SOUTHEASTERN PENSION SCHEME

UNDERSTANDING THE BASIC STATE PENSION

railway pension web site

'Don't Count On Your Home As A Pension'
By Sky News

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Homeowners are being warned they face an impoverished retirement if they rely on their property as their sole pension.

Increasing numbers of people claim to be planning to use their home to fund their retirement rather than saving into a fund.

But (Advertisement)

research by insurer Standard Life shows that, on average, downsizing from the family home to a smaller property during retirement would provide a pension worth just 16% of average earnings.

That is well down on most people's target of two-thirds of their pre-retirement pay.

The group said people could release the most money by downsizing from a detached property to a flat in the same region.

But with the average detached home in the UK worth £343,058, such a move would unlock only £144,000 worth of equity - which would provide an income of just £122 a week once it had been converted into an annuity.

Doing a smaller downsize, such as from a detached home to a bungalow, would free up only £118,000 which would bring in an income of £100 a week.

Meanwhile, moving from a semi-detached property to a flat would free up just £9,863, creating a pension of only £7 a week.

In some cases people could even lose money by trying to downsize - for example, on average people would be £6,434 worse off if they moved from a terraced house to a flat.

Andrew Tully, from Standard Life, said: "Across the UK many people are pinning their hopes on a continuing strong housing market to provide the retirement of their dreams.

"The reality is somewhat different."

RAIL UNIONS LOBBY PARLIMENT OVER PENSIONS . 2006 .

Railway Pensions Commission - Final Report
30 Jan 2008

The Rail Pensions Commission – which was set up in 2006 in response to the threat of industrial action by all the rail unions - has released its final report. ASLEF’s first reaction is ‘acute disappointment’ that it has failed to meet any of the key demands made jointly by the rail unions.

ASLEF had 4 key objectives on pensions. These were to

cap all employee contributions to 10.56% (the rate of contribution under the British Rail Scheme)
keep all benefits at their current level and ensure no reduction in pension provision.
streamline the current pension provision in the industry from 103 schemes to 3.
ensure that all employees have access to the scheme.
General Secretary Keith Norman said the union’s initial reaction is one of disappointment that the long-awaited report ‘does not address itself to these major issues we raised with the Commission.’

ASLEF is campaigning to ensure that rail pension schemes remain effective and ensure the wellbeing of our members in retirement. Many of the 103 separate schemes set up to replace the single BR scheme have come under attack by the rail operators

Some of the proposals in the Report appear attractive on the surface. It has, for example, suggested a contribution rate of 8 per cent for members and 12 per cent for the employers with a cap on member’s contributions at 10 per cent. However, we would be expected to accept much reduced pension payments for this – including accepting pension linked to a ‘career average’ rather than a final salary, and pensions based on one-fiftieths. It contains no plans to reduce the number of schemes or keep current benefit levels for new employees.

‘ASLEF will continue to push for the pension provision that rail workers deserve. Our four original objectives define what we mean by this,’ Keith Norman says.

EXCERPTS FROM THE PENSION COMMISSION REPORT . CLICK ON THE LINK BELOW FOR THE FULL REPORT .

