Q&A: Your pension scheme

The government’s decision to increase payments in line with the consumer price index rather than the retail price index means up to 12m members of final salary pension schemes now face the prospect of a smaller pension.

The news follows announcements from a number of companies that they are closing down their final salary pension schemes. It also comes as the BBC has decided to drastically change the terms and conditions of its own scheme.

In the light of these decisions many advisers now predict that scheme members will need to make additional savings into other tax-efficient schemes to make up shortfalls, while others suggest buying an additional annuity at age 70 or 75.

Laith Khalaf, pensions analyst at Hargreaves Lansdown, answers questions on this subject below

............................................................................................................................

Hi. I am in receipt of a BT pension, which has always been linked to the RPI. Leaving aside the moral question or whether the government should change my pension increases to the CPI figure, is there any way they can legally interfere with what I regard as a contract between me and my employer, taken out on the first day of my employment, 15th February 1977, when I signed a form confirming that I wished to contribute to the pension scheme? Thank you, Noel Todd

It depends what that contract (ie- the scheme rules) says. If the rules specifically say RPI, then, no they can’t. But if the rules say something along the lines of ‘in line with price increases as determined by the secretary for state’ then the contract hasn’t been changed; the measure of prices has. Check with BT which is the case- you could be unaffected.

............................................................................................................................

In the recent Budget, George Osborne said something about changing the pension contribution rules - and I’ve read that the plan is to introduce a single annual limit on how much we can pay in. I had been hoping to increase my pension contributions in coming years to make up for starting it late, so could I have a problem if this limit is set quite low - say at 20,000 a year? I currently earn 80,000, but have only been paying in 5% for the past two years. Should I try to pay in a much larger sum this year, while I still can? Sarah, London

I think it is unlikely to be as low as £20,000, the figure mooted so far is £30,000 to £50,000 which still gives plenty of scope for large contributions; however this year you face no restriction so you could pay in up to £80,000 (if you can afford it). You will only get higher rate tax relief on the portion of your income subject to higher rate tax however. I think much depends on how long you have until retirement; if you are still ten years away, assuming there is a £30,000 cap you could still build up a pension pot of £300,000 plus investment growth- that will buy you an inflation linked income of around £15,000 a year- if you want more then yes consider a big contribution this year.

............................................................................................................................

I am a year away from retiring and have two pensions - a personal pension that I’m currently paying into, plus an old company pension with a former employer. I left the employer 15 years ago but was told my pension would keep growing until I retired. Will the decision to use CPI to increase pension values, rather than RPI, mean that I lose out on 15 years’ worth of full index linking? In other words, will I now get a smaller pension than I was expecting? Len , Basingstoke

No, all uprating to date remains as is. It is only uprating from next year that might be affected. Once in payment your pension may be affected however as you scheme may only increase your payments in line with RPI.

............................................................................................................................

I’ve never been in a public-sector pension or a company scheme. I had a personal pension for some years, which I later transferred to a Sipp. So I am going to have to go into income drawdown or buy an annuity when I retire. But if all pensions are uprated inline with CPI from now on, does that mean I will only be able to buy a CPI-linked annuity - or draw an amount that increases in line with CPI? If everything is uprated only inline with CPI, would I be better off buying an investment-linked annuity instead? Can you still get with-profits annuities? Alan, Edinburgh

The CPI uprating only applies to final salary schemes, so with your personal pension you can take a level income from your drawdown and opt for a level annuity if you so wish. You can still get With Profits annuities, but With Profits funds are cumbersome opaque products with a big dose of insurer’s discretion about what you get paid built in to them. The government are currently consulting on removing compulsory annuitisation from next April, and it looks like you will have much greater flexibility in terms of how you can take your benefits form next year on. Watch this space...

............................................................................................................................

Dear Laith, I am 41 years old and have worked in the city for the last 17 years but am about to embark on my a new career in teaching. Shall I transfer all my previously built-up pension pots into the final salary teacher’s scheme or not? I am concerned on a number of issues regarding the Government’s proposals and possible future directives but at the same time still view final salary schemes as a ‘no-brainer’. Do you consider this to be the case? kind regards Mark Pantling, Hertfordshire

LK: I think you should get some advice on this one because there are lots of ifs and buts. The teacher’s pension scheme clearly has the attraction of the guaranteed benefits of a final salary scheme. However the 17 years of defined contribution pension you have built up may not buy you 17 years of service in the teacher’s pension scheme because those guaranteed benefits cost money. You may also get better tax free cash entitlement form the DC pension and the death benefits of the two options need to be explored.

