New job new pension

jem16

Empty_pockets wrote: »

Not sure if this is the same as actuarial reduction.

'When can I take my pension? - From age 65 without reduction.'

Basically yes. If you retire at normal retirement date of 65 there is no actuarial reduction. If you retire before this date the actuarial reduction can be around 5% per year. So retiring at age 60 could see you lose 25% of your pension.

Also are pension funds transferable?

To another pension scheme, yes. However usually ill-advised for defined benefit schemes.

marklv

Empty_pockets wrote: »

Not sure if this is the same as actuarial reduction.

'When can I take my pension? - From age 65 without reduction.'

This seems to imply that if you take your pension before 65 there will be a reduction - an actuarial reduction. What I mean by this is that not only will you have fewer years of contribution, but there will also be a deduction to take account of your longer life expectancy. In this case I think retiring at 60 might be a bad move.

Empty_pockets

Hi,

I see, I think I understand this now. I did a few calculations last night.

If I serve the full 36 years to 65 I should get £24000 ((40K/60) x 36)
If I retired at 60 it would be £20666 ((40K/60) x 31))


What happens if I don't retire? what happens if I simply leave the job after say 10 years? In that time I should have built up a pension of £6.5K. Surely there shouldn't be a actuarial reduction in that case??

Marklv, just to note, If I did retire at 60 I wouldn't be claiming the pension until it was due, I'd aim to live of ISA saving which I would hope to be about £20Kpa. I understand, as you said above, I would still have 5 years of missed payments into the pension.

Empty_pockets

One more thing...

What is actually happening to my money in the defined benefit scheme? If it's not being invested where is it going? I'll get tax relief on my 7.2%, where is that going?
I still don't comprehend the voluntary contributions...I understand this scheme to offer a set amount paid in over your career and a set amount out on retirement., why pay extra in?

taliesin

Good morning, EP. I've been following this thread with interest. You are going up the (rather lengthy) ladder towards understanding pensions. That's good. These are complex but critical matters that, regrettably, few people try to come to terms with.

Empty_pockets wrote: »

Hi,

I see, I think I understand this now. I did a few calculations last night.

If I serve the full 36 years to 65 I should get £24000 ((40K/60) x 36)
If I retired at 60 it would be £20666 ((40K/60) x 31))

If by "retire" you mean, "cease work and start taking that pension", I'm afraid not. Defined benefit schemes work on the assumption that, on average, members will live some length of time after the standard retirement age. They pay professional actuaries to work out the numbers in detail, but for the purposes of this discussion, let's say that someone retiring in good health at 65 is likely to live to 85. So the fund held by the trustees has to pay each pension for, on average, twenty years. If some members want to start their pensions at 60, their "share" of the fund will now have to stretch over (say) 25 years. (In fact, it's slightly less because you have to take into account the possibility that they may die or their health deteriorate before age 65, but we'll ignore that for now). So the fund will have to stretch over 5 extra years (and will have had five years less investment to build up). So the pension is "actuarially reduced" if taken early, typically by about 5% for each early year. So the second sum should be

((40K/60) x 31) x (1 - (0.05x5))) = ((40K/60) x 31) x 75% = £15499.50

Empty_pockets wrote: »

Hi,

What happens if I don't retire? what happens if I simply leave the job after say 10 years? In that time I should have built up a pension of £6.5K. Surely there shouldn't be a actuarial reduction in that case??

Most schemes of this sort will give you a preserved pension of £6.5k from age 65. "Actuarial reduction" (the ~5% per year) will apply if you take that pension earlier. Most schemes will also allow you to take most, sometimes all, of the value of your part of the fund to another pension provider. ("Most" because the trustees have to look after the interests of the members overall, and one person leaving puts up risks and costs for those that remain).

Empty_pockets wrote: »

Hi,

Marklv, just to note, If I did retire at 60 I wouldn't be claiming the pension until it was due, I'd aim to live of ISA saving which I would hope to be about £20Kpa. I understand, as you said above, I would still have 5 years of missed payments into the pension.

This is where saving for retirement starts to get really complicated, as you have to think about the costs and benefits of the various options ("pensions", ISAs, property, investments ...). It often works out that what you are proposing works quite well financially, but you might want to bear in mind that with this course of action you could land up with all of your personal wealth tied up in a pension fund that dies with you, or, at best, with the death of your partner.

taliesin

Empty_pockets wrote: »

One more thing...

What is actually happening to my money in the defined benefit scheme?

That's a good question to be asking, especially in or near the public sector. Some defined benefit schemes have a real money fund from which to pay the pensioners. The rules for such funds often restrict the trustees' room for maneouvre and insist that investments must be ultra-safe (for example, Treasury "gilts"). At the other extreme, such as for the main civil service scheme, the money simply goes to the Treasury and it takes the responsibility of eventually paying the pensions. In other words, it becomes part of the National Debt. In some local authority schemes, current contributions are used to pay the pensions of current pensioners, and the whole system relies on the long-term stability of the local government system and of central government to underwrite it.

