Pension black holes at Britain’s biggest companies expanded by 350% during 2015.
The deficit of FTSE 350 companies started the year at £39 billion and ballooned to £137 billion by Christmas.
The Mercer Pension Risk Survey revealed the difference between assets and liabilities grew by £10 billion in December.
However, the value of pension assets – the investments and cash underpinning current and future payments – increased by £19 billion in the month to £720 billion.
At the end of 2015, FTSE350 companies had pension liabilities of £673 billion and assets of £634 billion.
£857 billion liability
By the end of 2016, the gap was between liabilities of £857 billion with assets of £720 billion.
For investors who have money with a FTSE 350 company retirement scheme, the question is how safe is their pension?
Just because a pension is in the red does not mean retirement money is at risk – but the amount a retired worker can expect to receive might be.
Although 29 FTSE 100 pensions have enough assets to meet their liabilities to workers, 59 are running in the red – owing money to their schemes.
Should the scheme collapse, the government’s pension lifeboat, the Pension Protection Fund steps in and takes over.
Investors already over pensionable age still receive their promised benefits, but those yet to draw benefits face a 10% cut in payments.
To avoid paying out on final salary pensions, many FTSE 350 employers are offering golden goodbyes of up to 30 times the value of the anticipated retirement pay-out.
Workers accepting a golden goodbye must transfer the cash from their final salary scheme to another pension – where they can start drawing the cash if they are aged 55 or over.
Switching to a personal pension, such as a SIPP or an offshore Qualifying Recognised Overseas Pension Scheme (QROPS) for expats may mean a loss of some benefits, like spouse payments and guaranteed annuity rates.
However, this is balanced by flexible access and enhanced estate planning that allows a retirement saver to leave their unspent pension cash to loved ones if they die before the age of 75 years old without the worry of inheritance tax bills.
Expats receiving gold goodbyes into a QROPS can also forget worrying about the lifetime allowance penalties if their fund grows to more than £1 million, which is the current limit imposed by tax rules.