New pension rules to hit savers

Employees are being urged to check additional pension savings, as new rules could place some of their retirement cash in jeopardy.

17:21 25 October 2004

Employees are being urged to scrutinise their additional pension savings ahead of changes to the law which will dramatically alter their options and may place some of their extra retirement cash in jeopardy.

More than four million workers save extra into their pensions every year by making additional voluntary contributions, known as AVCs, usually into their company schemes.

This money can be used to bolster retirement income by investing it with an insurer, bank or building society. However, it must be used to buy an annuity as none of it can currently be released as tax-free cash.

Alternatively, employees may be able to buy additional years of service, so that their pension is based on their having worked for the firm longer than they actually have.

Such an option is available to more than one in five members of salary-linked private schemes and 88 per cent of government employees.

However, both kinds of arrangements face a major shake-up because of the implications of the Pensions Bill, currently going through parliament, and the Finance Act.

And experts are concerned that the savings of those currently buying added years in company schemes could be less safe after the Pensions Protection Fund is set up next April.

Watson Wyatt pensions partner Stephen Yeo warned that nobody should withdraw their savings in a panic.

"There are a number of big schemes with deficits, but of themselves these are not a matter of huge concern. The likelihood of most of these strong companies going bust is very small," he said.

"Of more concern is the situation where a pension fund is looking short of money and the company is similarly weakening.

"But these will be very difficult judgments to make, because there will be hefty penalties for moving money elsewhere."