FOOL'S EYE VIEW
How To Sort Out Your Pension

By Cliff D'Arcy
January 28, 2003

Until I joined the Fool earlier this month, I'd spent my entire adult life - about fifteen years - working for various financial companies.

I drifted into banking and insurance by accident when I took a year off between my first and second year at university and ended up temping at a large medical insurer that was a major local employer. I stuck with insurance after leaving university, first working for the UK division of an American life assurer, then a fast-growing private insurer that was eventually taken over by a giant US corporation.

I then moved on to join a large general insurer before switching to a specialist insurer that was a subsidiary of one of Britain's biggest banks.

Despite not taking my career terribly seriously, I've been very lucky, if only because I worked for large financial firms. Not only did I learn a lot about personal finance, I also enjoyed very attractive fringe benefits, including final-salary pension schemes.

Recently, being out of work and armed with a respectable severance payment, I decided to look back over my previous pensions to establish how my "random retirement planning" was going and how much more I should set aside.

To begin, I created a "pension CV", listing my jobs and pensionable service:

Dates        Employment History

1987-1990:   As a temporary worker, I was unable to join the company scheme.

1991:        No company scheme offered (US employer).

1991-1997:   5.5 years in contributory final-salary scheme.

1997-1999:   23 months in non-contributory final-salary scheme.
            (Because I left one month before completing two years' 
             service, I receive no pension. Argh!)

1999-2002:   39 months' employment.
             Joined contributory final-salary scheme after compulsory
             one-year waiting period, giving 27 months' pensionable service.

So, despite working since the summer of 1987, around 15.5 years, I've accrued just 7.5 years' pensionable service. By not paying careful attention, I already have an eight-year gap in my personal contributions.

What's worse is that with pensions, as with all investments and savings, the early years are far more important than the later years. So, unless I act soon, I'll have a lot less to live on when I come to retire in perhaps twenty-five years' time.

The first thing I checked was my State pension. I requested a pension forecast from the Benefits Agency, using form BR19, which showed that, having paid National Insurance Contributions since 1987 and assuming I work for another 28 years, I'm in line to receive my full State pension in the year 2033 (ironic cheer).

I then contacted the trustees (a sort of pension guardian) of the above two schemes of which I am a "preserved pensioner", asking for pension forecasts at age 60 (the normal retirement date for both schemes).

The trustees then provided me with details of the income I would receive, how it would increase over time, etc., plus "transfer values" - the "lump-sum value" of my years of service.

I now have three basic options:

1. Leave my schemes as they are and take my pensions when they become due.

These pensions are linked to my earnings when I left these companies in the 1990s and now increase each year only by the annual rate of inflation. As I expect my earnings to rise faster than inflation over my remaining working life, I want to boost the returns from these pensions.

If these were money-purchase schemes already invested in the stock market, I might prefer to leave them where they are to enjoy long-term growth. Alternatively, by putting all my money-purchase schemes in one pot (with a financially strong company), I could keep tabs on all of them on just one annual statement.

I'm not keen to leave things as they are, especially as I plan to retire before 60.  Besides, I may find it difficult to track down these ex-employers in 25 years - they could merge, be taken over, or even go bust before I get my money. I'll consider my other options.

2. Transfer my schemes into my current employer's scheme.

If I was working for a company with a final-salary scheme, it may offer to transfer in my two pots for "added years", boosting my years of guaranteed pensionable service. Thanks to the closure of so many final-salary schemes, this option is becoming increasingly rare.

However, at the Fool, we have a Stakeholder pension scheme (as must every employer with more than four employees). I could transfer my two pots into this Stakeholder scheme but, because they're worth quite a lot, I'll shop around for the best deal. What's my final option?

3. Transfer my schemes into a personal pension that I control.

By transferring all my previous pensions into a single pot, I can easily keep track of them and, what's more, control their investment profile, timescale, risk and returns.

As a "seasoned" investor, I understand that the impact of annual management charges and/or poor future investment returns could mean that I get a smaller payback than simply leaving them where they are.

I need to find the "hurdle rate", say 7% a year, at which I should be better off transferring them. Of course, if the hurdle rate is too high, say 13%, it's most likely too risky and I should leave my schemes as they are.

Valuing preserved pensions and establishing hurdle rates is fiendishly complicated, which is why actuaries (highly skilled mathematicians) do this work. Each pension scheme is subtly different, so it can be expensive to have someone do these calculations for you.

Luckily, as I have contacts that will do this work for me free of charge, this is the option I intend to pursue. In any event, I'll take advice from a qualified pensions specialist and fully explore my options before making a final decision.

In the meantime, the only way to deal with the eight-year contributions gap I mentioned earlier is to shovel money into it. By paying into a personal pension for this tax year, plus "carrying back" contributions to last tax year (if I can put them in before the January 31 deadline), I can begin to get my retirement back on track. In any event, thanks to higher-rate tax relief, every £1 I put in means £1.67 is invested (a 67% uplift). I'm also keen on having a self-invested personal pension (SIPP), where I make all the investment decisions. 

Find out more about SIPPs, Stakeholders and all other types of pension in our Pensions Centre.