Act now to avoid a big pension shortfall

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Money news, advice and predictions for savers and spenders. This week: pension schemes.

By Jeremy Gates

When two of Britain's leading firms announced big cutbacks to company pension schemes this week, they highlighted once again the problems facing millions of private-sector workers when they stop work.

BP closes its final salary pension scheme to new entrants from April 2010, while Barclays Bank is taking 18,000 staff out of its final-salary scheme and into an inferior defined contributions (DC) scheme, albeit with some protection against swings in the stock market. Barclays currently pays £350 million a year into its pension fund.

Although both schemes will be superior to the average company DC scheme, this week's events suggest final-salary schemes could soon vanish altogether in the private sector.

Britain's biggest FTSE 100 companies, facing total pension fund deficits of nearly £30 billion, have little option if they are to survive the recession. Morrisons switched 4,500 workers from a final-salary pension scheme into one based on average salary this week, while BT's share price continues to suffer from fears about its huge pension fund deficit.

Nearly three-quarters of a million British workers retire will in 2009, and with the value of pensions assets held around the world slashed by more than £3 billion since 2007, many will have trouble making ends meet.

A survey of people aged 60-plus by Intune, the financial services provider owned by Age Concern and Help The Aged, says 55% of private pension holders are disappointed with the income they expect to get when they stop work.

If they could do it all again, some 39% would have started a pension earlier or paid more into it. Many would have switched pension contributions into a savings account or an ISA investment, or paid the mortgage off much faster.

Mervyn Kohler, special advisor to Age Concern and Help The Aged, says: "Around 680,000 people are hitting retirement age this year, and more may be looking at buying an annuity earlier because they have been made redundant.

"There is clearly a worrying degree of market failure, as well as confusion, which should be tackled so people understand what annuities are and what their choices are."

The credit crunch is savaging private sector pensions. Anybody with a £50,000 pension pot retiring in 2009 will be 27% worse off - around £20 per week - than somebody who quit in 2008.

Pension expert Ros Altmann said in the MetLife Report: "Essentially, the entire UK pensions system has been based on a bet that equities would always do well enough over the long-term to deliver reliably good returns.

"The old idea that stock markets can always be relied on to deliver strong returns has left millions facing an impoverished old age. It is therefore important that people understand what risks and costs have now passed from employers onto their own shoulders.

"As both State and employer pensions provision declines, the importance of individual long-term savings increases. People are increasingly on their own to cope with both the costs and the risks."

Laith Khalaf, pensions analyst at financial advisor Hargreaves Lansdown (HL), says: "Many firms are likely to follow Barclays and BP over the next two years, although the new BP scheme, with total contributions at 15% of salary, will still be pretty good.

"As they see the markets recover, firms will close off final salary schemes to ensure they do not hit another downturn with that millstone around their necks".

HL figures suggest the average private-sector pension pot - built up since DC pensions began in 1988 - for workers retiring in 2009 is barely £35,000: enough to pay about £2,000 a year, or £1,500 - just £30 per week - to those who take the tax-free 25% deposit upfront.

Approaching 60, most people can do little about their pension income. By then, it's too late.

At 30 or 40, however, there is still time to make sensible financial preparations for old age.

"One of the healthier things to come out of the credit crunch could be a stronger savings culture. We will learn the hard way that we all have to save more," Khalaf says.

"Basically, if you start saving for a pension at 25, about 15% of salary should go into a pension pot. At 35, it should be 20%, and thereafter a higher percentage, the later you start.

In fact, the average contribution into private-sector pensions is barely 10% - and two-thirds of private-sector workers have no personal pension scheme in place at all.

Here are the options for workers struggling to find value for money from a private-sector pension scheme:-

:: Give up - and don't put a penny in your pension. Anybody retiring on the basic State pension (£95.25 per week) and no other savings can claim Pension Credit for a total £130 per week.

But these benefits could be cut, as the number of over-65s soars and the Government finds itself seriously short of money for a decade or two. Hardly a sensible option.

:: Once you're in a pension scheme, stick at it - because your employer probably tops up your monthly contribution.

If you aren't in the scheme, you lose this 'free' money.

However, if your employer's scheme isn't particularly attractive, put other money into an alternative savings vehicle - a tax-free ISA perhaps, or alternative personal pension, or even a Self Invested Personal Pension (SIPP) which allows a wider choice of funds, chosen with or without expert advice.

Even in a recession, these funds could perform better than your pension: although Russia is up by about 50% up so far this year, the likelier bet for long-term growth is Emerging Markets (up 20-30% in 2009).

HL head of investment research Mark Dampier suggests this portfolio for SIPP holders for long-term growth:

25% Invesco Perpetual UK Equity Pension

25% Jupiter Global Managed

25% AXA Framlington Balanced Managed

25% Aberdeen Emerging Markets

:: Drawdown option: if your fund is a minimum £100,000 and you have other savings besides your pension, there may be a case for taking the 25% tax-free lump sum on retirement and leaving the rest of your money invested.

Then you buy an annuity at any time you like until the age of 75, to turn this lump sum into income.

Khalaf says: "The Government's huge borrowing needs could fuel inflation in years to come. Drawdown offers income today, while keeping the retiree's options open to benefits from possible higher annuity rates in future should inflation return further down the line."

:: Delay your State pension, rather than your private one. On your State pension, each one-year delay adds 10.4% to weekly income - so a £100 pension is worth £110.40 if it was started a year ago.

If you defer a State pension at 65 for one year, you make up all the money lost by age 76 - beyond that, you are showing a healthy profit.