The Commission does not nor cannot propose any changes which would affect members benefits already accrued in the RPS [sca[. Past service benefits are protected by SECTION 67 of the Pensions Act 1995 , which states members consent or a certificate to be given by the scheme actuary to the effect that they are not reduced in value .
The principal change that the commission proposes to benefits for those who are already members of the RPS[sca] , but do not have the indefeasible right [those members who joined after privatisation] , is that retirement should be based on a pivotal age of 65 , rather than 60 as at present . Pensions on retirement before 65 would be reduced on a basis that is as far as possible cost neutral .
It is estimated that this reduction in the generosity of early retirement provisions , to be based on a pivotal age of 65 , would lead to a joint contribution rate lower on average by about 6 percentage points [2.4% employee and 3.6% employer] i.e contributions of around 24% of section pay in total , rather than the 30% or so that it is expected will be required to secure existing RPS[sca] benefits .
As the pivotol age of 65 can only apply to service after the date of change , the impact would only be felt gradually over a long period . For example , a long service member who retires only a few months after the change will still have the bulk of their pension based on a retirement age of 60 , with unchanged early retirement factors applied to that part of the pension .
Provisions to allow early retirement for those whose health prohibits them from continuing to work exist at present in the RPS[sca] and the commission proposes that these provisions should be modified to be based on service to age 65 .
All contributions to BRASS by Employees and Employers should stop . Though there is nothing to stop any Employer in the Railway Industry setting up an additional voluntary contribution arrangement for existing or new employees . But this must be seperate from the RPS[sca]
It should be understood that because RPS[acre]the new name for the proposed Rail Pension Scheme , is intended to be more affordable the the RPS[sca] the present scheme , the joint future service contribution rate will be lower .It is inherent in the commissions proposals therefore , that the new arrangement will provide a lower level of benefits than is being accrued by members of the RPS[sca] at present . However , the commission is of the view that the new arrangement will still provide an attractive package of benefits , including a reasonable income in retirement when taken with state pension benefits .
As well as being offered to new entrants to the industry , the commission believes that the RPS[acre] should be availble to existing members of RPS[sca] who find that they cannot , or do not wish to , afford the contributions that will be required if they remain members of that arrangement . There may also be members of RPS[sca] who decide that they might benefit from the greater degree of equity that the new scheme will offer . Such members should not lose their indefeasible right[protecion in law for those who were members of the BRPS before privatisation] ,however which means if and when they change employer within the railway industry , they should be treated by their new employer in exactly the same way as any other employee with the indefeasible right . Any other approach is bound to lead to excessive administration difficulties .
The commission does not beleive that a scheme that provides the current benefits of the RPS[sca] can be afforded in the longer term , either by members or their employers .Preliminary indications are that the joint future service contribution rate will be around 30% of section pay . Deficit contributions will be payable in addition . Part of the solution must be to provide an affordable alternative .
The issue of what is affordable is clearly a matter of judgement . The overall cost needs to be less that the rates identified above for RPS[sca], but worthwhile benefits must still be be provided for members .
The RPS[acre] will be a shared cost arrangement , the employers share of this proposed contribution will be about 12% of pensionable pay and the members share about 8% . It should be noted that for many members , the share of the contribution is not greatly in excess of the contribution rate of 5% that will be payable by members to the personal accounts due to become avaible in 2012 . The commission,s proposal also offers the employers the prospect of a contribution rate significantly lower that that which would be payable to the RPS[sca]
The commission recognises that deficits may still arise in RPS[acre] . although the potential for a future mismatch betwwen assets and liabilities should be minimalised by the use of assumptions that are robust in the longer term and the adoption of investment policies that match assets as closely as possible to changes in accrued liabilities . The commission proposes that in addition , employers and members should have further protection against the risks of escalating contibution rates by having calibration mechenisms built into RPS[acre]
There will be those who gain and those who lose from having a revalued average earnings arrangement , as compared to how they would have fared under a final pay arrangement , and this will inevitably be unwelcome to those who anticipate that they will be worse off . However , none of this will affect EXISTING MEMBERS OF THE RPS[sca] UNLESS THEY CHOSE TO JOIN RPS[acre]
How well a member will do in a revalued average earnings scheme , compared with a final pay scheme , depends on two sets of factors . First , there are the provisions of the respective schemes including , cruically , the accrual rates and , in the case of the revalued average earnings scheme , the rate at which pay is revalued during service . Second , there are the individual circumstances of the member , where the key factors are how long they remain as an active member of the scheme and how their earnings increase in real terms over their period of active scheme membership .
The debate between the stakeholders now needs to commence . Our report sets out an agenda for change but it is for others to take it forward . We are clear in our view , however , that the problems will get worse unless reforms start soon . Avoiding change is not an option , pension provision in the industry is already being altered , in a piecemeal way , in responce to the pressure of increasing cost . The real issue is whether it is possible to introduce an alternative system by consensus . The timetable for change is set by the publicaion of the acturial valuation results later this year .The need to agree the new joint contribution rates for the individual sections of the scheme will provide the opertunity to introduce a package of reforms in 2009 that will be acceptable to all parties . We encourage all parties to seize the moment .
Members with long periods of active service are likly to receive less from a revalued average earnings scheme than they would from a final pay scheme of an equivalent value . On the other hand , members with less than 30 years service do somewhat better . It should be understood that these particular results depend on the assumptions that have been made about pay increases , compared to the increase in the RPI . It is , nevertheless , clear that the benefits of the scheme are spread more widely in a revalued avereage earnings scheme , with the member who would receive the smallest benefits from a final pay scheme tending to gain the most .

