As a pension is considered to be income for retirement, many Britons merrily work and save, safe in the knowledge that this pension fund will keep them secure and comfortable in old age. The BBC has now become the first major public organisation to make large alterations to its existing pension scheme. From now on, increases in pensions will be halted at 1%, regardless of how big an increase in wages members of the plan receive. Private companies have already closed any final-salary schemes for members old and new. The main questions are, why are these lucrative pensions in danger and why is everything regarding pensions so complicated? Below are some general questions about pensions.
Should anyone bother with pension schemes any longer?
This is an unsurprising question when you consider how many companies have closed their final-salary pension schemes as well as the falling value of pensions. It was suggested in a survey that 66% of people under 30 who were working did not save for pensions. For some, property is a much better option than pensions for retirement money. However, if you join your employer’s pension scheme, they will contribute money on top of what you put in. Ignoring pension schemes is one way of saying no to a long term pay rise.
What are the various pension types?
An employer sets up an occupational scheme where they and the employee place money into the fund. The aforementioned final-salary scheme which is being closed by many companies is a pension that is guaranteed at the end of your career with a company and is dependent on your earnings and length of service. It is also called defined benefits and although many are closing, there are still hundreds available. A defined contribution scheme is essentially a fund for investments which is decided by your contributions as well as the return these investments give you. It can also be referred to as a money purchase scheme. As this amount depends on the success of the investment, it is usually not as lucrative as final-salary pensions.
What do I do if I am not in a company scheme?
The alternative is a personal pension. You will not receive any contributions from your employer but it is made up by tax relief from the government. If you were to enter £80 into the fund, the government tax relief will add an extra £20. You can purchase personal pensions from a specialised pension company, a building society or a large bank. The problem with personal pensions is that they are not guaranteed. This means that their value could fall as easily as it will rise.
Do these changes affect my state pension?
Though there are similar fundamental issues, these changes will not affect your state pension. You collect your state pension when you reach pension age which could be completely different to your retirement age. A formal consultation by the government is in the works when it will decide when to raise the state pension age to 66. This may occur in 2016 for men and 2020 for women. The previous Labour government was aiming to make a slower change, bringing the age to 66 in 2024. The current coalition government also has plans to scrap a rule that forces employees to leave at 65 by October 2011.
Why does this sound like my retirement years and income are decreasing?
This is because of increased longevity and a growing population. Essentially, the workforce supporting pension costs is getting smaller and the costs are getting larger due to the fact that more people are receiving state pensions. The recession also took chunks off investments. Many pension funds are invested in large companies like BP who have taken a serious financial hit. This has caused their investments to shrink. Those in the public sector have claimed that they took a smaller salary than those in the private sector because they would receive better pension schemes and earlier retirement in return. If the terms of pensions are altered, they will lose out.