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re shock
Page 36
Page 37
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With pensions under increasing pressure the spectre of a future generation of poverty-stricken pensioners is terrifyingly real. John
Davies warns that action must be taken now to protect HGV drivers.
poor stock markets, longer life expectancy and a reduction in government tax breaks have led to the possibility that our pension funds might not be able to pay us the pensions that we had planned for. In an industry like road transport where few employees have the benefits of a strong occupational scheme it is vital that employers and employees prepare early for retirement.
After all, even if they can pass their medicals, do we really want HGV drivers being forced to stay on the road well into their seventies?
Self-employed workers such as ownerdrivers do not have the option of joining occupational pension schemes, but they can set up personal pension schemes.
Tax relief
These personal schemes are offered by insurance companies, banks and building societies. Contributions paid into personal schemes qualify for tax relief, making them a tax-effective form of long-term saving.
The self-employed can also invest in a stakeholder pension. This is a new type of pension which was introduced by the government to make non-state pensions more affordable. Administration costs are kept to a maximum of 1% of the value of your fund and investors are able to make payments into their plan wherever it suits them. They can also decide to take a break from making contributions if their financial circumstances change.
Stakeholder pensions are also available to employees, even if they are already members of occupational schemes. Employers with at least five staff are required by law to provide access to a stakeholder scheme if they do not already sponsor an occupational scheme or a group personal pensions scheme.
In reality this means, as a minimum, pointing employees in the direction of a pension company.
The core of the UK pensions system remains the basic state pension. This is paid to anyone who has paid, or is credited with, standard rate National Insurance Contributions (NICs).The basic pension is currently £79.60 for a single person. Entitlement to the basic state pension depends on the number of "qualifying years" during which you have paid, or been credited with,NICs.
To qualify for the full basic pension, a man will usually need to have 44 qualifying years while a woman will need 39. The female figure will change as the state pension age is harmonised for both sexes.
State benefits
Other state benefits might supplement the basic pension.The State Second Pension (SSP) came into effect in 2002 to replace SERPS. SSP and SERPS both calculate additional entitlements by reference to earnings on which NICs are paid. But SSP is more generous:anyone earning under £11,600 is treated as having earned that figure, and those who earn between £11,600 and £26,600 (2004/5 figures) will build up a higher pension than they would have under SERPS.
Larger firms may operate an occupational pensions scheme and employees should join these because the payments they make into the scheme will usually be topped up by payments from the employer (although when schemes are cash rich employers may take "pension holidays"). Also,the administrative costs of the scheme will be borne by the employer.
Occupational schemes can be one of two kinds: defined contribution (money purchase) and defined benefit (final salary). In a defined contribution scheme members' pension entitlements are determined by the amount of contributions paid into the scheme, either by them or by the employer on their behalf. The more you pay in to such a scheme, and the more profitable the fund's investment has been over the years, the better the pension will be.
In a defined benefit scheme a member's pension is determined by a combination of his or her pay at or near retirement and the length of his or her membership of the scheme. Employees with long service combined with a high salary near retirement benefit most.
The drawback for employers in a defined benefit scheme is that they are committed to pay pensions calculated by a fixed formula, regardless of how successfully the scheme's funds have been invested. If the scheme's funds are inadequate it's up to the employer to make up the difference.
Employees can add to an occupational scheme pension by paying Additional Volun tary Contributions (AVCs). This is a useful way to increase entitlements for employees who are unlikely to work enough years in the scheme to qualify for the maximum two-thirds retirement pension..
John Davies is Head of Business Law at the Association of Chartered Certified Accountants