By contrast, delaying a private pension can be risky as shares might have gone lower, with annuity rates even poorer by the time you try to take your money.

:: Don't rush off to the public sector, where pensions provision is more generous and guaranteed by the taxpayers.

Even though five million public-sector workers are still guaranteed final salary pensions, there's a strong possibility that hard-up Governments will have to cut the 'perk' in due course because it will look ridiculously unfair compared to the problems already facing private-sector workers.

:: Information: Hargreaves Lansdown (0800 138 2121 and www.h-l.co.uk); Intune Annuity Advice Service (0800 130 3121 and www.intune.co.uk/annuities).

:: In my last column on the Car Scrappage Scheme, I said that British Car Auctions (BCA) blamed the scheme for a fall of £2,400 fall on prices achieved on 'nearly new' vehicles in its April sale. BCA says other factors, including low volumes and model mix, may have caused the fall.

Poundnotes

:: Savers are still getting hammered, says the latest survey from Investec Private Bank, which claims that just one in 10 savings accounts for balances of £25,000-plus pays 2% or more. Average return on a £25,000 balance between February 1 and May 1 was a paltry 0.89%.

Investec's High 5 account currently pays 3.03% gross, 2.53% higher than Bank of England base rate on minimum deposits of £25,0000.

And Cater Allen Private Bank is launching a three-year savings bond paying 4.25% AER for new and existing customers, on minimum deposits of £5,000. Its two and three-year bonds enable savers to withdraw money on the anniversary of the product at reduced rates.

Information: Investec (0845 366 6333 and www.investechigh5.co.uk); Cater Allen (0800 092 5500 and www.caterallen.co.uk).

:: The average credit card purchase rate has climbed to 18.1%, against 16.3% two years ago, says Moneyfacts.co.uk analyst Michelle Slade.

"Customers who repay the minimum will be hardest hit with an additional £408 in interest now being payable on a modest balance of £2,000," she says.

"In the last six months, 12 cards have increased rates including cards from American Express, Bank of Scotland, Capital One Bank, Halifax and Nationwide BS.

"Competitive credit card deals can still be found on the market, with 0% balance transfer deals available for 16 months and 0% introductory purchase deals for 12 months, but with the increased risk of default, only those with exemplary credit histories are likely to be accepted for the best deals."

:: Homebuyers leaving fixed, discounted, tracker and capped-rate deals to move onto standard variable rate (SVR) loans could be clobbered for an extra £20 million a month because banks have lifted the SVR to 4.6% above Bank base rate, against 1.9% in second quarter of 2008, says Richard Mason at Moneyextra.com.

Mason says: "It's blatant profiteering. Banks are shoring up balance sheets by charging huge rates for existing borrowers, but offering tiny rates to savers.

"Deluded customers who have recently taken advantage of a reduction in monthly repayments may fail to understand that the full benefit of rate cuts is not being passed to them."

Mason claims the worst SVR offenders are West Bromwich BS (SVR 5.84%), Chelsea BS (5.79%), Leeds BS (5.49%), Woolwich and Alliance & Leicester (both 4.99%).

However, as West Brom has recently been threatened with relegation of sorts, rather like the town's football club, it might presumably argue that it needs every penny it can rustle up for the next few months.

:: Holidaymakers heading abroad must plan their travel money carefully to avoid being hit by the weak sterling, says Andrew Hagger at Moneynet.co.uk.

For instance, they should take a prepaid travel card, (including FairFX Currency Card, Caxton FX Global Card, Post Office Travel Money Card and Travelex Cash Passport) for a better exchange rate, and also to avoid the 2.75% foreign loading fee on ATM withdrawals.

It's also worth finding out how much your debit or credit card provider charges for overseas purchases and cash withdrawals. And don't use a debit card for lots of small transactions, as you will be hit by a 2.75% loading fee in most cases and banks will sting you for an additional £1-1.50 per transaction.

Also, to assist in replacing originals if they are lost, keep a copy of the following in your hotel safe: front and back of credit and debit cards; travellers cheques; and passport.

:: High-five savers:

Phone No Rate Account Period Deposit Interest paid

AA 0845 603 2295 4.50% (F) Telephone Fixed Rate Bond Five Years (T) £500 Yly

ICICI Bank UK www.icicibank.co.uk 4.40% (F) HiSAVE Fixed Rate Five Years £1,000 OM

Halifax www.halifax.co.uk 4.40% (F) Web Saver Five Years £500 Yly

United Nat Bank 0800 218 2266 3.50% Three Month Gold Deposit Three Months £1 Half-yearly

Secure Trust Bank 0121 693 9111 3.11% 60 Day Notice Issue 2 60 day £1,000 Qly

Top-five borrowers

Phone No Rate Period Max% Adv Fee Incentive

HSBC 0800 494999 2.49% discounted for two years 60% £249 Yes

First Direct 0845 610 0100 2.89% variable for term 75% £799 Yes

Market Harboro' BS 01858 412250 to 30/9/11 75% £1594 Yes

HSBC 0800 494 999 2.95% variable for term 75% £799 Yes

Co-Op Bank 0800 633 5286 3.24% to 31/09/12 75% £ 995 Yes

Code:

*F - Fixed

*P - Operated by Post

*B - Operated by Post/Telephone

*T - Operated by Telephone

*W - Operated by Internet

*H - Operated by Internet/Telephone

*S - Available only to those aged 50 or over

*R - Available to those aged 60 and over.

:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice).