Pensions Bill - ?4.4 billion to be slashed from pension benefits of early leavers

The Government has today issued the Pensions Bill which takes forward changes to the private pensions regulatory framework.

These measures were originally considered within an independent report issued by Chris Lewin and Ed Sweeney on 25 July 2007 which aimed to make private pensions regulation simpler.

The Government has decided to go against the recommendations of the independent review in one major area.

The Pensions Bill will reduce the rate of revaluation of deferred benefits.

Currently pension entitlements of members who have left defined benefit schemes must be increased in line with RPI, capped at 5%.

The Government has reduced this cap to 2.5% for benefits built up from a future date.

The original independent report recommended leaving this cap unchanged.

The implementation date has not yet been decided but it is likely to be at some point during 2008.

To give a cash example of how this would impact an individual.

If we assume a male age 45 leaves his company.

He was earning £40,000 and had worked for his company for 15 years (all after the date this change happens).

The company offered a final salary pension scheme which gives a benefit of 1/60th of salary for each year of service (the standard basis) at retirement age of 65.

His pension benefit at date of leaving his final salary scheme is 15/60 x £40,000 = £10,000.

Under the current rules that would be increased by RPI capped at 5%.

If we assume inflation for the next 20 years is 4% each year, his benefit would grow to £21,911 at age 65.

Under the new rules, his benefit would only increase by 2.5% each year, and would grow to £16,386 at retirement.

This is £5,525 (approx 25%) LESS than he would have got under the current rules.

For people who are already members and have some benefits built up before the date this change happens the reduction will not be as great.

Conversely if inflation was above 4% the reduction could be higher.

The source for the £4.4 billion reduction is in the Government's impact assessment of the changes when they proposed them in October .

Andrew Tully, Marketing Technical Manager, Standard Life Assurance Limited, said: "These changes mean people will see pension benefits built up after this future date eaten away by inflation.

Reducing the pre-retirement revaluation rate for these benefits to a maximum of 2.5% will see deferred benefits slashed in real terms, particularly if inflation continues at current levels or higher.

For example if someone left their company in their mid-40s, and inflation was 4%, then by 65 their benefits will have reduced by 25% in today's money terms.'.

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