Will going part-time damage my pension?
Q: I have a final-salary pension with M&S, where I have worked for 32 years. I work 39 hours a week and have worked full-time since I was 18.
If I decide to reduce my hours, will my pension be based on my new working hours or will it take into account all of my service?
Philip Pearson is a partner at P&P Invest in Southampton
A: The definition of a final salary varies tremendously between different pension schemes. It would therefore make sense to review the handbook that you should have received from your pension provider when you initially joined the scheme to see how your provider defines 'final salary'.
If this doesn't clarify things, contact the personnel department. If there's a risk that your final salary pension will be reduced as a result of moving to part-time work, consider leaving the pension scheme before you reduce your hours to preserve the final salary benefit.
This will be revalued from the date of leaving until the normal retirement age by the level of either inflation as measured by the consumer prices index or 2.5% each year, whichever is lower, so providing a partial hedge against inflation.
It's important to review the value of your pension benefits each year to highlight any shortfall between the income that you are likely to receive from the scheme and the pension you are expecting. This should prevent any future shocks and give you sufficient time to make up any shortfall.
A form of money purchase defined contribution pension launched by the then Labour government in April 2001 with low charges and no-frills minimum standards. Designed to appeal to people on low and middle incomes who wanted to save for retirement but for whom existing pension arrangements were either too expensive or unsuitable, the stakeholder didn’t really take off and looks to be superceded by the National Employee Savings Trust (NEST).
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Final salary pension
A defined benefit pension scheme is one where the payout is based on contributions made and the length of service of the employee. A typical scheme would offer to pay one-60th (0.0168%) of final salary (the one you’re earning when you finally retire) for each year of contributions to the scheme (even though these years were probably paid at a lower salary). Someone retiring on a final salary of £30,000 who had been a member of the scheme for 25 years would receive a pension of 42% of their final salary (£12,300 a year before tax). Sadly, many companies are winding up their final salary schemes or closing them altogether, meaning pension benefits accrued after a certain date (or those available to new employees) may be on a less generous money purchase basis.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.