We are writing about control, because we spend much of our lives faced with things that are out of our control. Governments make decisions we have no say in, traffic congestion, the cost of fuel, the weather…the list goes on and on.
Recently we’ve talked of the perilous state of the UK pensions industry and the huge deficits that exist within in many large company pension schemes. Some would say a situation out of control. While some of these schemes may top up their deficits and potentially ride out the underfunding storm that currently exists, others won’t and then the members of that scheme will be faced with events out of their control.
But the thing that scares us the most is that a lot of peoples UK pensions (and therefore their retirements) are completely at the whims of a few numbers.
The one number that rules them all… bond yields
If you have a UK final salary pension and you don’t know about Bond (GILT) yields you really should. Because they are nearly everything, a small movement in these numbers can cause mayhem for your pension.
If the yields go up your transfer values and scheme deficit could reduce massively. On the other hand if they go down your pension transfer values go up and so therefore so do your schemes deficit. And the movements are big (we could be talking 50% movements or more in your pension transfer value).
But you have no control over yields or how they affect your pension value. Now bond yields have been at historic lows for a while and this is keeping pension transfer values really high. The values are so high that most schemes can’t actually afford to pay what they have promised. But that hasn’t stopped these schemes paying out full value to people leaving the scheme.
In real life this can have very devastating consequences, imagine a UK pension scheme that can only afford to pay 60% of the pensions that it has promised to members. Now what happens if 20% of the members leave the scheme being paid out in full? That means that the remaining 80% of the members only have their pensions 50% funded. Great for those who get out, not so great for those still in the scheme. The total deficits in the UK on final salary schemes are now 20% of the value of the schemes, that’s a whooping £450 billion. You want to know how sensitive your pension values are to the bond yields look at the fact that this deficit can move by £40 billion or more a month.
The million dollar question – how long will you live
As average life expectancies have crept up so to have the values of final salary pension schemes. Why? because the UK pension companies know that they will have to pay more under the contract to provide an income for life. This has been another problem that has caused the funding deficit described above.
All these factors putting pressure on UK final salary schemes has seen a number of companies intentionally winding the company up and throwing their pension scheme into a UK government bailout called the Pension Protect Fund (PPF). Then they resurrect their company the next day and don’t have to worry about funding their pension deficit anymore. The PPF will pay you 90% of your promised pension (at the moment), but you lose complete control and your pension will be stuck in the PPF forever. If you want to know about it ask the workers at Carillion or BHS.
We advocate for taking control of your UK pension and the first step to taking control is understanding it.
What’s it’s true value is, what’s the tax I have to pay if I transfer, how will I be better off if I transfer, what can I do with the money when I transfer, how much earlier can I start taking a pension, where will I invest the transferred funds, all these questions once answered put you in control of your UK pension rather than some faceless bureaucrat that’s changing rules, moving funds and treating your UK pension like they’re the ones in control.