Cancel Employer Pension?

kimsbutterfly

Hi,

i am 23, and have had an employer pension since i was 16. My first pension was opened when i worked with pensions compan Scottish Equitable. I left before 2 years to join Fife Council and transferred my money into Fife Council. My contributions from SE and FC are locked into my FC pension which was frozen when i left.

Now I have since left there and work for another company where i have an employer pension. I am currently paying £75 a month (4% mandatory, 2% voluntary).

I am wondering whether or not i should cancel this? All you read in the media is people getting shafted (for want of a better word!) left right and centre and i wonder by the time i am retirement age (a long time away) will it even be worth anything anyway.

Please can someone give me advice

dunstonh

All you read in the media is people getting shafted

No you dont. Not unless you read the same sort of media that makes up stories, like the MMR vacine scam or many others.

i wonder by the time i am retirement age (a long time away) will it even be worth anything anyway.

If its a final salary scheme the pensionable salary its based on will be index linked. If its money purchase its based on investment returns that over the long term have historically beaten inflation by a long way.

Please can someone give me advice

Change your newspaper would be the first one. If not, realise that papers scaremonger on minority of cases. Only around 200,000 have lost money in pensions. That is out of the 30 million or so people that have pensions. Since then, protection and laws have come in to stop that reoccuring.

The most common failure with pensions is not one of the pensions fault but an unrealistic expection by the individual. e.g. someone paying £50pm for 30 years into a pension with the belief that it will pay them back £1000 a month for 30 years in retirement. It is by far the most common problem. Too small premium, too high expectation.

Your state retirement age is 68. The basic state pension is £4900 a year. Do you fancy living on that? You may get some second state pension that brings you to around £7000 a year but thats just over the current benefits level. So, unless you want to be poor in retirement, you should keep paying into your pension.

It will also help you to understand how the pension works. Is your current one money purchase or defined benefit/final salary? Do you know what that means and how it impacts on your planning? Do you know how much your current planning will give you in retirement?

jh2009

None of the below is advice as im not allowed to give it on this forum, but this should help your thinking........

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In terms of the council pension, I dont think you are asking this, but you cannot cancel this as you have more than 2 years service.

I think your query is should you stop the current pension.

There are several things to consider.

1. You pay £75 a month. I guess you are a basic rate tax payer, so if you stop this, then you will not get £75 added to your pay. The full £75 will be subject to tax, and so you will only get £60.

This means that of your £75 contribution the tax man is paying £15 of this.

2. If you stop paying in, your pension will no longer get any employer contributions that may also be going in (assuming they contribute).

So for the sake of £60 extra pay, you are losing £15 from the taxman, plus any employer contributions by opting out.

Its almost like a pay cut, although the effect is only in the long term as you end up with a lower income in retirement.

3. Do you need the extra money the pension saving would produce?

Do you have debts, expenses, that require this money, or will it simply end up in the shops, pub, etc?

If you're single with no overheads, then that could change in a few years and it may be easier to contribute now and cut then, than stop now and try and find the money later.

4. The time to pay in pension contributions is when you are young.

I have heard it said that each £1 contributed in your 20s now would cost £2 in your 30s, £3 in your 40, £4 in your 50s,etc. (generally your money has more time to grow at a younger age)

5. Investments due to the current economic crisis are cheap.

So your £75 plus employer contributions is buying you lots more investment units than a few years ago.

And if you retire at 65 (in 42 years time) then surely there is time for a recovery??

6. If you dont contribute to a pension, then there is a danger you may end up having to rely on state benefits.

State pension age goes up to 68 by the time you retire, so private provision would allow you to maybe have a chance to retire before then and a bit more flexibility.

7. People getting shafted by pensions!

Well, i agree it has happened in some cases where final salary schemes did not hold sufficient funds. A lot more protection has been provided to these members and despite the negative images in the media many will now receive a substantial part of their benefits. I dont think these members should be considered by you though.

It sounds like you have an investment account for your current pension and what you have at retirement will affect your pension at retirement.
No investment is guaranteed but you have 42 years til you are 65, so if you are worried about the media saying investments are losing money, etc, then again unless this recession lasts 42 years it will not affect you and you can think long term instead.

9 What will you get when you retire?

Assuming this is a money purchase scheme,

In current law, you can take 25% as cash, with the rest buying an annuity.

While its difficult to predict returns if you look at any statements, an attempt will have been made using set assumptions. While the future is unknown you should either look at these, or request a prediction from your administrator.

These should give an idea of what may happen if you stop contributions or carry on to retirement age.

These statements are not guaranteed though, as people are living longer, investment returns fluctuate, etc.

I work in pensions, so if you have figures on the statement you can pm me to them if you really dont understand them and want me to tell you how they have calculated them.

Optimistic_cynic

if you're pension is defined benefit (often called final salary) then you might like to ask the trustees how the pension is performing. 90% of defined benefit pensions are in deficit at the moment. whatever you do, i wouldn't stop saving for retirement though - you are lucky that you started investing so young

jh2009 - since you work in pensions what's your opinion on the Pension Protection Fund? They are £500m in deficit themselves and there are a load of big schemes already in the assessment period (Woolworths among them if i'm not mistaken).

jh2009

Early Days with the PPF, and yes, the woolworths fund is one of the funds that is in the initial assessment period.