I Googled the railways pensions schemes and it seems that CARE does involve a real fund, but a new one distinct from the old Railways Pension Scheme. Quite why they have started a new fund isn't clear to me, but there's some information on the RMT website. (I can't find any on the CARE site itself!).

Empty_pockets wrote: »

If it's not being invested where is it going? I'll get tax relief on my 7.2%, where is that going?

All of your 7.2% goes into the fund, as does the employer's contribution. By the way, the contribution rate could change if the trustees feel the fund needs more or less to cover its obligations to you and other beneficiaries.

Empty_pockets wrote: »

I still don't comprehend the voluntary contributions...I understand this scheme to offer a set amount paid in over your career and a set amount out on retirement., why pay extra in?

What you get out is based on the total of what you put in and what the employer puts in. AVCs are where you agree to put additional contributions in, over and above the standard level. You will get a higher pension as a result, but doubling your contribution level won't double the eventual pension, because there is no matching contribution from the employer. Nevertheless, many people find this a more attractive option than putting contributions into a private sector scheme such as those regularly discussed on this board, because "defined benefits" are not available through that route. AVCs will attract the same tax relief as your main contributions or contributions to a private sector pension. Making additional contributions may be particularly attractive to you, EP, as you are on the margin of higher rate tax. You may be able to arrange it so that you receive 40% relief on all your contributions but pay standard rate when you finally take the pensions.

A final "by the way": don't confuse AVCs with "Free-Standing AVCs", FSAVCs which were (maybe still are) commercial pension funds which have arranged with some employers, so that contributions can be taken from wages. These may, or may not, be offered by your employer. They were all the rage in the 1990s. Current thinking is that, if you want a separate commercial pension fund, you would likely be better off going into the market as a whole, and probably through a stakeholder fund.

I did say this stuff was complicated, didn't I?

Quite a few years ago, I elected to go into my employer's defined benefit scheme and to make AVCs. It has worked out very well for me and, although the pensions landscape has changed somewhat over those years, the principles of how it works have stayed the same. If I were in your shoes now, I would make that same choice.

HTH

Empty_pockets

Hi,

Thanks for all this info.

The CARE scheme is a newish scheme, I think less than a year old. Most employees are on the NRDC scheme which was the only other option.

The Railway pension scheme I think is a different thing. You need 5 years railway service to be eligible for that one. You get a one off opportunity to join it. I imagine it's a even better option that the CARE.

marklv

Empty_pockets wrote: »

Hi,

I see, I think I understand this now. I did a few calculations last night.

If I serve the full 36 years to 65 I should get £24000 ((40K/60) x 36)
If I retired at 60 it would be £20666 ((40K/60) x 31))

At 60 you would get less because of the actuarial reduction, unless you did not claim the pension until you got to 65.

Empty_pockets wrote: »

What happens if I don't retire? what happens if I simply leave the job after say 10 years? In that time I should have built up a pension of £6.5K. Surely there shouldn't be a actuarial reduction in that case??

No actuarial reduction as long as you don't claim your pension until you get to 65. The pension would be preserved and index linked (probably only to 5% a year maximum) until you got to 65.

Empty_pockets wrote: »

Marklv, just to note, If I did retire at 60 I wouldn't be claiming the pension until it was due, I'd aim to live of ISA saving which I would hope to be about £20Kpa. I understand, as you said above, I would still have 5 years of missed payments into the pension.

Yes, your pension would be lower because of the fewer contributions but without actuarial reductions if claimed at 65.

marklv

Empty_pockets wrote: »

One more thing...

What is actually happening to my money in the defined benefit scheme? If it's not being invested where is it going? I'll get tax relief on my 7.2%, where is that going?
I still don't comprehend the voluntary contributions...I understand this scheme to offer a set amount paid in over your career and a set amount out on retirement., why pay extra in?

Your 7.2% is invested in your employer's pension fund - it's up to them what they do with it. They have made you a promise and they will need to keep it. Generally, the contributions are invested in the stock market and other funds like gilts.

The AVCs are useful as a way of building an extra pension in addition to the employer's one - it's mostly useful for older joiners who haven't managed to build up a decent pension fund yet; say if you were 40 then you would really need to an AVC in order to have a decent pension, as the CARE scheme would probably not be enough for your needs.

marklv

Empty_pockets wrote: »

Hi,

Thanks for all this info.

The CARE scheme is a newish scheme, I think less than a year old. Most employees are on the NRDC scheme which was the only other option.

The Railway pension scheme I think is a different thing. You need 5 years railway service to be eligible for that one. You get a one off opportunity to join it. I imagine it's a even better option that the CARE.

The CARE scheme is a good one. I'm surprised that you would be offered another scheme after 5 years - if you are, then you should look carefully at that one, as it may be more beneficial than CARE. If it is, then you will be able to transfer your CARE benefits into the railway scheme and just continue with the latter until retirement.