“EVERY time there’s a good suggestion, somebody brings up the budget.”
These words, by the cartoonist Charles Schulz (creator of Charlie Brown), could certainly apply to government proposals in the past six months.
It particularly refers to the so-called ‘pension triple lock’, which protects the value of the basic state pension against inflation. The triple lock safeguards the value of the state pension by increasing its value every year in line with either inflation, average earnings, or 2.5 per cent, whichever is the greater.
This preserves the buying power of the pension, ensuring that it continues to buy the same amount of goods as it did the year before. Sounds like a good suggestion.
Nonetheless, the Conservatives wanted to axe it. Why? Because somebody brought up the budget. Preserving buying power doesn’t come cheap: the triple lock is going to cost £45 billion over the next 15 years.
This is relevant right now because we have just learned from the new Conservative/DUP government that they will now leave the triple lock alone – plans to alter it have been abandoned as part of their compromise deal.
Good news, then, for the state pension – but with the week that’s in it, let’s not forget about our other pensions as well.
If, when you retire, you will have this inflation-proofed state pension coupled with a final salary pension, you will be, as they say in country parts, ‘on the pig’s back.’ You’ll have the best of all possible worlds.
Final salary pensions, also known as ‘defined benefit’ (DB) pensions, are generous pensions that guarantee you a certain income when you retire. A final salary pension is linked to your salary and years of service, and it pays you a guaranteed amount, no matter how the investments underlying the pension perform.
However, in the 1990s we saw poor returns from the shares and bonds that underpin pension payments, which led to large deficits building up. Final salary schemes were simply not growing fast enough to meet their obligations to those who had retired.
Combine this with the fact that we are all living longer and drawing our pension for longer these days, and a final salary scheme suddenly became a very pricey proposition indeed.
Final salary schemes rapidly became millstones around the necks of the companies running them, because the risk lay on the shoulders of the employer. It was the companies who had to dig deep into their reserves, to make up the consequent shortfall.
We can remember that some of the biggest household names in the country learned this to their cost. Lloyds Bank, for instance, had to pump £12 billion into its pension scheme to make up a particularly severe shortfall; other blue chips like British Airways, Barclays, Pirelli, Fujitsu, IBM, Costain, and Dairy Crest Foods also got badly burned.
No wonder, then, that the last decade has seen almost all the final salary schemes in the country shut their doors to new members. A year ago there were only 11 companies in the FTSE 250 with final salary schemes still open, and that was heading for zero.
This is why most of us today are in defined contribution or DC schemes, where our payments into the scheme are defined, but our returns are not. There is no guarantee on the amount of the pension we will get out – it will depend on how the investments perform.
With no guarantees available, we in DC schemes are responsible for fine-tuning our pension investment – and taking care of that is crucial to maximise our retirement income later on.
We tend not to pay enough attention to our pensions. In a study of female pension savers by Aegon, which we quoted last week, it was found that a third of women in the UK are not even aware of how much they have in their pension. How can you plan for your retirement, when you don’t even know where you stand?
We have to keep on top of our pension by having our financial adviser analyse how our money is invested, and ensure that our savings are in top-performing funds.
From Tilney Bestinvest’s regular fund rankings we know that recently there were 30 under-performing funds in the UK, including some of the largest, between them holding a massive £18 billion in investments.
That could include your pension savings, which doesn’t mean you’re losing money, but you are missing out on additional money you could have had.
It is so easy to switch to better funds and boost the growth of your pension. You can start the ball rolling by calling a financial adviser today.
:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005 . Further information on Facebook at Kennedy Independent Financial Advice Ltd
