If you think you are in a final salary pension scheme setting you up for a comfortable retirement, then think again.
Many workplace defined benefit pensions are not what they seem as employers look for ways to cut costs.
Behind the complicated terms and conditions, many retirees only find out as the approach giving up work for good that their pension is unlikely to a pay-out based on their final salary and length of service.
Instead, the generous payment is often a career average revalued earnings scheme (CARE).
In general, that means pensionable earnings are not worked out on the last three years of salary.
Pensionable earnings manipulated
The calculation is based on average earnings adjusted for inflation over the time of employment.
Earnings is a term that varies between different CARE schemes.
Some exclude overtime, commission, a bonus or benefits, such as a company car or private health cover that go towards making up gross income.
The scheme takes a fraction of these revalued earnings for each year of working with the employer.
Typical fractions are 1/60th or 1/80th of CARE for each year worked.
The government’s Pension Advisory Service gives an example of how CARE works for a typical worker.
In the example, Amanda has worked for her employer for 20 years. In that time, she has earnings totalling £420,000, giving an average revalued income of £21,000 a year. The fraction for the calculation is 1/80, so she has 20/80th x £21,000 for her pension, which is £5,250 a year.
Her tax-free lump sum is 3/80th x 20 years of £21,000, which is £15,750.
Deficit problems
The latest survey of pensions offered by FTSE companies by experts JLT Employee Benefits reveals only eight FTSE250 firms are paying into salary-linked schemes coming to over 5% of their wages.
Half of FTSE100 companies offer a defined benefit pension to staff.
The UK’s 6,000 defined benefit schemes are £408 billion short of promises to pay out.
The experts forecast that all FTSE250 defined benefit schemes will close to new members before next summer.
The latest to face problems is Ibstock, the brick maker.
