Q. I am a member of the University Superannuation scheme, which is changing next April. It will cost me more but the potential benefits are being reduced. I understand this is because the rising cost of pensions has meant there is a large deficit in the scheme. Is it still worth being a member or should I invest elsewhere?
A. The first point I should make is that your benefits in the scheme are still secure. The scheme has to predict its liabilities many years into the future (for the lifetime of yourself and all your colleagues), and ensure there are sufficient assets to meet these liabilities. The deficit in the scheme is mainly due to the increased cost of gilts and bonds, in particular index-linked gilts, which are used to value the pensions payable.
The yields on these assets have reduced over the last 30 years or so, something which has accelerated in the last few years due to the Quantitative Easing employed by the government. As a result, steps have been taken to bring the deficit down, including a cap on the benefits which are linked to your salary, an end to the “final salary” nature of the scheme, and partial conversion to a “money-purchase” basis. The members are also being asked to pay 8% instead of 7.5% of their earnings towards the cost of the scheme. These changes are not unique to the USS. Many defined benefit pension schemes have been taking steps to ensure they can continue to meet their liabilities.
However the good news is that our calculations have shown that the benefits which members will accrue in the scheme continue to offer much better value than anything you could secure elsewhere, primarily because of the employer contribution. Whilst it is undeniable that the benefits under the scheme are not as good as they were before the proposed changes, they still represent excellent value for money, compared with alternative investments you could make elsewhere without the employer contribution.
Q. I have recently heard a little bit about Junior ISAs and would like to know more?
A. Junior ISAs or JISA for short were first introduced in October 2010. Anyone below the age of 18 and born on or after 3rd January 2011 or before September 2002 is able to open one but if the child is under 16 a parent or guardian has to open the account for the child (between these dates a Child Trust Fund would have been automatically opened for the child by the Government). There are two types of JISA, a cash JISA or stocks and shares JISA. You can invest in any combination of these up to £4,080 within the current tax year. Investment decisions are made by the parent or guardian up to the age of 15, at 16 the child is able to make investment decision but they are unable to access the money until they are 18. Family friends and other relatives are also able to contribute to the overall £4,080 limit.
JISA are a tax efficient way of saving for a child but it could be argued that a Cash JISA is not so attractive as it is likely that the child would not pay tax on their savings anyway outside of a JISA. One major disadvantage of JISA is the child automatically gets access to the JISA at age 18 rather than it being at the discretion of the person who saved the money for them in the first place. Perhaps one would hope they would put it to good use, and spend it on education or a deposit for a house, but there are no guarantees that will happen. As George Best once said “I spent a lot of money on booze, birds and fast cars. The rest I just squandered!”.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
