involved in these consultations.

But if you are worried that you might lose all your pension, then you can sleep easy.

You have already built up your pension, it is your younger colleagues who will suffer as they will no longer be able to build up benefits in a good quality final pension salary pension scheme.

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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