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Work is changing pension, confused(20 Posts)
Work is trying to change our final salary pension claiming it costs too much.
Originally they offered 2 options which are:
Change over to a defined contribution pension and receive 6k compensation which can either be paid out paying tax on it or reinvest it back into pension tax free
Change over to defined contribution pension, don't get a lump sum but company will pay in higher contributions of 15% regardless on how much I would pay in.
Company got fa's in and as I still got at least 25yrs service left the latter option was financially better for my circumstances.
However unions weren't happy and company has given us a 3rd option:
We can stay on final salary but will have to pay increased contribution of 3.4%, a salary cap of 1% introduced plus the actual rate changes from 1/54 to 1/65.
This has put a spanner in the works for me as I don't know what I should do now. It looks like the company will not pay to get another financial advisor in.
Does anyone know anything about pensions? I like the idea of a fixed salary from the final salary pension but as I am only part time but wanting to go full time in the next few years I don't know if the salary cap will affect me negatively. At the moment there is no cap.
If I would go over to defined contribution pension my final salary pension will be frozen so would have 2 pensions on retirement.
What's the best thing to do?
I think you should see an IFA for help with this. Most people seem to have 2 plus pensions these days . The advice was hang on to a final salary scheme because basically as often giving up to 2 thirds final salary it is also index linked for the rest of time.
DFC were/are often used to buy an annuity of which there are several kinds.You need to have a lot in your pot to buy an annuity with inflation proofing however. You do not need to buy an annuity and an IFA would be able to tell you more about other investments/options.
You say you have 25 years still to work. Do you think you will still be with the same employer? Given the way work is going at the moment
it is likely you will move jobs. If so a DFC is the most probable ?
DFC are very mobile these days as they can be taken to your new job
You need to take independent advice on this, speak to an IFA
Thanks, you're right, I should see an ifa. It's a mine field
You definitely need advice. However if it was me I'd be taking the final salary option. 1/65ths is still quite a good accrual rate as some fs pensions just have 1/80ths. 3.4% contribution is quite low compared with the contribution rates I know others pay. 1% salary cap is not great if inflation goes up a lot, but still I'd take the certainty of a fs pension over gambling my retirement on the stock market.
I would take the final salary option. Most companies don't have this anymore as it is too expensive.
What do you mean by a salary cap of 1%?
I think you mean that there is a salary cap, and that each year that cap will rise by 1%.
So if the cap is £100K, next year it will be £101K.
You have said what the actually starting salary cap is, or what happens to the part of your salary that is higher than the cap.
If the cap is £50K and you earn £20K (full time equivalent) and don't expect any career progression, you'll get a lot of years in full FS scheme before the £50K ( and its 1% increases) becomes an issue.
Btw a FS on 1/65 for only 3.4% sounds bloody good!
The 3.4 % is additional to what I pay now. I think pay 5% contribution at the moment so it would rise to 8.4%
I don't know what they mean by salary cap, it was not explained how it would affect us. All I know is the company want to introduce a1% salary cap.
Ah, makes more sense cos only 3.4% would be a great deal!
So did you just get an email or something just saying "1% salary cap"? That's shocking! Union should slay them for not bothering to give proper information. You can't get your own IFA to look at it without the correct details
I expect it is what I described - they would decide on a maximum salary that can be in the FS scheme, and allow that maximum to increase by 1% each year.
You need them to give precise details though - and they also need to tell you what scheme your earnings above the salary cap go into: do you still get the DC scheme with the 15% employer contribution (cos 15% regardless of your pay in is pretty good - not best in class astounding, but pretty good - especially as it's not dependent on your contribution)
I took the salary cap to mean that salary rises would be capped at 1%. So if the Op gets a 2% pay rise only 1% of that would count towards her pensions entitlement.
I think even at 8.4% contribution the FS pension is a great deal.
While i understand how attractive it is to get an IFA just to 'tell' you what to do, infact they can only really work out the sums for you, to help you choose and recommend alternative products.
How do you feel about working out the options for yourself. On a spreadsheet, its really not complicated. So, for example, you might work out how much you get overall, if you stay there for 1, 5, 10, 15, 20 and 25 years. Start with the same salary, then make some guesses about how your salary might rise, and add those options in too. Talk to someone to clarify what the 1% cap means, and any other conditions.
Generally, if you stay there a long time, the final salary option will be hard to beat. If you stay there only say one to three years, the defined contribution options which lets you take everything with you * might* be better. But i thought that and stayed another ten years.
If you do it this way, you will really understand the options and will be able to see what difference different options will make and plan accordingly. Hope it works out for you.
I suppose we're both only guessing! But I've just gone through a "FS salary cap" in the way I've described, so I thought that might be a 'thing' now!
Thanks for all your input.
Yes indeed I got a letter on Friday with the new 3rd option but not really explaining what the salary cap means.
I have to say our union is pretty good and will ask when in in next for more explanations from the company. I'm sure I'm not the only one there who's confused.
I have made some calculations and if I stay there till pension age the final salary would be best if I live for at least another 10yrs after taking the pension. This I based on what I currently earn and not increasing hours.
Great fluttershyby, very glad you decided to do some calculations yourself. Do you feel a bit more in control of the decision now? Good work.
It's such a big decision to take isn't it? After all whatever I decide now will have an effect on my future old self.
I know it's good from the company to give us options, not many people have a choice but why give us 3?
I'm usually quite money savvy but this isn't just finding the best savings account.
They gave you 3 because they only wanted to give you 2 but your union pressured them to still give some kind of DB option. That's great they secured the extra option!
Check the details on the second DC option of 15% contribution though - I'd be surprised if that was guaranteed for more than say 5 years. That's a good contribution, especially as you don't have to put anything in - and I would be surprised if it wasn't reviewable.
I googled pension salary cap and I think it means they want to cap the amount your pensionable salary can be increased by. So, if you are currently earning £30,000 and you receive a 3% pay increase next year, they will only increase your pensionable salary to £30,300 even though your actual salary is £30,900.
That's a good point cabrinha. There isn't a mention in the paperwork how long the 15% in option 2 lasts. They're claiming the current pension is too expensive so it could happen again in a few years time.
I'm sure it will - I've been with one company for 15 years, it's a big company, financially strong and with no black hole in the scheme. Yet I now have 4 separate pension "pots", from each significant rule change, and the 4th is a temporary higher employer contribution to a DC fund. So although it'll only be (so far!) 4 different pots paying out, it's already going to be 5 different periods of rules!
You definitely need to know whether the salary cap is like mine or as the PP described. Mine is capped at £50K. If you're on £20K and not likely to progress from admin to management, that cap isn't too big an issue.
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