Some five million deferred members of salary-related pension schemes are missing out on valuable opportunities to make the most of their savings because of poor communications from their former employers, according to research from insurer Royal London. Most occupational pension schemes do a bad job of staying in touch with members who are no longer working with the employer sponsoring the plan, but who have left their benefits in the fund, says the firm. Hence many of these savers have no idea how to get the best value from their membership of the schemes.
The default option for deferred members of a salary-related pension scheme is to take their benefits once they reach the retirement age that they had agreed when first joining the scheme offered by their former employer. But most salary-related occupational pension schemes offer a variety of other options. You may be allowed to take your pension early at a reduced rate, or delay drawing your benefits in return for extra income.
You might be able to exchange some or all of your pension for a cash lump sum, or give up more valuable benefits, such as inflation protection, in favour of a higher income. You may be able to take more pension initially – while waiting for state benefits to kick in, say. It may even be in your interests to move to another scheme.
Unfortunately, most deferred members do not realise they have so many options. Even where schemes do offer more information, they often don’t leave members with enough time to conduct sensible financial planning.
Just 10% of schemes write to members well before their normal pension age to explain their options, according to Royal London. The remainder only get in touch in the months leading up to the age at which members are due to take their benefit. Similarly, while most schemes have an option for deferred pensioners to take early retirement, four in five do not highlight this option to deferred members – retirement communications typically arrive too late for members to make use of the options available.
Information on transfers is also sketchy. There have been some improvements – 30% of schemes now quote transfer values in communications with former members, up from 20% two years previously – but the majority of deferred members still aren’t being told what their benefits would be worth if they took them elsewhere. In most cases, it pays to take financial advice on how to get the best deal from a former pension plan, and you will almost certainly have to do so before transferring money out of a salary-related scheme. But the first step is to check what is possible with schemes where you have a deferred membership.
Finally, one big danger for deferred pension scheme members is that they lose track of savings they’ve accumulated with former employers, particularly if they move house and fail to update old schemes with new contact details. The average Briton now changes jobs 12 times – as a result, the government estimates that savers have lost touch with £400m worth of pension benefits. Last year the government launched the Pension Tracing Service, a free online tool that aims to help people find lost pensions. The service can’t tell you whether you have a pension with a particular company, or what it might be worth, but it will give you up-to-date contact details for occupational pension schemes throughout the UK, as well as providers of private plans, such as personal and stakeholder pensions, so you can find out for yourself.
Increased pension contributions will hit young workers
There are fears that rising pension contribution rates could soon prompt many savers to opt out of their workplace pension schemes. The auto-enrolment system – under which staff are enrolled in their workplace pension plan unless they choose to opt out – has boosted the number of Britons saving for their old age. But that may change when contributions increase next year.
At present, the total minimum contribution is 2% of pay, of which the employer must contribute at least 1%. From April 2018, the total minimum contribution rises to 5%, with an employer minimum contribution of 2% (potentially leaving the employee paying 3%). From April 2019, the rate rises to 8%, with a 3% minimum employer contribution (so potentially 5% from staff). If employers stick to the minimum level, then many savers may be unable to keep saving – younger workers on lower pay are particularly likely to opt out.
Meanwhile, there is also growing concern about a change to the national insurance contributions (NICs) that people must make to qualify for state pension benefits. From next April, reforms mean that NICs will rise by almost £12 a week for around 100,000 workers on very low incomes.
These changes are aimed at simplifying the system and will benefit many self-employed workers. However, those earning less than £6,000 a year will be worse off.
Tax tip of the week
You can pass on some agricultural property completely free of inheritance tax, either during your lifetime or as part of your will. In order to qualify for agricultural relief, property must be land or pasture that is “used to grow crops or to rear animals intensively” – see Gov.uk for details on what kind of land is included. The land must also have been owned and occupied for agricultural purposes immediately before its transfer for two years if occupied by the owner, or seven years if occupied by someone else, says HM Revenue & Customs. Finally, if the person making the transfer originally inherited the property from someone other than a spouse or civil partner, the period of ownership is calculated from the date of that first death.