DOCTORS in Scotland recently voted to take industrial action to protect their final salary pensions, but sweeping changes that will make public sector pensions less generous are inevitable.
Public sector workers will have to take greater ownership to ensure they remain on track to achieve their retirement goals. Kevin Mackenzie, a financial planner and pension specialist at Acumen Financial Planning, offers his tips on dealing with the changes and getting the best for your retirement pot.
1 WHAT’S THE STATUS QUO?
Public sector workers across the country have guaranteed pension benefits in retirement known as final salary or defined benefit pensions.
If we use the 2008 section of the NHS superannuation scheme as an example, someone who completes 40 years’ service at age 65 with a final salary of £60,000 would be entitled 1/60th for each year of service.
This would provide a generous pension of £40,000 a year, which would rise in line with inflation for the rest of the pensionrers’ lives.
At retirement, the member can opt to take a lower annual pension in exchange for a tax-free lump sum of up to 25 per cent of the capital value of the pension.
2 WHAT’S THE PROBLEM?
Final salary schemes are now very rare in the private sector, with rising life expectancy driving the cost to employers of providing final salary pensions up to unsustainable levels.
All private sector employers in the UK have to provide workplace pensions and will have to meet minimum contribution requirements by 2016, though these are not nearly as generous as final salary pensions.
3 WHAT’S CHANGING?
In order to reduce the cost of providing pensions for public sector workers, Lord Hutton has proposed changes that will reduce members’ benefits.
His report for the government set out that final salary pensions in the public sector should be replaced by career average pensions, whereby payouts are linked to earnings throughout your career, not at the point of retirement. Retirement ages will be linked to state pension age, which will increase to 66 in 2020 and eventually to 68. The changes are likely to affect the armed forces, teachers, firefighters, police and health service workers.
4 WHAT CAN I DO?
These changes will put greater onus on workers themselves to take steps to meet their retirement goals. The first step is to paint a picture in your head of your desired lifestyle in retirement. Some people live modest lifestyles in retirement, while others have aspirations of travelling the world and indulging in expensive pastimes. Think about the level of income you would need in today’s money to achieve your retirement goals.
5 CRUNCH THE NUMBERS
Ask for a benefit statement or projection of retirement benefits from the Scottish Public Pensions Agency (SPPA). This will show the level of pension and tax-free lump sum you can expect in retirement. Check with the SPPA that your pension has not exceeded the annual allowance or lifetime allowance, as this might trigger an unexpected tax charge now or in retirement. Obtain current valuations of any other savings and investments you and your partner have.
6 GET PROFESSIONAL HELP
Make an appointment to see an independent financial planner or adviser. You might have one already, if not you can find one at financialplanning.org.uk or www.unbiased.co.uk.
A good financial planner will be able to ascertain the future value of your desired income in retirement then calculate any shortfall by deducting existing provisions, such as your occupational and state pension entitlements.
7 BRIDGE THE GAP
You may well face a shortfall in your retirement pot as a result of the changes. The earlier you take steps to tackle it, the easier it will be. Establish an additional monthly savings plan to ensure you remain on track to achieve your retirement goals. Investing money regularly means you buy into the market at different times, which helps to mitigate risk and smooth returns.
8 BUY ADDED YEARS
Bear in mind that many public sector pension schemes, such as the NHS superannuation scheme, allow you to buy added years or make additional voluntary contributions (AVCs). Check your scheme rules to see if this is possible and how much it will cost.
9 BE A SAVVY SAVER
Consider tax-efficient homes for your savings, such as a personal pension or individual savings account (Isa). Ask your financial planner to review existing savings and investments. Often these are over-charging and under-performing, in which case switch to a better arrangement.
10 STAY ON THE BALL
Review your financial affairs at least annually. Your personal circumstances and objectives might change. Likewise, governments might change future pension legislation and tax rates, so it’s important that you meet with your pension adviser regularly to ensure you remain on track.
Whatever happens, the power is in your hands to take control of your own destiny and plan for your future.