Retirement funds at risk with final salary pension schemes

24 Feb

The safety of final salary pensions has again been thrust into the limelight, with many individuals in their forties and fifties facing up to a 10 per cent reduction in their retirement incomes.

A recent article in The Telegraph highlights that five in six final of these supposedly ‘gold-plated’ schemes in the UK have fallen into difficulty and will face an uphill struggle to pay future retirees a full pension.

According to the chief executive of the Pensions Protection Fund (PPF), Alan Rubenstein, a considerable number of the 11 million people with a supposedly guaranteed pension linked to inflation, are being “misled” that their pension is safe – when this may not be entirely accurate.

Mr Rubenstein also warned that if individuals draw down their pension pots early, when the government’s pension freedoms come into effect on 6th April, they could risk losing as much as 40 per cent of the value of the retirement funds they’ve accrued due to the schemes’ shortfall.

So, when these pension freedoms come into effect, the health of final salary pensions will have worsened considerably, facing a deficit of at least £300bn, which is the largest figure in three years.  This is predominantly due to the low interest rates and concerns over Greece’s exit from the Eurozone which has led to a rise in funding costs for companies offering final salary pension schemes.

Therefore, as a result of this huge deficit, the difference between the amount of money held in these schemes and the level of pensions they are obliged to pay is increasing all the time.  Final salary pensions hold £1,200bn of investments, and there is an estimated £1,500bn required to fulfil promises to members.  This substantial £300bn shortfall has grown over a period of just 12 months.

There is also the added concern that should companies offering final salary pensions close down or are taken over, the pension scheme would be taken over by the PPF, and members would receive 90 per cent of their forecast pension payments annually.

However, payouts would be capped, usually at approximately £30,000, meaning wealthier savers would lose more.  The PPF anticipates having to rescue twice the value of pensions over the next year as in 2014, primarily due to the increase in deficits of failed schemes.

Misleading savers into believing their final salary pensions are not in difficulty will only lead to a whole host of consequences down the line.  Even though so-called recovery plans are in place, they could easily fail if returns drop further.

To me, what is abundantly clear from this report is that people just aren’t saving enough for their future and that many simply don’t release how underfunded company schemes are – most of these schemes are, in my view, wholly unsustainable.

As such, is imperative individuals seek advice from an independent financial adviser, now more than ever before, to become fully aware of the possible risks to their pensions and how they can be mitigated or avoided through established financial vehicles.  For example, if you live outside the UK or intend to retire abroad, it would be worth considering a Qualifying Recognised Overseas Pension Scheme, or QROPS, which is an overseas pension scheme that meets certain requirements set by HMRC.

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