Act now to protect your pension

Employees are being urged to act now to protect their pensions, as employers seek to cut costs by slashing benefits.

Investors in company pension schemes are finding that their employers are reducing contributions or even cutting them altogether as the recession bites.

One in 10 companies with a defined contribution pension scheme has already cut benefits, while a further 18 per cent have considered making changes, according to a survey by Standard Life, the insurer.

Cuts in pension contributions can result in a significant shortfall in the value of employees’ pensions when they come to retire. But there are things employees can do to ensure their pensions remain robust.

1 Pay in more

Employers often offer generous pension benefits, matching or even doubling the contributions that their employees make. Yet many people do not enrol into their workplace pension scheme. Others fail to increase their contributions when they move into a higher age bracket, as employers often pay more for older workers.

2 Top up yourself

It’s worth trying to make up for any shortfall in your employer’s contributions. You can also put in a lump sum – though some pension schemes have restrictions. It’s only possible to get tax relief on 100 per cent of your salary a year, so payments above this won’t qualify.

3 Do the sums

Have an idea of what level of pension you want and how much you need to save now to get there. “Most pension providers have pension modellers for people to estimate how much pension they can get,” says Chris McWilliam, senior consultant at Aon Consulting. FT Money has a detailed planning tool at www.ft.com/pensioncalculator.

4 Contribute regularly

Since April, people earning more than £150,000 have only been entitled to full higher rate tax relief on the first £20,000 they pay into their pension. However, some are exempt from this rule. Anyone who was making regular – at least quarterly – pension payments before April above £20,000 will be allowed to retain the extra tax relief. If employers start cutting contributions and this level falls, so will the level of protection on this tax relief. So high earners have an extra incentive to top up their pensions otherwise they could lose tax relief on future contributions, too.

5 Do a salary sacrifice

Tom McPhail at Hargreaves Lansdown suggests that staff encourage employers to switch to a salary sacrifice arrangement, whereby they pay more into a pension and less in salary. This can be more tax efficient for employees and employers.

6 Nag your employer

Some employees are still in a defined benefit – or final salary – pension scheme but this is not expected to last long. Employers are keen to close these schemes and move to defined contribution (DC), laying market risk on the employee. But if they set up a DC scheme, there is room for negotiation. McPhail says employers might be willing to contribute 15 per cent with no conditions.

There’s also a mandatory 60-day consultation process if an employer wants to cut contributions to an existing DC scheme – you should ask for a definite time limit on how long the cuts will last.

7 Retire later

If lower employer contributions look like creating a shortfall in your pension, you could work longer. Working just one year extra can result in higher income for the rest of your life, as you will have a larger fund to buy your annuity.

8 Don’t panic

It is statistically unlikely your employer will make cuts to your pension. Of the companies surveyed, 74 per cent had not considered touching pension benefits. Cutting pension contrib-
utions is far more common in the US than in the UK, where it is frowned on.

And the introduction of the national pension savings scheme in 2012 is likely to help. David Millar of Friends Provident suggests that, because employers will be legally required to pay in 3 per cent of their employees’ salaries from this date, this may deter them from taking pension holidays now as the pain will be harder to bear in three years’ time.