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I wonder what the effect will be on companies who are forced to enter the scheme. The money they'll have to contribute will have to come from somewhere. Lower wages perhaps? tinyurl.com/l7bcdgg
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I don't doubt for a minute that some smaller employers might struggle with this.
OTOH there are plenty of large and profitable PLCs paying low wages and with no pension scheme. The taxpayer is effectively subsidising their profits by way of tax credits and the pensioners minimum income guarantee.
That is a trap we've got to get out of as a nation.
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>> That is a trap we've got to get out of as a nation.
Correct.
When most people fell off the perch by 65, it was quite feasible for the retired to be supported by the working population. By 2050, there are expected to be only two adults of working age for every pensioner.
The obvious solution is that everybody should provide for their own retirement, and what is happening with auto-enrolment is if anything too little, too late. Employees can opt out, and employers are not currently going to be required to contribute more than 4% by 2018.
The low paid of course will be little better off - the modest provision they can accumulate will mostly just substitute for welfare payments. So the savvy ones who know they can't save enough to make themselves much better off will opt out and let the rest of us, including tax paying pensioners, pay for them.
What is needed is a system where everybody is obliged to pay in to a National Insurance scheme that will accumulate benefits for them, which they will be entitled to draw on in retirement. Now there's a novel idea...
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>> I don't doubt for a minute that some smaller employers might struggle with this.
>>
No. We are voluntarily implementing it now, in advance of compulsion. Any decent employer should. It's always worth investing in staff well-being and satisfaction, a small reward to pay in return for motivation and loyalty.
But it's a shame that it's taken so long nationally to wake up to the fact that people are living longer. A man retiring at 65 in 1953 might on average have 5 years of retirement.
Someone retiring today will probably live to 80 or 90.
For most middle-aged workers it is too late to start contributing towards a meaningful pension. It would take years of contributing 25% of salary to catch up, and no one can afford that.
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Part of the problem is that in most cases the pension provided for most people in the future will be based on investment of whatever size of pot has been accumulated which is likely to mean huge discrepancies for people who retire a few years apart depending on interest rates and forecasts.
Final salary pensions are a dying phenomenon.
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>>Final salary pensions are a dying phenomenon.
>>
I recall, 15 years ago, a few guys I worked with decided to " take an offer" to retire early purely so that they ensured they got their index linked pension rather than carry on and risk all.
Eventually I took an offer to retire early purely on the basis that the offers were likely to dry up. I got out a couple of years earlier that I really wanted ( my two offspring were both at Uni for two more years ) but all worked out well in the end.
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>> Eventually I took an offer to retire early purely on the basis that the offers
>> were likely to dry up. I got out a couple of years earlier that I
>> really wanted ( my two offspring were both at Uni for two more years )
That's exactly where I am now. Current outfit is being closed down (bonfire of quangos) and there's a redundancy/early retirement scheme as an alternative to redeployment. Ideally I'd like a few more years in the pot but no guarantee there'll be finance for another scheme in 2016/17 even if I were in an eligible post.
Hopefuly I can find local work to more than cover the net £300/month I'll lose once I'm not travelling to London most working days.
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>> Final salary pensions are a dying phenomenon.
More than that, they are dead jim.
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Not everywhere, but mostly yeah.
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Yikes I retired at fifty ! Now back in full time work again and a 40% tax payer so I guess I'm economically active for at least the next five years if I choose and my health is good of course. I have opted out of the CAB scheme and ducked a pay rise offered last week...
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R.P., probably easier for you to find well paid employment than some without your qualifications. You might be back to paying 40% tax but I am assuming you were getting plenty more income before.
I took out the final salary pension when I joined my current employer. They initially pushed back final pension age and then closed to future accruals or whatever the term is. So there's still some money in there.
I've said before I am lucky they eventually agreed to compensate for moving us to the other pension scheme. So it's the usual I pay 5% and they pay 10% but they also pay an extra 10% on top. So this pension is getting 25% salary equivalent paid in.... so probably about enough to buy a new kettle in a few decades! :-)
Last edited by: rtj70 on Fri 7 Jun 13 at 22:05
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>> in full time work again and a 40% tax payer .........................I have opted out of the CAB scheme
Surely that doesn't make economic sense? Unless of course you don't expect to live long?
I was redundant at 55. I found a little job, with the option of joining the final salary pension scheme. I've never paid more than the basic rate tax, but it seemed a 'no brainer' to me.
I'll collect next year, if someone moves that damn bucket................
