News Archive - June 2009
Farewell to final salary pensions
4/06/2009Barclays is closing its final salary pension to existing members.
They will still have a company pension scheme, one which is much more
generous than many schemes offered by smaller employers. But employees
will not build up any more pension benefits within the guaranteed final
salary scheme. The reason for this is simple. The scheme has a huge deficit
which is ever-widening. The cost of providing final salary pensions is
just too much in the current economic climate.
Only four FTSE100 companies still offer final salary pensions to new entrants.
Now that money purchase pensions are the norm, over time I am sure that
these four dinosaurs will also close their schemes. That only leaves the
public sector with final salary pension arrangements as the norm. And
how long can they continue? To replace these pension arrangements would
be a huge decision which would be extremely unpopular with the many millions
who work for the state. However, the current situation is unsustainable.
There is effectively a two tier system, with huge discrepancies between
the two types of scheme. Sadly, I doubt that many public sector employees
who have a final salary pension (whch will give them a guaranteed and
inflation-proofed pension in retirement) really appreciate the value of
that benefit and the sheer cost to the taxpayer of its provision.
I think that public sector workers should be offered a hefty one-off rise
in pay to compensate for the loss of their final salary pension schemes.
The short term cost to the government might be considerable - but the
ongoing cost of continuing with the current system is unaffordable.
Income Drawdown
10/06/2009People approaching retirement this year have some tough decisions to make.
The value of their pension pot is likely to have fallen over the last
2 years. If they buy an annuity now, these losses will be crystallised
and they will probably end up with a pension lower than they could have
had if they had retired 2 years ago. Many pensioners are looking around
for possible solutions and one might be Income Drawdown,
or Pension Fund Withdrawal to give its more formal title.
This is an option which allows the withdrawal of some or all of the tax-free
lump sum, and then the provision of a regular income, withouit actually
buying an annuity. The pension fund remains invested which gives the potential
for its value to recover before the annuity is purchased. Annuity purchase
can be delayed until age 75.
At first glance this looks like a good option for many. However, in practice
it is far riskier than it sounds.
When using Income Drawdown there is little point in using low risk investment
funds. If your pension fund is not growing then it is almost inevuitable
that its value will be eroded by the withdrawals taken, meaning that you
end up with a smaller fund and a lower annuity than you could have had
in the first place. If you do not want to take higher levels of risk with
your pension pot then it is not likely to be a good option for you. Income
Drawdown can offer useful features for some, especially those with a larger
pension pot (£100,000 plus) and other sources of retirement income, and
also for higher rate tax payers who would like some flexibility in how
they draw their pension income for income tax purposes.
However, for the average pension investor, it should be considered with
caution.
Speak to Mulberry Financial about your retirement options. It
is a once in a lifetime decision - why make it without advice?
The material here is for general information only and is not intended to be relied upon for individual investment decisions. Appropriate independent advice should be obtained before making any such decisions. Mulberry Financial Ltd does not accept any liability for any loss suffered by any user as a result of any such decision.
The information is based on our understanding of current HMRC rules and practices (as at the news article date) which are always subject to change. Taxation and trust advice and Cash ISAs are not regulated by the Financial Conduct Authority. This site is aimed at UK residents only.
Please remember that the prices of shares and other investments can fall sharply. You may not get back the money you originally invested. Past performance is not necessarily a guide to the future.
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