What would YOU do? Pensionwise

fimonkey · 28 January 2008 at 2:59PM

Please bear with me, I'll try to explain it as best I can..

1. I work for a private educational establishment, the board of governers have limited employer contributions to any pension at 5%.

2. I have the option of joining the teacher's pension scheme, however the employer contribution to this scheme should be 14.1%, but the college will only contribute 5%, this means that employees (ie me, if I join) have to contribute the remaining 9.1% to make up the remainder of the employers contribution.

3. This is known as a 'salary sacrifice' and thus means our gross salary is reduced by 9.1%, and this reduced figure is what the final salary pension is based upon (and also the figure given to banks etc if I want to get a mortgage).

4. In addition to taking the 9.1% drop (to make up the employer contributions) I would also have to contribue 6.1% of my salary.

5. So effectively if I join the teachers pension scheme I will be worse off by 15.2% of my Gross salary (which is currently 30K per year).

6. Alternatively I can join a stakeholder scheme and contribute 5% of my salary and employer will contribute their agreed 5%.

Given the 9.1% drop in salary which final benefits will be calculated upon when I retire, is it really worth it me joining this pension scheme rather than a stakeholder?

If so, then WHY??? (15% from 30K is a MASSIVE drop for me, as I'm attempting to save a deposit for a house and obviously any mortgage I take will be based on my salary minus the 9.1%). By the way, I'm currently 31 yrs old.
I look forward to hearing your replies. Many thanks
Fi

Andy_L · 28 January 2008 at 3:40PM

The teachers pension provides better benifits than a 5%+5% contribution to a stakeholder pension.

An analysis, based on your personal situation, would be needed to decide if those extra personal contributions are worth the extra contributions

As an aside many mortgage providers allow for salary sacrifice schemes & use a pre-sacrafice salary in their calculations

fimonkey · 28 January 2008 at 4:40PM

If I were to take out a stakeholder with 5% + 5% and then save 9.1% of my salary myself, would that be a better option? (At least then I can get to that money if i need it).

I'm seriously worried about taking a 9.1% drop in salary (plus then a further 6.1% drop) as it would take me down to a Gross salary of £25K from £30K (30000/100 * 84.8).

What would this difference be in my take home pay every month? (ie, if I currently earn 30K pa GROSS now, what is the equation to show me what my take home pay is per month please? So I can caluclate whether this is even affordable for me).

thanks

PS I thought 'salary sacrifice' schemes were meant to be beneficial? Can anyone see the benefit to me or is it my stingy employer that gets all the benfits?

Retired_I.F.A. · 28 January 2008 at 5:46PM

Unless the government have some unheard of to me at least deal allowing private schools / colleges to provide the scheme for their teachers at a fixed cost I dont see how you can join the teachers pension scheme anyway. The employers contribution to the teachers pension scheme usually comes from local council authority and is not 14.1% of salary, it's a defined benefit scheme where employees make a contribuion and employers have the liabity to fund the rest of the cost. In the good years when investment returns are high that cost can actually be less than zero and in the bad years as many employers have realised costs can be beyond their means. Not surprising then that a private colledge wants to fix their costs as they foot the bill not the council rate payers who have an apparently bottomless purse.
You only option then is to have a personal pension, a stakeholder or a self invested pesonal pension to which there are hundreds to choose from. These are money purchase schemes not linked to your final salary and build up a fund from investments for your retirement.

As your employer will contribute 5% and also apparently do a salary sacrifice deal then it's down to you as to how much you contribute.

Andy_L · 28 January 2008 at 7:17PM

Some independant schools are part of the TPS. Schools (state or private) that are members have to pay a "pseudo-employers" contribution out of their budget, currently calculated at 14.1%. Like the civil service scheme this contribution is used to pay the pensions of retired members rather than being invested.

http://www.teacherspensions.co.uk/members/members5.htm
"employed in an independent school or further and higher education establishment that has been accepted into the teachers’ scheme"
&
"As a member of the TPS you will pay 6.4% of your salary towards a package of benefits. Your employer pays a further 14.1% . This makes a total of 20.5%. You will receive income tax relief on your contributions. The Government Actuary reviews these rates at regular intervals."

fimonkey · 28 January 2008 at 7:48PM

Thanks Andy and Retired IFA.

The college will only contribute 5% regardles of what the rules say, hence whether we choose the Teachers, or Local Government, or Stakeholder, anything over their 5% contribution has to be made up by ourselves.

They call this 'salary sacrifice' though it doesn't seem to match the description of salary sacrifice in the sticky on this board. I really can't see what's in this for me? I specifically want to know if I can afford the drop in net take home pay (is my calculation correct) and the benfits will be greater than me merely investing in a stakeholder plan (especially as the benefits are based on my salary minus the 9.1% employer contribution I'd make up).

Thanks for bearing with me so far, this is quite complicated but I really appreciate your input.