On the positive side, it brings a lot of reassurance to final salary scheme members, and to pension schemes and hopefully avoids old men protesting around whitehall in their underpants again!

It also isnt easy for schemes to get into the PPF. To qualify your parent company needs to have basically been liquidated with most shareholders losing their money, so schemes cant be dumped into it lightly.

On the negative side, the costs are picked up by a levy on schemes so there is a fear its adding to costs to pension schemes, with the current formula seemingly penalising the better run schemes.

I was at a conference a few weeks ago and they are looking at a new system whereas riskier funds pay more, with reward for well run schemes in lower levys, but again its early days and the dangers of it are that schemes may take less risk in investing simply to pay less in levys, which in the long run is counter productive!

The big question is funding, with many including the NAPF asking the government to act as a guarantor to the PPF, which in time it may either need to do, or to pick up a part of the bill for it.

My view is i think its a good thing, to have a safety net in place. The media always as usual looks at the negative extreme side of things all the time (which i doubt will happen) and talks about big costs, and remember the figures quoted are based on the current recession it seems lasting for the rest of time, which wont happen! I think the government will at some stage have to pay more into this but that could be in many many years time, and may not be anywhere near the deficit figures published.

I doubt if it will be allowed to collapse or become less generous as politically its counter productive to encourage saving to have people losing their pensions.

jh2009

Early Days with the PPF, and yes, the woolworths fund is one of the funds that is in the initial assessment period.

On the positive side, it brings a lot of reassurance to final salary scheme members, and to pension schemes and hopefully avoids old men protesting around whitehall in their underpants again!

It also isnt easy for schemes to get into the PPF. To qualify your parent company needs to have basically been liquidated with most shareholders losing their money, so schemes cant be dumped into it lightly.

On the negative side, the costs are picked up by a levy on schemes so there is a fear its adding to costs to pension schemes, with the current formula seemingly penalising the better run schemes.

I was at a conference a few weeks ago and they are looking at a new system whereas riskier funds pay more, with reward for well run schemes in lower levys, but again its early days and the dangers of it are that schemes may take less risk in investing simply to pay less in levys, which in the long run is counter productive!

The big question is funding, with many including the NAPF asking the government to act as a guarantor to the PPF, which in time it may either need to do, or to pick up a part of the bill for it.

My view is i think its a good thing, to have a safety net in place. The media always as usual looks at the negative extreme side of things all the time (which i doubt will happen) and talks about big costs, and remember the figures quoted are based on the current recession it seems lasting for the rest of time, which wont happen! I think the government will at some stage have to pay more into this but that could be in many many years time, and may not be anywhere near the deficit figures published.

I doubt if it will be allowed to collapse or become less generous as politically its counter productive to encourage saving to have people losing their pensions.

Optimistic_cynic

i'm sure you're right in that the £253bn deficit will look a bit nicer when the recession is over - i just get the feeling that won't be any time soon. I think we'll see a government rescue of some sort within a few years but then i am very bearish at the moment especially after the budget's laughable economic recovery predictions. next stop IMF.

i agree people need a safety net though - just not sure defined benefit is anything other than empty promises based on the Ponzi principle. Much tighter controls are surely needed and perhaps investment strategies aligned to liabilities rather than trying to 'catch up' with riskier investments.

reading that again i even depressed myself... i'd better leave it there!

jh2009

If anything DB schemes are crying out for less regulation and laws, especially concerning the law that requires them to pay increases each year.

I see the point about ponzi schemes but DB schemes have worked well for years, and i do think a lot of the deficit figures flying around are in some cases theoretical and worst case scenarios. Although pensions are getting more expensive to provide, a lot of the figures quoted about in the media are i think paper figures and will not actually need to be paid. I think the same applies to the PPF deficit figure quoted about. Also its a long term thing, so the real costs should be spread over time rather than needed up front.

Also a lot of money through things called recovery plans have been poured into DB Schemes in recent years, and the recent economic issues do cloud this.

Optimistic_cynic

Madoff's scheme worked well for years didn't it? the whole point is that the pension fund does not itself contain sufficient funds to meet it's commitments so that means future contributors must fund their own and our pensions - it's so much like a pyramid it just has to be one.

Don't get me wrong though - i'm all for pensions, just not DB schemes. i also take your point about worst case scenarios and paper losses that might not need to be crystalised

on the regulatory front, i agree with your point about the increases but don't forget that there's been some bad behaviour there too - not contributing enough during the boom years because they'd rather invest in the firm to increase the share price, investing too much in risky assets etc etc

Dave101t

ive gone the other way on this than the OP.
im 26 and refused the company pension. it was a contribution based pension.
i know it means i am paying tax on all my income, but it also means i can save 10,000/ year and put it in an investment of my choice, and i can access it and care for it so i dont become one of those unlucky 200,000.

a bird in the hand and all that...

and one of the main reasons i opted out is that it was too confusing!

dunstonh

im 26 and refused the company pension. it was a contribution based pension.

How much does the employer pay into it?

so i dont become one of those unlucky 200,000.

You mean one of the 0.5% of the population? That is only on defined benefit schemes and not defined contribution. So, if that is your reason, then it is an incorrect assumption.

and one of the main reasons i opted out is that it was too confusing!

No more than any other investment. And how much are you losing because you are not getting an employer contribution?