Join company pension?

Any

Hi,
I am hoping someone can give me their opinion please.

I have a new job and I will probably stay for some time as they support my studies in return for signing special contract that I will stay at least 12 months after gaining my full qualification (which I have 2 more year to go).
The company operates personal pension with Clerical Medical. I pay in 4% of my salary and my employer pays 8% which I think is very generous.

Someone might say it is no brainer, but is it? Given the current financial climate is it good idea to start with it?

I would appreciate anyones views to help me decide.
Thank you
Any

dunstonh

Someone might say it is no brainer, but is it?

Certainly is a no brainer.

Given the current financial climate is it good idea to start with it?

Couldnt ask for a better time to start.

Given the reaction of some people, you would think this is the first bear market there has ever been. Typically these occur at least once every 5 years and current drops are a lot less than the last decline we saw at the start of the millenium. These events are quite normal. The reasons will vary and the depth of the issues will change but you should expect something like this at least once every 5 years.

The only difference nowadays is that we have 24 hour media that loves to scaremonger. You really could not ask for a better time to be paying on monthly into a long term pension.

McKneff

you couldnt possibly turn down a chance like this, its free money, man.
grab the chance with both hands.:D

Any

Thank you for your replies.
Anyone knows whether Clerical Medical has "good" or "great" record in dealing with pensions?
I have tiny pension with Norwich Union from previous employer (£700) and they are awfull. Never got a statement and just to change my surname as I got married required all sorts of paperwork! Could not log on to internet "banking" as they haven't provided me with necessary paperwork and then when they did it didn't work for me... And when I wanted to continue paying the minimum amount for while myself they wanted tons of paperwork about my new employer, about me, how do I pay etc etc etc...

dunstonh

Anyone knows whether Clerical Medical has "good" or "great" record in dealing with pensions?

They are perfectly fine.

I have tiny pension with Norwich Union from previous employer (£700) and they are awfull. Never got a statement and just to change my surname as I got married required all sorts of paperwork!

The paperwork they required would have been required by all providers. The process is fairly standardised across the board.

And when I wanted to continue paying the minimum amount for while myself they wanted tons of paperwork about my new employer, about me, how do I pay etc etc etc...

As they are obliged to do and again, those declarations would have been required by others. Some may have done it electronically and that is Norwich Union's weak point but you cannot avoid the legal requirements by changing provider.

Any

Thank you Dunstonh,
I just didn't like the way they were going on about it. I sent them emails about what is required, changed it on the online "banking" and it still took them 2 months to send out the forms. By then I was no longer interested (knew about the new pension) and I still don't have my statement which I thought I should get annualy and it is more then year I started the pension.

I know some pensions give you the option of moving an old pension to them, should I do that? It is only £700 but it is still my money and I thought having just 1 pension would be easier. What do you think?

dunstonh

As its only £700 then its really a case of simplicity of having one rather than two. CM pensions also have fund based discounts. £700 wont make any difference for a while but in the long term it will take a few months off qualifying for the discounts

It may or may not be cheaper with CM but you are only talking about £700 so even if there is a 0.1% difference, its not worth the hassle.

leviathan

dunstonh wrote: »

Certainly is a no brainer.

For this person it might well be but not for all.

If you are staying long term with the company then certainly. If it's a short term job leading you to something else then it's not such a wise move.
As I understand it you often cannot transfer the funds from one company pension scheme into your next company scheme. So you are left with a pension fund which doesn't have much in it.

Certainly my company fund states that it has the potential to be worthless if you don't pay into it for very long.

Further to that you're forced to buy an annuity.
Depending on how the fund is managed, come retirement you may well find the forcast for your pension isn't as good as the reality.

Early retirement may well have an effect too.

Yes, the free money is nice but so is being able to manage your own destiny.
There are other ways to secure your future retirement than pensions.

dunstonh

If you are staying long term with the company then certainly. If it's a short term job leading you to something else then it's not such a wise move.

Can you explain why you think that?

As I understand it you often cannot transfer the funds from one company pension scheme into your next company scheme. So you are left with a pension fund which doesn't have much in it.

That is incorrect. Virtually all pensions can be transferred. This one is a money purchase scheme so it will be transferable.

Certainly my company fund states that it has the potential to be worthless if you don't pay into it for very long.

You would get that same risk warning whether you were an employee who only gets £5 a month going in or £500pm.

Further to that you're forced to buy an annuity.

Only at age 75. However, annuity purchase is not necessarily a bad thing. Especially when your net contribution is 3.2% and there is 8% of free money and you get 25% back at the end. Basically, the annuity is going to be a nil cost option for the OP as they will get back more in the 25% TFC than they paid in.

Depending on how the fund is managed, come retirement you may well find the forcast for your pension isn't as good as the reality.

Or a lot better. Current illustration rates are virtually spot on with returns. Going back in time that was usually not the case. Single fund investing is not a good move but you can choose where you invest with most pensions and can spread it across different funds at different risk levels.

