This is the penultimate article in the series on swapping from a defined benefit scheme to a defined contribution scheme.
So there you are, enjoying your retirement, waiting for the fish to bite when the postman delivers a notice informing you that your defined pension fund is about to be closed down by your former employer.
The first question is: Are you about to become a financial castaway? The answer is no. Pensioners' interests are protected under the Pension Funds Act and the Financial Services Board (FSB), which polices retirement funds.
This series of columns has dealt with fund members who are still working. Today's column looks at members who are receiving a pension from a defined benefit pension fund but whose fund is being closed down and converted to a defined pension scheme.
To set your mind at rest André Swanepoel at the FSB says there are various waysto protect the interests of defined benefit fund pensioners whose funds are being converted.
The main protection devices include:
* A fund's actuary has to submit a declaration to the FSB stating that all the existing accrued rights of a pensioner are not in any way reduced; and
* If there are complaints from existing pensioners that their rights have been infringed, the FSB will put the application to switch on hold. The FSB actuary would investigate the conditions and stop the process if it was against the interests of any members.
However, there are a number of issues you must consider when your fund approaches you with its proposal. There are also a number of options available to you. No case is the same because of the rules of different funds and the different approaches taken by the sponsors of the fund (normally your former employer).
The first issue to settle is: if you are receiving a pension you cannot be paid out with a lump sum as you would be if you had retired as a member of a defined contribution provident fund. Because of tax structures and the Pension Funds Act you must continue to receive a pension.
The issue is whether you receive a pension from the defined contribution fund; or whether your fund trustees offer you the choice of buying a pension outside the fund; or whether the trustees buy the pension for you from a life assurance company.
The purchase of a pension on your behalf can follow two routes. The company cantransfer all pensioners to a life assurer and have no further liability; or it can buy the pensions while retaining liability should anything go wrong.More important than the choices is what will happen to your benefits.
If you are offered, and take the option of either buying your own pension or having a pension bought for you by the fund, you need to ensure:
* That your pension will be at least the same as it was before the switch;
* That some account is taken of inflation that will be similar to any increases that have been awarded previously by your defined benefit scheme;
* That the same level of cover is provided for your dependants as you receive before a switch;
* That you will still have adequate medical cover. You may be offered the choice of remaining with your current medical scheme or taking an increased pension to cover medical insurance outside your existing scheme.
In this case you must be sure that the monthly amount you pay is the same and that you will receive the same level of health care benefits. (Remember that health inflation is currently higher than average inflation.) This could take some investigation, but it is essential that you do it properly as medical expenses are seldom higher than in your retirement years; and
* Whether you will be paying additional tax. If you are older than 65 you can claim your medical expenses against your income. If you are younger and are paid a higher pension to make up for any additional medical costs, you will pay more tax. You need to ensure that the extra payments for medical cover also cover the additional tax you will be paying.
Now to the choices. If you are offered the option of buying your own annuity or pension you must be extremely careful about the type of annuity you select. The two most important considerations are:
* Ensure that your capital lasts as long as you do. Unless you are in command of your finances and are relatively well off avoid sophisticated pension schemes, such as living annuities;
* Ensure that your pension will go up in tandem with inflation. This means having a lower pension now. If you buy a level pension you will get comparatively more now but you will be impoverished within a few years because inflation will eat away at your income.
If the fund trustees decide to buy a pension on your behalf, ensure there are measures to take account of inflation.
Howard Rodd, a director of consulting actuaries, Ginsburg, Malan & Carson assisted me in writing this column.