I’m 35 and in the Tata Steel pension scheme…can I cash out my savings and walk away? Steve Webb replies
I’m 35 years old and have been paying in to my pension scheme since August 2000. The future of the scheme looks bleak – it’s the British Steel Pension Scheme, run by Tata Steel.
I’m uncertain if I will ever actually get anything at all from it. I would like to know if I could withdraw everything I’ve ever paid in, and walk with that without ever attempting to draw on the pension in later life.
I don’t want to transfer it to another scheme. I simply want my money back from it as I could do more good with a small sum now than I would ever be able to do with a larger sum at whatever age I get to retire.
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Pension worry: Tata steel plant at Port Talbot in South Wales
Steve Webb replies: When a business is in trouble, those who work for the firm are understandably concerned about what this may mean for their pension.
The truth is that the situation may not be as bleak as you think, but I’m happy to explain what would happen if your company became insolvent when there was a shortfall in the pension fund, and also what options you have today.
Many company pension schemes are currently in deficit. This means that the amount of money they have set aside is not enough to meet the likely future cost of the pension promises they have made.
Whilst this is not ideal, as long as the sponsoring employer stays in business and continues to top up the pension scheme, it should be possible to gradually reduce and clear the deficit.
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Because pension liabilities run for many decades, it is not necessary to clear the deficit immediately, but it is important to have what is called a ‘recovery plan’ to deal with the deficit.
You are concerned about what would happen if, for example, your employer became insolvent before that recovery plan had been completed.
If there was a significant shortfall in the scheme, the members of the scheme would be transferred into a ‘lifeboat’ arrangement called the Pension Protection Fund.
All of the assets of the scheme would be handed over to the PPF and it would take on responsibility for paying you a pension when you reached pension age.
As you are below scheme pension age, you would get a pension based on 90 per cent of the full pension you were expecting.
There are some other differences between PPF benefits and the benefits payable under your scheme. For example, I believe your scheme increases pensions in retirement each year by inflation as measured by the Retail Prices Index, whereas the PPF uses the generally lower Consumer Prices Index.
In short, you won’t get as much in pension from the PPF as if your company carried on in business, but nor will you lose everything.
If you are concerned about this possibility, you do have the option to transfer out of the British Steel Pension Scheme.
The way it works is that you ask the scheme to give you something called a Cash Equivalent Transfer Value (CETV).
This is simply a lump sum that they would offer in exchange for giving up any further claim on the scheme. I have made contact with the British Steel Pension Scheme and they have confirmed that a scheme member up to the age of 64 can apply for a transfer value.
I have also checked and am told that although the trustees could reduce the transfer value to take account of the deficit in the scheme, they have never done so in the past and are not doing so at present.
However, because you are under the age of 55 you would not be able to access this cash. You would have to transfer it to a new pension arrangement which would take your lump sum and invest it until you wanted to access it at age 55 or beyond.
Because you would be giving up potentially valuable pension rights under the British Steel Pension Scheme, there is a rule which would require you to take impartial financial advice if the CETV is more than £30,000.
My wife is a retired teacher still saving into a private pot, will she be hit by new ‘pension recycling’ tax trick limit?
Even if you could access your pension cash now, it’s far from clear that this would be a good idea.
You are in the very rare position of having been in a salary-related pension scheme for most of your working life and this gives you a very firm foundation for later life, including giving you choices about when you want to stop working.
If you were able to take the cash now there’s a real danger that you would spend it now and never quite get round to building up a fund for retirement.
With regard to the future of your British Steel pension, I should add that there is a third option under consideration.
The trustees of the British Steel Pension Scheme are looking at options for keeping the scheme out of the PPF even if the link with Tata was broken.
Their idea is that they could find a way to provide benefits which may be short of the full pension you were expecting but better than the benefits that would be payable under the PPF.
Opinions differ as to whether this would succeed or not, but it might be something to mention to a financial adviser if you come to the point of discussing a potential pension transfer.
Finally, as you will be aware, workers have recently voted in favour of a package that would mean that no-one could build up any new rights in the British Steel Pension Scheme. Read more here.
But this does not change my observations above about the pros and cons of transferring out the rights you have already built up.