PENSION COMMISSION FINAL REPORT

DEFINED BENEFITS MEMBERS [FINAL SALARY]

INFORMATION TAKEN FROM THE RAILWAYS PENSION SCHEME A GUIDE FOR MEMBERS . INFORMATION CORRECT AT TIME OF UPLOADING .[30/01/08]

boosting your pension
There is no question about it: many people in the UK face a low level of income in retirement. So, it’s important to review the state of your pension planning regularly to check if it is on target to give you the income you need when you retire.

If you need to boost your occupational pension* scheme, there are three main ways of doing so:

you can pay extra contributions into a pension scheme to build up additional benefits;
you may be able to start taking your pension later and increase your pension;
if your employer offers it, you can use what’s known as ‘salary sacrifice’ where part of your pay is in the form of pension contributions.
You also need to check that increased contributions don’t breach the tax limits, and annual and lifetime allowances.

And if you are thinking about boosting your pension it’s worth considering getting financial advice to help you make sense of the choices out there.

Making extra contributions to your employer’s scheme
One common way of making extra contributions is to use an additional voluntary contribution scheme (AVC*) run by your employer. Until April 2006, AVCs* were offered by all company schemes. Since April 2006, the rules have become more flexible so that you can pay your extra contributions into any type of pension scheme and now employers who run occupational schemes no longer, by law, have to arrange for their employees to pay AVCs. However, many continue to do so voluntarily.

These ‘in-house’ AVCs work in two main ways – added years scheme and money purchase schemes.

Added years schemes
This option is available only with salary-related schemes and mainly in public sector schemes such as those for teachers and NHS workers.. The pension you get in a salary-related scheme is linked to the number of years you belong to the scheme and how much you earn (see Salary related schemes). These additional contributions are used to buy added years in the scheme which increases the size of your pension. The cost of buying extra years generally increases the closer you are to normal retirement age.

Money purchase schemes
With money purchase AVCs, your contributions are invested to build up a fund which can be used to increase your pension or tax-free lump sum*, or buy other benefit such as life cover. As with money purchase schemes generally the amount of pension you get will depend on the amount paid into the scheme, the investment returns and charges.

Other ways of making extra contributions
If you are a member of an occupational pension scheme, current tax rules mean that you may be able to use a stakeholder pension* or a personal pension* to build up extra pension. You don’t have to use your employer’s AVC scheme.

Instead of taking out an in-house AVC scheme offered by their employer, many people in the past were sold what are known as free standing AVC schemes (FSAVCs*) by insurance companies and advisers. FSAVCs are basically the same as personal pensions but often have very high charges compared to in-house AVC schemes.

Now that the rules have been changed so that you can pay extra contributions into any type of pension scheme, the important thing is to compare which type of scheme offers the best deal for you in terms of charges and risks.

Taking your pension later
If you retire later than the normal pension age for your pension scheme, you may be able build up additional pension if the scheme allows it. The way you build up the extra pension depends on the type of the scheme.

