Employees of John Lewis will no longer be provided a generous final salary pension, in the latest death knell for gold-plated retirement saving.
The John Lewis Partnership, famous for its “never knowingly undersold” slogan, has been forced to cut costs to compete in a tough retail sector. It moved to a combined defined benefit, or “final salary”, and defined contribution scheme in 2015 and has been one of a handful of businesses to still offer the former.
Defined benefit pensions are great for staff but expensive for employers to provide – they guarantee an income for life and lump-sum on retirement based on an employee's career earnings, service and age, rather than individual investment returns.
Employees also contribute less to a final salary scheme, around a third versus the employers’ two thirds. By comparison, with defined contribution schemes the split is generally the other way around.
Other companies still offering defined benefit pensions will take John Lewis’s move as a signal to reassess their own situation. Employers must provide an alternative, usually a defined contribution scheme under "automatic enrolment" rules. These put much more onus on the individual.
My employer has shut my pension – what now?
Relax, what you have saved so far is safe. Generally the pension you have built up will increase up to your retirement date to protect the current value against future inflation.
Your employer is replacing ongoing pension saving with a defined contribution pension. The pension pot you will get from this will depend on how much both you and your employer pay in and how well the investments perform until you retire. The savings can then be used to provide income in retirement.
On rare occasions, the defined benefit pension you have accrued could be affected if the company goes bust. If that happens, a safety-net called the Pension Protection Fund will pay at least 90 per cent of your pension, subject to a cap, if you’re not yet retired.
What do I need to do?
Think about investment. In a defined contribution pension the investment responsibility switches from the employer to the employee. Think carefully about how much risk you need to take to get the income you need in retirement.
If you’re a long way from stopping work, it may be worth investing in a higher-risk fund, which will be more volatile but should deliver a better outcome over the long-run.
If you do not make any active choice the contributions will be invested in a "default fund" where overall charges are capped. This is normally a diversified investment fund designed to meet most people’s needs. Regularly review how your pension fund is performing.
To help with investment decisions your employer will usually provide access to a basic financial advice service.
Contribute contribute contribute
Your income in a defined contribution scheme relies on how much you, and your employer, put in while still working plus any investment returns. Can you afford to pay in contributions over and above the minimum that is required to join the scheme? If you can, do it, especially if your employer will pay in more if you do.
Unlike your take-home pay, money paid into a pension is not taxed so there is a big incentive to set money aside. Maximise the amount you can afford to contribute
Understand what your pension will provide. Use a retirement calculator, such as the one provided by the Money Advice Service, to figure out how much you are likely to save (include the employer contribution) and how much annual income it would provide. This can also give you a guide for how much to save outside your pension plan
What happens when I retire?
You will still get your defined benefit entitlement, a guaranteed income in retirement, based on whatever you accrued up until the schemes closure. Or you may want to transfer it into your defined contribution pension. This can only be done before you starting receiving any income. Be warned, once you have transferred out of the company scheme, you are entirely responsible for generating an income that will last for life.
For the defined contribution part of your pension there are many ways to take an income tax-efficiently. You may also decide you need an income plan that provides for your family after you die. The advantage of defined contribution schemes is they offer employees more choice and flexibility.
If you want peace of mind at any point, speak to a professional financial adviser. They will help assess all your options and give you a recommendation which is specific to your own individual needs. Most will offer an initial consultation at no cost to you.