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Final analysis

I am a deferred member of a final-salary scheme. I am 52 years old and the normal retirement age is 60. The scheme has been in the news recently as there is a sizeable deficit. Should I worry and what are my options?

Statistics from the Pension Protection Fund website show that the aggregate funding position (total assets minus total liabilities) of around 7,400 defined-benefit funds is estimated to be a deficit of £188.5bn at the end of April 2009. This is a staggering figure.

The total deficit of schemes in deficit in April 2009 is estimated to be £204.8bn whereas total surpluses of schemes in surplus rose to “just” £16.4bn. With these sorts of figures, it is no surprise that people are worried about the security of their final salary pensions.

Your options are as follows:

  • Do nothing.

  • Take early retirement through the scheme.

  • Transfer to another pension scheme

  • Transfer and draw a pension via an insurance company.

    This is a hugely complicated decision and certainly one that should not be taken lightly. The following is just a snapshot of some of the considerations.

    You need to request an update from the scheme administrators. This should include a transfer value quotation, a summary of the pension at normal retirement age and upon early retirement. In addition, it should clarify the position with regard to a spouse’s pension and also to what extent your pension would increase in payment.

    If you do nothing and the scheme remains solvent throughout your and your spouse’s lifetime, and you live a long time, this will probably have been the best option.

    Final-salary schemes are often very generous when compared with what sort of annuity you could buy from an insurance company if you transferred the fund there.

    If you are worried about the long-term viability of the scheme, you could always take the maximum tax-free cash lump sum at retirement to reduce your exposure to the scheme, even though it might not represent good value for money on paper.

    If you take early retirement, you can draw this tax-free lump sum early which is an advantage, but other than that the scheme still needs to remain solvent to pay you your income. If it does get into trouble and has to fall back on the PPF, it is only people past their normal retirement age who get superior protection.

    If you transfer to another scheme you should obtain a transfer value analysis report that will show the investment return you will need to generate in order to match the pension you will be foregoing.

    Irrespective of your concerns about the financial stability of the scheme, it will be a good indication of how generous (or not) the transfer value being quoted to you is.

    Additionally, you will be moving from an environment where you are taking no investment risk to one where you are. Therefore you should probably stagger your investments.

    Finally, if you draw a pension from an insurance company, you need to make sure that you are comparing like for like against the final-salary pension being given up.

    Have a look at the PPF website as this explains what benefits would be payable. Compensation is capped and indexation of benefits may be much lower than via the main scheme.

    Jason Witcombe is a director of Evolve Financial Planning

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