The consequence for some of poor pension management

Pensions are a lengthy investment of your private savings made over several decades. It not going to take much to realise that financial and economic circumstances are going to change over that period and any or all economic adversity is going to affect your final payout and the older you are when you realise these facts, the less time you'll have left to make up for the loss. You may have been working with the same organisation for your entire working life, say 16 to 65, making a solid contribution towards savings to a final salary company pension scheme or you may have changed jobs several times, but you can still find yourself with little more than an average state pension. How is this possible? The final salary scheme is based on the continuing employer contribution to the pension fund.

If the employer finds his company in financial difficulties, one way of reducing his outgoings is to cut contributions. The fund becomes very underfunded. Legislation will kick in when the fund runs so low it can no longer fulfil its promises and the employer goes into liquidation. The fund is then closed and an independent trustee appointed to wind up the pension fund, which can take three to five years with a fee due to the trustee of at least 4% of its value. The trustee is then tasked with distributing the remaining fund after he has taken his slice of the pie. The pot of savings is used to provide pensions for employees and deferred pensioners and because there is no source of income to balance the withdrawals, provision has to be made for existing pensioners via annuities. Rates for annuities have taken to around 5% for an index linked pension. The reality is that you'll need to have saved around £300,000 to provide an income of £15,000 a year through your retirement.

The final salary scheme is about to become another extinct option because of the huge risks involved. Theses schemes are being replaced by cheaper pensions. In recent months the government has come under attack for refusing to economize on public sector pensions where 90 per cent are final salary schemes compared with a mere 11 per cent in the private sector. Many workers are now offered defined contribution schemes, less generous pensions that do not provide a guaranteed payout and can amount to nothing in a stock market decline. Last autumn a government pensions adviser warned that private employees on guaranteed pensions will drop from the 11 per cent to 0. While legislation tries to cope with the fallout from bad company pension schemes the final salary option is coming to a close for many. Companies faced with poor asset returns in this economic decline, increased regulatory scrutiny and rising life expectancy cannot continue or meet the payouts promised.

Pensions are a lengthy investment of your private savings made over several decades. It not going to take much to realise that financial and economic circumstances are going to change over that period.