Q: I have recently been made redundant and read your article last week. Rather than paying into a pension can you please clarify the position around stopping or reducing contributions into a plan. What are my options?
A: At the moment your financial present may well be worrying you rather than your financial future. The credit crunch has done much to disrupt retirement planning, and even if you can’t afford to pay into a pension at the moment, there are things you can do to try and keep your retirement on track.
You don’t mention what type of pension scheme you currently contribute to but I will go through the various options, as unfortunately the position you find yourself in is not unique. If you are a member of what is known as a final salary scheme then when you leave service of the employer, your contributions and those of your employer will automatically cease and you will effectively have a deferred pension arrangement.
What this means is that the pension you eventually receive at retirement will be based upon your service and salary with that company at the date of leaving.
The pension entitlement will rise each year between now and then at normally a fixed rate, of say 5%, or in line with inflation.
Whenever you find new employment you will not be able to restart the contributions to this plan.
It may be possible to transfer your accumulated pension into an alternative private plan, but this should only be done once someone has carried out an analysis indicating what the pros and cons are of such action.
If you are in a scheme such as an employer’s money purchase plan, then your options and actions are almost identical to those described above.
In this instance however, rather than being entitled to a deferred pension, you will have accumulated an actual pension fund.
This fund will not automatically rise each year by a set percentage; instead its value will rise and fall depending upon where the funds are actually invested.
So while there will not be an option to consider continuing payments into the plan, one thing you should consi der doing now and on a regular basis going forward, is to review where the fund is invested and ensure that investment strategy suits both your attitude to risk and changing circumstances.
The final type of arrangement you may have been a member of is a personal pension plan. Here the options open to you are much wider.
Again, if the employer has been making a payment into this plan, these will automatically cease. You may consider what you do with your ongoing investments.
As this is a personal arrangement you may, if you want, continue to make contributions towards the plan.
There is a limit on how much you can invest which is 100% of salary. So as long as you have earnings, you can contribute up to that limit. If you have no earnings then the maximum that can be invested is £3,600 per annum.
Earnings are accessed each tax year so again this is a point worth bearing in mind. As and when you find employment again, you can if you want continue to contribute into your personal arrangement irrespective of the type of pension scheme your new employer offers.
Again, if you intend to suspend contributions permanently or temporarily as this arrangement is based on a fund and not a pension, you should consider where the funds are invested to ensure they match your objectives. As ever, you should at such a critical time make sure you receive advice before taking any action
Raymond Mulligan is managing director of Johnston Campbell, a company of independent financial advisers regulated by the Financial Services Authority. For further information, please contact firstname.lastname@example.org or (028) 9022 1010