As Carillion liquidates we review workplace and private pensions
In the news recently leading construction company Carillion went into liquidation. As with British Home Stores and with Tata Steel the workplace pension fund is short; in Carillion’s case by an estimated £580m. This workplace pension deficit has placed an additional burden on the Pension Protection Fund (PPF). It is expected that the PPF will take over the pension scheme if Carillion goes into administration. Though current Carillion retirees will not see any changes to their pension terms, existing employees that are soon to retire may see their funds cut by as much as 20%; and top-earners may have some of their pensions capped.
Why some workplace pensions are in trouble
Though workplace pensions are not new, the Roman army had them from around 30 BC, struggling funds are a relatively recent phenomena. There are two main drivers of this change.
Defined Benefits (DB) pensions guarantee pensions linked to an individual’s pay. Years ago, this meant that firms could slow down pay increases for staff, but make up lower wages with increased pension funds for retirement. Funding pensions, however is a challenge. There is a growing retired population and a shrinking tax contributing working population. Effectively the pensions candle is burning at both ends.
In 1960 the average life expectancy of a British male was 75 years, and for females it was 80 years. Now the average life expectancy of a British male is 83 years, and for females it is 85 years. But also, the amount of tax available to go towards later-life living costs: healthcare and the NHS, public transport, infrastructure and state pensions is in decline.
And though the Chancellor has taken steps to buoy the Pension Protection Fund it is clear that some workplace pensions, particularly Defined Benefit ones are becoming too costly to sustain.
The appeal of private pensions
Private pensions (also known as Defined Contribution schemes) where; an individual saves from their earnings into a pension fund, can run alongside workplace pensions and state pensions, or be the main pension scheme for the saver. Contributors must be aged 18 years’ old and also be a UK resident. Tax relief is available on private pension contributions, which makes this a particularly attractive savings ‘vehicle’.
In addition to the above, contributions are invested in funds which benefit from a tax-efficient status. When choosing to draw benefits from the plan, up to 25% of the fund can be taken which is also tax-free.
Personal Pensions are extremely flexible in comparison to DB schemes. Finally, when taking benefits from the private pension fund, there are no restrictions on the amount of money that can be withdraw at any one time.
Though HMRC proposes to increase the minimum retirement age for pension schemes from 55 to 57 by 2028, the state pension retirement age will increase to 67, meaning that private pensions can fund an earlier retirement.
It is clear, with the sad demise of the likes of Tata Steel, BHS and Carillion, that both Defined Benefit and Defined Contribution pension funds can be complicated. As ever we would advise you to speak to a local Independent Financial Advisor about pensions, retirement planning or any other financial concern that you have. Please call our team of Chichester based IFAs on 01243 532 635 to arrange a consultation.
To discuss pensions, retirement and investment plans with us please ask to speak to Richard Smith.
To discuss Life, serious illness, equity release (to provide for retirement income) and income protection insurances please ask to speak to Hamish Gairns.
To discuss mortgages & insurances please ask to speak to James Mayne.