Money: Financial makeover - If redundancy is on offer

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The Independent Online
NAME: Tony Cullen

AGE: 48

OCCUPATION: Computer operations manager

PROBLEM: Tony works for an NHS Trust and his department is due to be outsourced (ie taken over by a private employer). Tony has the choice of taking a net redundancy payment of pounds 32,000 now, or having his salary "protected", at pounds 31,200 per annum for up to two years, followed by a substantial salary reduction to pounds 19,200 a year.

The problem with the former option is that Tony feels his age may be a barrier to obtaining a reasonable new position, and the problem with the latter is that the protected salary may end as soon as his department is out-sourced and, even if honoured, his income and standard of living will fall sharply afterwards.

Tony is single with no financial dependents. He has been in the NHS superannuation scheme since 1975 and is making additional voluntary contribution (AVC) payments to purchase extra years within the scheme. He recently remortgaged his property, choosing a variable rate, interest-only mortgage, supported by an existing low-cost endowment policy.

The protected salary could continue beyond the age of 50 even under the outsourcing, as long as complicated transfer of undertaking protection of employment (Tupe) regulations apply. Equally, they may not.

THE ADVISER: Mark Stevens MSFA, of Membership Services Direct, independent financial advisers in Brentwood, Essex (01277 267000).

THE ADVICE: Tony had favoured the idea of taking the redundancy payment now, finding a temporary position until he reached age 50, and then drawing his pension benefits, making up any shortfall by taking an income from the invested redundancy money and, if necessary, renting out his house.

Tony had correspondence from the pension scheme administrators which showed his prospective benefits on retirement at age 50. However, research into the NHS scheme rules showed that taking benefits at age 50 without penalty is only possible if he is still employed by the NHS at the time.

Leaving before 50 means that benefits would be preserved until age 60. An important exception is in the case of serious ill health, when benefits can be drawn early, but Tony is fit and healthy.

If Tony's department is taken over then, as a result of specific legislative requirements, the new employer must effect a broadly comparable pension scheme for employees. The NHS scheme is a final salary arrangement (ie benefits relate to years in service and the level of salary when the pension is first taken).

Various changes in pensions law have made final salary schemes onerous to run, particularly for smaller employers. Tony's prospective employers may set up a money purchase pension where benefits depend on fund performance and annuity rates. Remember, the new scheme must be broadly comparable, not identical. If the link between salary and membership is broken, Tony's pension cannot be accurately predicted.

So, if Tony stays and is outsourced, the only prospect of retiring at age 50 would depend upon him transferring his guaranteed NHS pension into a possible new scheme, the details of which we can only guess at. Leaving the pension preserved with the NHS means he cannot start drawing it until he is 60. Neither route fits with Tony's requirements.

What happens if Tony takes the redundancy pay now? We know his pension will not start until age 60, but he will have pounds 32,000 to invest. Tony has a current minimum income need of pounds 700 per month after tax. Renting his property out should secure a net income of pounds 600 per month, so a relatively modest withdrawal from his investment would cover his needs.

However, spending the next 12 years in rented accommodation is hardly ideal, and the whole plan would start to collapse if Tony were unable to rent his own house or if mortgage costs escalated. Of course, a splendid new highly paid job would ease Tony's finances for now but, as he points out, such an employment may be wishful thinking and it still doesn't enable him to retire at 50.

The best approach may be to talk to the current employer. The best compromise would be for the NHS Trust to guarantee Tony a job until he reaches 50, in his current position until the outsourcing occurs, and then in some other appropriate position at the same (or reduced) pay. This will save the Trust having to make a redundancy payment and Tony should be prepared to give some form of undertaking that he will retire at 50. In the meantime, his pension will be enhanced by his extra two years in the scheme and by his continuing AVC payments.

If he reaches the age of 50 while still employed by the Trust and wants to retire, three options apply. Tony could do so, but face actuarial reductions in his pension for leaving early. He could be backed by the Trust, in which case it takes on board some of the costs of his early retirement. Or he could be made redundant, in which case the Trust would meet the full cost, without penalties, of an early retirement.

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