Retired_I.F.A. · 28 January 2008 at 8:34PM

Aha so the deal does exist then. Cheers Andy.

I cant see any real advantage in joining it though not when you can have the employers contributions in your own scheme, So it's really a question of how much a nett pay drop are you comfortable with now?.

For a figures sake lets say thats £100 p/m. What you then should do is work out the gross pay required to reduce your nett pay by the £100 thus a difference of "x". Add to x the NI savings of the employer "y" and the 5% of your current salary to give you "z", the employers gross contribution. Then appoach the employer with this proposal that costs them nothing more than the 5% offer already on the table. Thats full salary sacrifice with the employer contibuting the whole of the pension contribution, the way they'd do it for themselves. but maybe they are only offering their version which does not include any NI savings? because from what you say they will simply reduce your salary by 9.1% and add the difference which is not 5% to bing their contribution up to the TS requirement of 14.1%

Andy_L · 29 January 2008 at 10:42AM

Retired_I.F.A. wrote: »

Aha so the deal does exist then. Cheers Andy.

I cant see any real advantage in joining it though not when you can have the employers contributions in your own scheme,

It boils down whether you can beat a 1/60ths final salary (although based on 90.9% of final salary) fully RPI'd retire at 65 pension by investing 19.1% elsewhere (be that pension/ISA/property/ etc) & at those numbers it's a very close call.

If you are going to stay in teaching/the wider public sector I'd join while you can (as the cshemes ae only going to be salami sliced away for future members) if not I'd go for the flexibility of you own scheme, bearing in mind that 10% savings is unlikely to be enough to keep you comfortable in old age.

Retired_I.F.A. · 29 January 2008 at 1:41PM

Believing actuaries take a very conservative view as to future investment yields (with the exception of those employed by final salary schemes to calculate transfer values) I'd imagine the 19.1% equivelent they calculated in coming up with this deal to likewise air on the side of caution. Combined with the flexability, and choice of ones own plan I'd expect more would gain than lose going the money puchase route.

A deciding factor for someone believing it to be 50-50 may well be the life insurance and their own health at the begining as the final salary scheme provides a set amount regardless of health at onset but ceases if employment stops as opposed to a non gaurenteed acceptance for an amount appropriate to needs thats there regardless of the job.

fimonkey · 29 January 2008 at 2:19PM

Thanks for the answers guys, though a little bit above my head I'm afraid, Retired IFA.

1. I'm confused by your calculation of working out how much gross pay would be after the reduction in net pay. If, for arguments sake, my net take home pay is £1800pm, (I'm not sure what the equation is to be able to tell what my Gross annual pay should be).. but then lets say I can afford to take home £1550pm instead, which means I can 'loose' 250pm net from my salary. My crude way of working this out has been as a percentage, so 1550/1800 X 100 = 86%, which just about comes up to the 15% I could afford to 'loose'.... hmm now trying to work out the equation you gave above flummoxes me I'm afraid, but am I along the right lines with those figures? IE can I afford to join the scheme?

2. I am also confused with your explanation of the true salary sacrifice, though I think you're saying that if I join The Teachers Pension Scheme then my employer benefits EVEN MORE than if I join a stakeholder as they save even more of their NI contribution as they then only pay on my reduced salary, and you're saying I could ask them for this back? - Have I missed any more of this argument as I really want it clear in my head before I approach my employer.

Andy, I'm taking from you that it'd be better to join now as I will stay in the public sector. Thanks for your simple explanation.

Thanks both for your time so far, it's finally getting thruogh the cotton wool to the brain cells behind it.

fimonkey · 29 January 2008 at 2:22PM

Retired_I.F.A. wrote: »

Believing actuaries take a very conservative view as to future investment yields (with the exception of those employed by final salary schemes to calculate transfer values) I'd imagine the 19.1% equivelent they calculated in coming up with this deal to likewise air on the side of caution. Combined with the flexability, and choice of ones own plan I'd expect more would gain than lose going the money puchase route..

Sorry Retired IFA, didn't really undersatnd a word of this, are you saying a stakeholder scheme where I contribute 15.2% and my employer contributes 5% will be better in the long term??

Retired_I.F.A. wrote: »

A deciding factor for someone believing it to be 50-50 may well be the life insurance and their own health at the begining as the final salary scheme provides a set amount regardless of health at onset but ceases if employment stops as opposed to a non gaurenteed acceptance for an amount appropriate to needs thats there regardless of the job.

And another apology, I followed this paragraph up to the bit where you say "final salary scheme provides a set amount regardless of health at onset" ... ? but ceases if employment stops? What ceases and at what onset?

And as opposed to the stakeholder which is non guaranteed acceptance which means waht in terms of health and insurance?

Many thanks and sorry for the big Dunce cap on my head

What would YOU do? Pensionwise

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