Pension Changes

StephenM_2

It had to happen, I suppose.

My employers are planning to close the final salary scheme to new members and give existing members the following options.

1. Increase employee contributions from 5% to 9% and keep the 1/60th final salary accrual rate.
2. Keep employee contributions at 5% but the accrual rate will drop to 1/80th.
3. Join a Defined Contribution scheme with 5% employee contribution and 10% employer contribution.
4. Leave the pension scheme completely and get 10% cash benefit from the employer.

What do people think?

RichandJ

1 or 2, preferably 1

3 at worst

4 do not touch

I do find it a shame that politicians (and their CS advisers) have destroyed through incessant meddling what used to be one of the best final salary regimes in the world. The Fourth Reich doesn't help either.

dunstonh

ditto for Richard.

pension-newbie

I agree you should choose 1

you are very lucky they are still keeping it open for existing members.

It is highly likely that in a few years (max 5) they will transfer the lot of you to DC - but even then you will be much better off much more often than not than the alternative of starting DC now.

StephenM_2

Thanks. Number 1 is probably the option I'll choose as I've got a fairly high savings rate at the moment. The plan is supposed to go out for consultation over the next couple of months and take effect from the New Year. I've got about 31 years worth of membership in the current scheme.

Andy_L

is 1 vs 3 that clear cut or is it not a bit "it depends"

If you move to No.3 is the final salary scheme frozen (and thus just has some form of inflation indexing) or do you just not acrue extra years but still use your, hopefully improving, final salary?

How much better is an extra 1/60ths compared to 19% into a money purchase, or 15% plus the extra 4% going into an ISA /spouse's pension for flexibility.

Suspose you've hit the top of your pay scale & forsee no payrises until retirement, or even worse paycuts that the FS scheme rules reflect in your pension, "about 31 years worth of membership" implies the OPs only got 9 years left to run.

StephenM_2

I've got nearly 14 years left, though will be nearer 13 by the time this scheme comes in. Whilst I've got 31 years worth of membership, I've not been in it 31 years. I've got some added years due to transferring in a previous pension. Whether that was a good or bad decision is a moot point - what's done is done.

The "final salary" is actually the average of the best consecutive 3 years in the last 10 before retirement.

I don't know any more details than what I've posted yet. We just got an overview, with details to arrive in the next few days.

Stargazer57

Andy_L wrote: »

is 1 vs 3 that clear cut or is it not a bit "it depends"

If you move to No.3 is the final salary scheme frozen (and thus just has some form of inflation indexing) or do you just not acrue extra years but still use your, hopefully improving, final salary?

How much better is an extra 1/60ths compared to 19% into a money purchase, or 15% plus the extra 4% going into an ISA /spouse's pension for flexibility.

Suspose you've hit the top of your pay scale & forsee no payrises until retirement, or even worse paycuts that the FS scheme rules reflect in your pension, "about 31 years worth of membership" implies the OPs only got 9 years left to run.

We don't know the full details of the OP's situation, or the fringe benefits of the scheme, but at retirement age each pound of pension he gets is likely to cost between £25 and £30. Let's say it is £27.50 for simplicity. In simple terms that means that the 1/60 pension he earns in his final year will cost 27.50/60 or just under 46% of pay of which the OP will have to pay 9% and his employer 37%

However we know he has 13 years to go, so there will be interest earned on the contributions before then and his salary will change. Let's be pessimistic and assume that his pay does no more than match RPI inflation for those 13 years. The investment return that you would need to earn on the money purchase scheme in order for that to be a better deal than the 60ths offering would be over 13% (in excess of RPI) per annum. Even if you could earn this phenominal rate you would still be comparing a final salary scheme with the backing of the employer and the PPF on one side with a risky investment proposition on the other.

You may think this is not clear cut but I do.

Zelazny

Andy_L wrote: »

is 1 vs 3 that clear cut or is it not a bit "it depends"

If you move to No.3 is the final salary scheme frozen (and thus just has some form of inflation indexing) or do you just not acrue extra years but still use your, hopefully improving, final salary?

How much better is an extra 1/60ths compared to 19% into a money purchase, or 15% plus the extra 4% going into an ISA /spouse's pension for flexibility.

Suspose you've hit the top of your pay scale & forsee no payrises until retirement, or even worse paycuts that the FS scheme rules reflect in your pension, "about 31 years worth of membership" implies the OPs only got 9 years left to run.

In order:

1 is a lot better than 3

If you move to 3, the final salary benefits will be deferred. They will continue to increase in deferment, but there will be no additional years added, and the salary used will be the one at the time you become deferred.

So the benefits to look at are: 9% contributions for 1/60 FS, versus 10% contributions for a total of 15% of salary put into DC.

Consider someone with a salary of X.

Under the final salary scheme, they pay in 9% of x and get 1/60th of X per year as a benefit (at normal pension age).

Under the DC scheme, they pay in 10% of X and get 15% of X added to a DC fund.

Assuming salary increases at the same rate that the investments increase, then the benefits at retirement date in respect of that single year of service are:
FS: X/60 p.a. (= 0.01667 X)
DC: 15% of X multiplied by annuity rates. Assuming retirement date is age 60, annuity rates (for an index linked pension with spouse benefit attached, so we're comparing like for like) are something like 2.5%, meaning you'd get 15% x 2.5% x X = 0.00375 X

The FS benefit is more than 4 times as much.

Now, you will want to bear in mind that annuity rates do change, and it may be that you won't get any pay rises, where you could get reasonable investment returns, but on the face of it the FS benefit is worth a lot more.

With 14 years to go, if the investment return is 10% better than the salary increases, the FS benefit is still better, although the difference is cut down to 17%. (bear in mind as well that the FS scheme costs 1% of your salary less).

Zelazny

Hehe - While I was typing all that out, Stargazer beat me to it :-)

StephenM_2

I will have to make my decision in November. If I fail to make a choice it'll default to option 2 (5% contributions, 1/80th FS accrual)

Anyone choosing to leave the FS scheme won't be allowed back in. Also anyone opting for the 1/80th scheme won't be allowed back in the 1/60th scheme