Category: retirement planning

Regulators tell Solicitors to only refer to Independent Financial Advisers

New guidance has been issued by the Solicitors’ Regulation Authority (SRA) stating that Solicitors must not refer clients to tied or multi-tied advisers; i.e. advisers who are not truly independent.

The SRA has stated that it is aware that some law firms have been approached by multi-tied and tied advisers seeking to enter into restrictive arrangements to provide financial services to the law firms’ clients. It reiterated that firms must always act in the best interests of their clients. This means that they must refer clients to independent financial advisers for investment advice.’

According to Sifa (the body representing independent financial advisers who specialising in working with law firms), there is confusion among solicitors about the status of financial advisers and this has resulted in widespread breached of the Solicitors’ Code of Conduct. Sifa said it had received numerous calls from IFAs reporting instances of solicitors referring clients to St James’ Place.

This was a subject alluded to in an earlier Blog entitled Confusion on Sources of Financial Advice I have also commented here in more detail about the differences between Independent and Tied Advice.

So, if you are a Solicitor or indeed anyone seeking financial planning advice make sure that you ask the adviser whether they are genuinely independent. Solicitors can be sanctioned for failing to do so and individuals are likely to suffer from a restricted choice and, in all probability, high charges

Protection for Final Salary Scheme Benefits could be under threat

In an earlier blog I commented on the inadequacy of the Pension Protection Fund (PPF), which provides benefits to members of final salary pension schemes where the employers have gone bust. To summarise, the maximum benefits for employees who have not yet reached retirement age, are subject to a cap and are likely to increase both before and after retirement by less than the original scheme. In addition, options such as early retirement are not available under the PPF.

The PPF is funded by a levy on other pension schemes. Unsurprisingly, in these times of recession, an increasing number of schemes are having to call on the PPF because their employers have ceased to trade. In June of this year the PPF announced that levies will remain at the current level, which increases in line with wages. However, the Chief Executive of the PPF, Alan Rubenstein, also indicated that, whilst they are aiming to avoid increases above the level of wage inflation, further rises above this level cannot be ruled out in future, in order to maintain the benefit levels.

Whilst the PPF can demand more from schemes, the question is, can they actually raise the money? Recently a major firm of actuarial consultants has pointed out that, unless the recession ends fairly soon, it may not be possible for the PPF to simply impose increased levies on schemes attached to employers that are already suffering from the economic down turn. If this occurs, the PPF will have little option but to reduce the level of protection it offers to members of final salary pension schemes. Such cuts can be applied not only to the benefits which are not yet in payment but also to benefits already being paid to pensioners.

So what should you do if you have final salary benefits with a current of past employer? (For the avoidance of doubt these are benefits in which your pension is based on your years of service and final salary and are not normally related to investment returns or annuity rates.)

– Order a transfer value and statement of deferred benefits. These will tell you how much the scheme would provide you with were you to transfer elsewhere and also the value of the benefits which you have in the scheme.
– Provide these details to an independent financial adviser, who specialises in pensions, to carry out an initial review (they may need further information, which they can obtain from you or directly from the scheme).
– Obtain a copy of the employer’s accounts to get a view on how solvent they are.

If you are worried about the financial security of an ex-employer, depending on the state of funding of the scheme, there may be a case for moving the transfer value to a scheme under your own control. This is a complex matter requiring specialist professional advice, which I will cover in more detail in a separate post.

Inadequate Protection When Final Salary Schemes Close

Final Salary Scheme Closures

In a recent survey nearly a third of employers indicated that they intend to freeze their final salary schemes to existing members and over 80% had already closed the schemes to new members. In addition, the Pension Protection Fund (PPF) recently indicated that collectively the UK’s final salary schemes have a shortfall against the amount needed to provide members benefits of £179.3Billion.

What is this article about?

This piece looks at the reality of the protection provided by the Pension Protection Fund. If you want to be spared my verbiage and cut to the Conclusions

Final salary schemes have traditionally been described as guaranteed on the grounds that the benefits provided by them are ‘guaranteed’ by the employer. In any case, if the employer went bust, benefits would be protected by the PPF. Correct?

Well, not quite. Whilst those who had already retired and reached their scheme’s normal pension age when their employer went bust will receive 100%of their entitlement, others will receive 90% of a their entitlement subject to maximum pension of £28,742.68. This equates to the maximum pension an individual earning £43,115 would receive after 40 years service assuming that their entitlement builds up at 1/60th per year of service (which is commonly the case with this type of scheme). Individuals with a greater pension entitlement than this will have their benefits reduced to £28,742.68.

Many readers who are not lucky enough to be on high earnings or who don’t have a large pension entitlement may conclude that they are pretty well protected by the scheme since it provides 90% of their pension entitlement. Unfortunately, especially for those with some time to go, before they are due to retire, there are a couple of other catches with the ‘protection.’ One of these is that the option of early retirement is lost. PPF Benefits are only payable at the original scheme’s normal retirement age, typically 65. Forget heading to Spain at age 55!

The other catch, which is more subtle but, in the long run highly damaging to the level of benefits actually paid out, relates to the level at which the pension entitlement increases in the time before retirement. Since the Social Security Act 1990 came into effect all benefits must be increased between leaving service and retirement by RPI, subject to a 5% pa cap. This means that deferred pensions are substantially inflation proofed. However if the scheme comes under the auspices of the PPF the rate at which deferred pensions increase is capped at 2.5% per annum.