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Not planing on working there long. Three years max for when Mrs RP retires - I will then live off my private pension quite happily !
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If you contribute enough to reduce your taxable income to basic rate you could considerably enhance your pension income.
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>> It would take years of contributing 25% of salary to catch up, and no one
>> can afford that.
>>
Are you saying that employees will be allowed to contribute 25% of salary?
In my day Inland Revenue rules limited me to paying 15% of salary, presumably to limit avoidance of income tax. On top of that there was a pension limit of 2/3rds of final salary.
Salary meant "pensionable salary" which was as defined by the pension scheme, and which was significantly less than actual salary.
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You can put more than that into AVC schemes, L'es, and I think you can also use a few years' previously unmaxxed allowance unless rules have changed.
Investment returns are so weak over the past 5 to 10 years there will be many investors who will have seen their AVC pots pretty static after charges, and this doesn't exactly encourage prudence for the future.
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>> You can put more than that into AVC schemes, L'es ...............
I've found it. www.hmrc.gov.uk/incometax/relief-pension.htm#4
"Limits on tax relief
You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 per cent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension from which you benefit from tax relief is subject to an 'annual allowance'. The annual allowance for the tax year 2013-14 is £50,000."
That's a big jump from the contribution limit of 15% of pensionable salary which applied when I was contributing into a pension scheme. Is it fair? I think not. I don't think that anybody should be allowed to avoid paying income tax to that extent.
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>>I don't think that anybody should be allowed to avoid paying income tax to that extent.
It's more of a 'deferrment' rather than avoidance of income tax, as the pension acquired will be taxable as income (other than the 25% lump sum that can be taken prior to buying an annuity).
However, it does offer advantages to higher rate tax payers who become lower rate payers on retirement as their ultimate tax rate is lower.
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>> That's a big jump from the contribution limit of 15% of pensionable salary which applied
>> when I was contributing into a pension scheme. Is it fair? I think not. I
>> don't think that anybody should be allowed to avoid paying income tax to that extent.
Depends which end of the telescope you are looking down. A lot of things have changed in the last few years in regard to pensions.
Say you earn £60,000 a year and want to have a pension of £40,000. That would be quite feasible with a final salary scheme, which would also probably give you free life insurance, RPI increases at least up to 5%, and spouses and dependants' pensions on your prior death.
If you have buy that in annuity form, with just the RPI link and the spouses pension, you will need c. £1.5m in your pension pot. The current lifetime allowance for pension assets is £1.5m, set to reduce to £1.25m and the annual allowance is going to reduce to £40,000 from 2014-15, so not many people will be getting 2/3 of final salary, or even average salary revalued, in their pensions in the future.
When my defined benefit scheme closed, I had to make some serious contributions to my SIPP to even half correct the loss. The annual limit is mostly relevant to people in that situation, not people putting in that amount every year.
Incidentally, the £50,000 (to be £40,000) includes the employer contribution.
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>> ........... which would also probably give you
>> free life insurance, RPI increases at least up to 5%, and spouses and dependants' pensions
>> on your prior death.
Possibly not probably. I get no life insurance, a Christmas bonus of £30 and once in a blue moon I get a gratuitous increase of 0.5% p.a. Final salary schemes didn't fritter money away. And as long as the scheme could meet its projected commitments my employer contributed nothing ~ which was for the vast majority of years.
Last edited by: L'escargot on Sat 8 Jun 13 at 11:46
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>>And as long as the scheme could meet its projected commitments
>> my employer contributed nothing ~ which was for the vast majority of years.
The contribution amount from the employer is irrelevant for a DB scheme. The value is in the guarantee, it's the value of the defined benefit that matters.
Some of them frittered money to a ridiculous degree - early retirements without reduction in pensions, mainly.
It's true that many very good schemes also had long contribution holidays, partly because investment returns were so good and they were not allowed to over-fund.
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>> Is it fair? I think not. I
>> don't think that anybody should be allowed to avoid paying income tax to that extent.
>>
It was previously unfair to people who whose incomes only increased in later life.
Entrepreneurs might have put everything into their businesses, only be in a position to make substantial pension contributions later on, catching up on their pension provision.
Even so, the reduction a few years ago in annual contribution limit from £255,000 caught out some people who had planned on funding their pensions later, eg from the proceeds of selling the business. The reduction next year to £40,000 is another strange action from a government supposedly commited to encouraging private pension provision and small businesses.
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I think 15% in your day would do rather more for you than 25% now, never mind the defined benefit guarantee.
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Workplace Pensions - Bromptonaut