The teachers scheme also has an added year’s facility where you can buy up to five years service in the scheme. Assuming you stay in the scheme until age 65 and buy your added years, you could still end up with 29 years of service in the scheme, with your existing defined contributions pension to boot. Keeping your DC pension separate also means your eggs aren’t all in one basket. With the teachers scheme there is clearly as little risk as you can get that the employer will go bust, but bear in mind the backdrop of the cuts we are seeing to public sector final salary schemes- the move from RPI to CPI, the BBC capping pensionable salary to 1 per cent rises per annum, and there is a public sector commission investigating public sector pensions which will report on reforms before next April. Like I say, lots of ifs and buts, so individual advice is in order.

............................................................................................................................

Will this change to CPI impact on existing members of the BT scheme who are already drawing their pension? The BT Scheme states in its documentation that increases are RPI related - can this be changed? John Gilbert

Pensioners already receiving their pension are potentially affected by the change. However if the scheme says RPI in the scheme rules then it should abide by this for all benefits already accrued, though it may well change the rules for benefits built up from now on. I would suggest that you check with BT what they are planning to do, but it  sounds to me like you are probably ‘safe’. There have been some rumblings from some parties asking the government to override such a requirement in the scheme rules, but the government have given no indication that they will provide such an override.

............................................................................................................................

I am a deferred member of a company final salary scheme and have heard that any changes to such schemes are unlikely to effect any existing terms prior to 1997. Are you able to confirm if this is the case? Many thanks John Moore, Norwich

Not quite. Your pre-97 benefits will be split into GMP (Guaranteed Minimum Pension) and ‘Excess Benefits.’ Your GMP will be revalued until retirement either by a fixed set rate or broadly in line with rises in average earnings, so shouldn’t be affected until that point. However once the GMP comes into payment it is likely that it will go up with CPI rather than RPI. Your ‘excess benefits’ are required to be revalued in line with inflation up to retirement, so CPI from now on. Once in payment there is no minimum statutory increases that have to be paid on these excess benefits. However in reality many scheme wrote into their rules that they would provide increases; if those rules specifically say RPI then they have to abide by that.

............................................................................................................................

I am in receipt of an occupational pension that provides index-linking based on RPI capped at 5 per cent, subject to a minimum increase of 3 per cent. I had assumed that the change to CPI announced by the government would only apply to future service, not to pensions in payment or accrued pensions for those members still in service. However, judging from the example set out in the Department of Work and Pensions written clarification of its new policy it seems that the government intends that this change also applies to pensions in payment. Given that section 67 of the Pensions Act 2005 does not allow a pension to reduce accrues rights, does this point to this section being repealed which amounts to retrospective legislation and should be resisted? A C Smith, Dundee

Yes it does apply to pensions in payment too I am afraid, as I have said before these are the minimum statutory requirements, schemes can still choose to give more and you should check if your scheme is levelling The fundamental pension rights are not being withdrawn, they are simply being uprated at a different rate so legally the change is unlikely to be challenged. If for instance the scheme rules state that benefits will be uprated in line with increases in the general level of prices as determined by the secretary of state then the rights have not been changed, it is the measure of the general level of prices that has been substituted. The situation is different for those schemes who specifically say that they will uprate in line with RPI; switching to CPI would then be a modification of existing pension rights.

............................................................................................................................

When I retired from being a teacher my decision to forego commutation was based on the expectation that my pension would be linked to the RPI. Can the Government now ‘move the goalposts’ and retrospectively impose CPI linking on those already in receipt of a pension?

Despite the pension scheme’s description as unfunded (which simply means my 11% contributions were spent and not invested by the Government), I paid handsomely into this scheme. If my ‘annuity’(?) is to be interfered with, would I be entitled to revisit my decision about commutation? Anna Walsh, Nottingham

I don’t see how the scheme could unwind the pension in payment to allow you to revisit the commutation decision, even if they were willing to which I doubt they are. Worth asking the question but please don’t hold your breath.

............................................................................................................................

I am 35 years old and find it difficult to calculate how much I should be saving into a pension per month. How much should I save per month if I want to buy an annuity at 60 and to have £15000 per annum index linked for the rest of my life? Stuart Lawrence, London

There are loads of pension calculators online that allow you to play around with how much you can put in, what growth you get and what you can get out- there is one on the pension section of our website www.h.l.co.uk

............................................................................................................................