For example, if your scheme is salary-related, say a 1/80th scheme, then you may be able to build up your pension at a rate of 1/80th of salary for each extra year of scheme membership.

If it’s a money-purchase scheme you may be able to get a bigger pension if you put off taking your pension beyond the normal retirement age for your scheme because:

the pension fund is invested for longer and will continue growing if investment returns are in your favour. However, you could be unlucky if the value of your pension fund falls due to poor investment returns. You should take very little risk with your investments in later life;
extra contributions may be paid into the scheme. But you need to check the rules of your particular scheme to see if your employer carries on making contributions on your behalf after normal pension age.
Salary sacrifice
Another way of boosting your pension is to get part of your salary paid in the form of employer’s pension contributions. This boosts the amount of money going into your pension. So check if your employer offers this option.

Salary sacrifice can offer tax advantages for both you and your employer. However, on the other hand it could affect your entitlement to the additional state pension* as the amount you get is linked to your earnings over the period in the scheme.

Personal pensions
With personal type pensions, you can increase your contributions into your stakeholder or personal pension but as with pension schemes generally check that you don’t breach the tax or annual and lifetime allowances.

The other thing to watch out for is risk. If you are already investing into an insurance company’s personal or stakeholder pension it might be worth considering choosing a different provider’s personal pension scheme for the extra contributions so your eggs are not all in one basket. The crucial point is though that if you are not confident about choosing between different providers or assessing risk, then you should get advice from an independent financial adviser.

Other ways of boosting your pension
There’s nothing that says you have to use a pension scheme to boost your income in retirement (or indeed even use a pension as a way of saving for retirement in the first place at least until the new pension reforms are implemented – see Pension Reforms ).

There are other ways such as investing in individual savings accounts (ISAs), non-pension type investments such as unit trusts or investment trusts, or using property. But it is important to remember that there can be significant tax advantages using a pension scheme.

Individual savings accounts (ISAs)
An ISA is just a tax-free wrapper for savings or longer term, stock-market type investments such as unit trusts or stocks and shares, and insurance. With an ISA you can save up to £7,000 each tax year and not pay tax on the income you receive from your investment - although you don’t get tax relief on the contributions you pay in unlike pension schemes.

There are two types of ISA – a maxi-ISA and a mini-ISA. You cannot invest in both a maxi-ISA and a mini-ISA in the same tax year.

A maxi-ISA can include both cash savings and stock-market type investments such as unit trusts or stocks and shares, and insurance. You can open only one maxi-ISA each year and the total amount you can invest is £7,000 in each tax year - £3,000 of this can be in the cash element.

Mini-ISAs come in two types – cash ISAs and stocks and shares ISA. You can invest up to £3,000 in a cash ISA and £4,000 in a stocks and shares ISA. You cannot invest in more than one mini cash ISA, or more than one mini stocks and shares ISA in the same tax year.

ISAs are not as tax-efficient as pensions but can be more flexible as you can get your money back at any time – however, some may prefer the discipline provided by pensions as access is restricted. You can get more information on how ISAs work from the HM Revenue and Customs website.

You could of course invest in products such as unit trusts outside of an ISA but you wouldn’t get the same tax benefits. However, you could consider this option if you have already invested up to the ISA annual limits.

Property
Property prices in the UK have performed very well over the past 30 years. Perhaps not surprisingly many people have been tempted to rely on property as a way of providing for retirement, or boosting income in retirement. This can be done for example by trading down to a smaller property, taking out an equity* release scheme or investing in other properties through buy-to-let* schemes for example.

However, care should be taken. Relying on property to fund a decent income in retirement is a risky strategy. There is no guarantee that property prices will continue to deliver the same returns in future and equity release schemes can be complex and expensive. So, unless you are very confident about assessing the risks associated with using property, you should seek independent, qualified financial advice.