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The Demise of Final Salary Pensions

An ever-increasing number of employers, including the Public Sector, will continue to water down pension entitlements to try and reduce their liabilities. In addition about 2.5m public sector workers will have to pay £1.1 billion more in pension contributions from April 2013. The maximum rise for the highest earners will be 2.4% from April 2013. The need to review your Retirement Planning, to ensure that you compensate for these lost benefits, is absolutely critical.

Public Sector Pensions have already been effectively reduced by 15% in value, as they are no longer linked to RPI but to the less valuable CPI. Lord Hutton's Review of Public Sector Pensions has made a number of recommendations, all of which will reduce the retirement income of the members. Public sector workers will still receive far better pensions than their counterparts in the private sector - even after the changes.

The same applies to those members of similar schemes, such as Asda, who have announced the closure of their Final-Salary Scheme. The sooner any shortfall is evaluated and addressed, perhaps by starting a personal pension, the greater the likelihood of maintaining your anticipated pension income.

Higher earners in the civil service, NHS and top-paid teachers will be hit hardest, paying 2.4% extra into their pensions from next year. This will affect different professions at different income levels: NHS workers who earn more than about £110,000; teachers on over £112,000 and civil servants earning more than £60,000.

Rates are staggered for those on lower and middle incomes, so those earning between £15,000 and up to about £21,000 will see rises capped at 0.6% points from April.

A nurse on £27,000 a year would see their contribution increase from 6.5% to 7.1%, meaning they would pay £162 a year extra (£130 after tax relief). Meanwhile a teacher on £50,000 would see contributions increase by 1.6% to 8% a year - and would have to pay an extra £800 into their pension - £480 after tax relief.

Is anyone exempt? The government has said that about 750,000 public servants earning less than the full-time equivalent of £15,000 a year will see no increase in contributions.

There will be a ban on transfers out of unfunded DB Schemes, such as Police and Armed Forces, which will prevent access to the freedoms soon to be enjoyed by members of DC Schemes from April 2015. It is no surprise that MPs have exempted themselves from this restriction !

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