Here is a conundrum for you. I was contacted by a reader who is employed by a small business.
She earns £13,000 a year, will be 65 in June and is drawing her state pension.
From April, her employer, aged 71 and considering retirement, must offer her a workplace pension.
He has been very naughty and suggested that to avoid the administration he would instead give her a pay rise allowing her to save into a pension of her choice.
She is divorced, and, for some reason, did not get any of her husband’s pension. So, what should she do?
On balance, I feel her best option would be to take the money, as long as enough was on offer.
In fact, the employer could be fined merely for offering such an inducement.
But is there any way it would be in this woman’s interest to start saving into a pension at age 65 using merely the legal minimum contributions?
Back-of-the-envelope calculations suggest that on her salary she might build a pension of around £72 by the time she hits 65 in six months’ time. Half of this would be her own money.
Allowing for the fact that she pays tax at the basic rate now, and will probably be a non-taxpayer when she retires, a pay rise of around a tenner a month would be more than enough to compensate for the lost pension.
There are other issues to consider. She would lose money to charges and face the hassle of retrieving the money back when she retires.
I also have enormous sympathy for the employer. Why, at the age of 71, would he want to go through the enormous administrative burden of setting up a pension for one person?
I am told by Alan Higham, who runs the pensionschamp website, that there are 14 separate documents breaking down the rules on setting up such a pension.
If she can extract a pay rise of £15 to £20 a month, it would leave her considerably better off than with the pension and save her boss an administrative nightmare.
If she can extract a pay rise of £15 to £20 a month, it would leave her considerably better off than with the pensionAs a journalist writing a newspaper column, I can point this out. I suspect you cannot – you certainly could not condone the employer’s incentive. Neither could this lady – and I suspect her employer – have afforded your advice.
Which all leads me to ask, in our pursuit of a pensions paradise, have we thrown commonsense out of the window?
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Zurich made Ed ‘Stewpot’ stew
What a miserable January so far. The stock market performance by large companies at the start of the year was awful and economic predictions are gloomy.
Then Ed “Stewpot” Stewart and David Bowie died on the same weekend. It feels as though my youth has been ripped up and thrown in the waste paper basket.
Ed Stewart was a favourite of mine from his days on the best pirate station of them all: Radio London. Then, like millions of others, I tuned to Junior Choice in the early 70s.
So imagine my surprise when in 2006 he phoned the Money Mail office asking for help with his pension.
Dealing with a divorce meant he missed his tiny pension window. Zurich Assurance reduced his £43,694 pension by a staggering £8,539 via a market value reduction.
He had asked for figures on February 16, and Zurich took seven weeks – until April 3 – to reply.
His 65th birthday was on April 23, but just three weeks later Zurich locked his money up until age 70.
So while it was all right for them to take seven weeks to respond, his money was locked away in less than half that time.
Zurich refused to budge, saying that as they had received no communication they assumed he wanted to remain in the fund. The case went to Fos.
His death at 74 shows just how little benefit he might have received after years of saving. I felt the case underlined how pension firms seemed intent on destroying the credibility of products they relied on.
Sadly, David Bowie never called about his pension...
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Time for some nettle-grasping
I was taken aback by Aviva’s report suggesting that just one in seven parents have formal written plans for what should happen to their children if they, the parents, die prematurely.
More than half have made no provision at all.
Surely children’s financial security and future well-being should form the bedrock of parental planning.
As Aviva suggests, this smacks of too much living in the present and not enough planning for the future.