In common with many financial calculations, the effect of a 1-2% reduction to pension increases in deferment may be difficult to see. However, this is perhaps best illustrated by the rate of return (commonly called the ‘Critical Yield’) required to match final salary scheme benefits given up in the event of a transfer. Without going into the full details of final salary pension transfers, returns of 6-7%pa are usually required to match scheme benefits in the event of a transfer. However, in a number of cases I have recently looked at, returns of around 3-4% are required to match PPF benefits. This means that the PPF benefits, which need to be targetted, are substantially lower than the original entitlement. In addition, whilst it may be borderline to transfer for the purpose of beating original benefits, even for relatively risk averse individuals the chances are fairly good that PPF benefits would be exceeded.

It would be remiss of me not to point out there there is a great deal more to final salary pension scheme transfers than this and it is essential that professional advice from an appropriately qualified pension specialist be sought before making any changes to pension benefits.


The Pension Protection Fund provides limited protection at best in the event that an employer with a final salary pension scheme goes bust. Benefits are capped and higher earning employees could stand to lose a substantial amount. Early retirement is not available and benefit increases, before and after payment, are subject to a low cap. PPF benefits are funded by way of levies from other pension funds and if there is a shortfall benefits could be reduced.


Anyone with final salary benefits should arrange for these to be reviewed by a specialist pension consultant, especially if they are fearful of the financial strength of their ex-employer. Once an employer goes bust it is too late.

Pension savers miss out on £720 million

Research recently published by Unbiased has revealed that UK pension savers are missing out on £720 Million in tax relief by failing to top-up their employers’ pension schemes. Higher rate tax payers who make additional contributions are entitled to tax relief at up to 40% on contributions, which they make to improve their retirement income. These can be to the employer’s scheme or to a private arrangement.

With many schemes under pressure and reducing the rate at which future benefits build up, or even ceasing to provide future benefits, it has never been more important for people to take personal responsibility for their retirement planning. Tax breaks are available for pension contributions as well as for other forms of saving. Unbiased have provided a tax waste calculator to help you find out whether you are making full use of the relief available to you. Find out how much tax you are wasting here

Half of all UK adults are making no retirement savings

A recent survey commissioned by the BBC suggests that half of all UK adults have made no pension savings. Only 36% of under 30’s make any contributions and only 45% of 41 to 65 year olds contribute. Most cite lack of affordability but others expressed concerns about pensions given recent stock market falls and the well publicised failure of companies such as Equitable Life.

This is not as straight forward as it seems. For many on low earnings it is arguable that they are quite right in not making private pension contributions as this is simply likely to tip them over the threshold for state benefits of far greater value than the pension which they will receive. The UK government has tried to remedy this effect by introducing Pension Credits. You can find our more about Pension Credits here If you know what your expected private and state pensions are, you can can obtain an estimate of your entitlement, if any. It would be sensible for anyone on low earnings who is considering making private contributions to check whether they will actually be better off.

The FSA consumer website Moneymadeclear also provides a great deal of useful information, not only on pensions but other aspects of financial planning.

Whilst I recognise only too well that younger people can only afford very limited contributions, it is worthwhile mentioning that if an early start can be made with retirement planning a respectable level of retirement income can be built up at an affordable contribution rate. The opposite is also true. If contributions are left too late, it will be nearly impossible to make them up. In this table the FSA have shown estimates of the levels of pension which can be expected given different levels of contributions and starting ages.

For example, a 20 year old contributing £50 per month could expect a pension of £238 per month when they retire at 65. They would need to live just under 8 1/2 years after retirement (i.e. to age 72 1/2) which is within most people’s life expectancy, i.e. they are likely to get their money back.

Of course, other assets can be used such as properties and business sale proceeds. These need to be factored into retirement planning. The key word here is ‘Planning‘. In order to ensure that you are able to achieve the level of income in retirement which is needed to maintain your standard of living, you need to have a plan which is updated regularly. The plan should be based on cash flow modelling as this is the only effective means of analysing the impact of different types of assets as well as changing levels of requirement.

Is Higher Rate Tax Relief On Pensions Under Threat?

A number of commentators have suggested that The Chancellor will abolish higher rate tax relief on pension contribution in The Budget on 22nd April.

Financial Times

Yahoo Finance

These could just be ‘buy now while stocks last’ rumours but there may be some truth in them, given the financial pressure, which the government is under.

If in doubt, it would make sense to bring forward contributions to prior to the Budget. It is unlikely that any changes will be retrospective but this can not be ruled out.

If tax relief is removed, this should not be a reason to stop making savings for retirement. After all, at some stage, like it or not, employment and the earnings associated with it will cease. When that day comes, there needs to be a replacement source of income. This does not just need to be provided by way of a pension but as long as there is some tax relief on contributions they probably have the edge on other methods of saving. See my last blog for more information on this.

Waiting Longer for the State Pension

A little known fact is that the government have fairly quietly increased state pension ages for men and women so that for all people retiring after 2024 will increase from age 65 to age 68. What does this mean to you?

Well, if you were able to retire now you would receive £90.70 per week plus any increases due to the State Second Pension (previously known as SERPS)This equates to £4716 per year. Therefore if you are one of the unlucky ones you could be loosing out on £14,149 over the three years.

The Pensions Service have put together a useful little calculator on their website so that you can find out how much extra you will have to wait for your state pension. If you would like to find out, click here

What can you do about it? Well… the starting point is to have a plan. Of course, the state pension should only be a part of your income when you retire. You need to assess what you require to maintain a comfortable standard of living and then compare this with the level of income which you think you will get. If there is a shortfall, something needs to be done.

Alternatively you could consider making use of a financial planner who can prepare a cash flow based model for you which will show you where you stand and help you to create a plan to make sure that you don’t descend into penury when you retire.