Early retirement may well have an effect too.

As it will with any option.

Yes, the free money is nice but so is being able to manage your own destiny.

The OP is getting 8% free from the employer and is paying 3.2% (after tax relief). So on £120 contribution, the OP is paying £32 for every £120 that is being paid into the pension (assuming basic rate taxpayer.

There is going to be no alternative that can offer turn £32 into £120 of fund value overnight. That would take a savings account about 30 years to get what the pension gets in 24 hours.

There are other ways to secure your future retirement than pensions.

Yes there are and options should always be considered but being blinkered against money purchase pension schemes is not being objective.

leviathan

dunstonh wrote: »

If you are staying long term with the company then certainly. If it's a short term job leading you to something else then it's not such a wise move.

Can you explain why you think that?

If you work with a company for 2years and go else where you have a pension fund with 2years worth of contributions. It's not going to buy a lot.
However, do read further before responding to that...

As I understand it you often cannot transfer the funds from one company pension scheme into your next company scheme. So you are left with a pension fund which doesn't have much in it.

That is incorrect. Virtually all pensions can be transferred. This one is a money purchase scheme so it will be transferable.

Note, I specifically said at the begining of my post that my comments may not apply under his circumstances.
Certainly when talking with the pensions advisors here I was told that I could not transfer an existing pension into the company fund and that if I left it was unlikely that I would be able to transfer the contents of this pension into the next company fund.
This reasoning was backed up by a couple of people I know who have multiple funds from different companies.

Certainly I may have been given bum advice but at the time it all seemed perfectly reasonable.
I figured that there would indeed have to be a catch.

Certainly my company fund states that it has the potential to be worthless if you don't pay into it for very long.

You would get that same risk warning whether you were an employee who only gets £5 a month going in or £500pm.

Yes, and indeed it would be if you stopped payment after a short time.
What I was led to believe by the pension advisor if I were to leave the company and thus not be able to transfer the fund into a new pension fund.

Further to that you're forced to buy an annuity.

Only at age 75. However, annuity purchase is not necessarily a bad thing.

Well what other options are there than annuity? Generally.
Again, I got the impression that you take a "wage" from a pension based on you purchasing an annuity with your fund when it's time to retire.
I'd personally rather have the lump sum (all of it...), but I guess that's the catch and they have to make money somewhere.

Especially when your net contribution is 3.2% and there is 8% of free money and you get 25% back at the end. Basically, the annuity is going to be a nil cost option for the OP as they will get back more in the 25% TFC than they paid in.

TFC = Tax Free Contibution?
Verses 3.2% of salary over the lifetime going into say ISA's to build up a big pot and getting 100% of it.
As I said in the beginning of my post, it's a no brainer for this guy but not for all.

Depending on how the fund is managed, come retirement you may well find the forcast for your pension isn't as good as the reality.

Or a lot better. Current illustration rates are virtually spot on with returns.

Surely you cannot say that for 40+ years ??

There is going to be no alternative that can offer turn £32 into £120 of fund value overnight. That would take a savings account about 30 years to get what the pension gets in 24 hours.

But you're only going to actually see 25% of that in your purchase at the end (going by above)?

Yes there are and options should always be considered but being blinkered against money purchase pension schemes is not being objective.

Perhaps not so much blinkered as not being given a proper explaination of it up to this point.
My company scheme is 5% given for a minimum of 2.5%.

I can indeed take it with me, but with the understanding that the new company allows me to transfer the fund into theirs.
Is there more ways to do that than just to cash in the fund and take a lump sum to pay in? (I guess so, but that would be dependant on them allowing you to do so right?)

Part of the reasons I personally didn't join was my history of employment would have left me with many funds at the moment, and there was the potential to move abroad with the job to a different structure.
For the short term (measured in a few years) it didn't make much sense, but I'd happily revisit it.

EdInvestor

dunstonh wrote: »

The OP is getting 8% free from the employer

This is what tips the balance in favour of contributing.

.. and is paying 3.2% (after tax relief). So on £120 contribution, the OP is paying £32 for every £120 that is being paid into the pension (assuming basic rate taxpayer.)

For a basic rate taxpayer, the tax relief is much less important, as the pension income will be taxable in retirement, and thus the relief is clawed back (apart from the 25% tax free cash). The relief is much more valuable for the higher rate taxpayer who will pay basic rate tax in retirement and gets a net freebie of 20% (often cash in hand now).

There is also some additional tax benefit for those on very low earnings/basic state pension only who can take advantage of the 10k tax free old age allowance to get 20% relief going in and pay no tax on the income later.

But generally, for any basic rate taxpayer who expects to retire on an income higher than 10k a year, from the tax point of view, an ISA may well be preferable if there is no employert's contribution to the pension. For many people the tax gain on the lump sum will not compensate for the severe restrictions imposed on the rest in the pension wrapper.