Final Salary or Money Purchase scheme?

dirker

Hi all, wonder if someone could offer some advice please. Apologies in advance for such a long first post.

Now it seems like a silly question in the title. I know from reading other threads if you're in a final salary scheme then it's best to stick with it.

This is the situation. I am 43 and in a final salary defined benefit scheme currently accruing at 1/60ths (via higher contributions, I'm currently paying 7.5% in total). Pension able salary at the moment is my basic annual salary for pension purposes.

The scheme itself is in deficit to the tune of £17m. They are making changes to the scheme from 1st April 2007 so that it accrues at 1/80ths (no 60ths option) based on my basic salary less the LEL and paid via salary sacrifice.

My other option is to come out of the final salary scheme and go into a money purchase scheme. This will be based on my annual salary with my contributions going down to 6% and my employer’s contribution being 8.5%.

I have taken advice from an IFA who has said that my best option is to come out of the final salary scheme and start paying into the money purchase scheme. I have questioned the IFA on numerous occasions as I didn't expect anyone to advise me to come out of a final salary scheme. He is adamant that what my company is doing to the scheme is criminal and I will be better off in the money purchase scheme.

Has anyone got any advice on this situation because I'm still very confused.

Thanks

david78

You need to set aside the pension you have built up to date and just consider the best way to go forward from now.

I have done some simple calculations on what you could get from the money purchase scheme based on growth after inflation and charges of 4%, 5% and 6%. I have assumed that you are retiring at 65 (i.e. have 23 years service left) and will get an annuity of 5% of the value of your final pension value.

Assuming 4% real returns, with the money purchase plan, you will achieve an annual pension of 26% of your salary (assuming this will rise in line with inflation.) (for 5% it would be 30%, for 6% it would be 34%).

With the final salary plan, you will get a pension of 23/80ths or 28.75%.

These are only rough figures. But you can see that in monetary terms both routes provide similar figures. You need to weight these up and consider that you will pay less into the money purchase plan.

There are doubtless other considerations too. Do you get life insurance from them if you stay in the scheme? Will you get pay rises ahead of inflation? Are you expecting to get a promotion or two -- each of these makes the final salary scheme more attractive. Also the use of Salary Sacrifice could save you considerable national insurance (dependent on Salary).

dunstonh

The IFA you have spoken to would only make a recommendation like that knowing the facts. Generally it is against the trend but certainly not impossible. I did a review of someone's last week and found that the trustees are no longer index linking the pensionable salary which means those with more than 10 years to go to retirement are better off leaving the final salary scheme.

I assume that the IFA has done a TVAS calculation with both schemes. Final Salary schemes are often said to equate to around 15% on average and that is what the money purchase scheme is getting in total.

At the end of the day, this is a calculation which no-one can tell the end result. There are unknown variables and I would want to know the critical yield required on the money purchase scheme for it to match the final salary scheme.

dirker

Thanks to you both for taking the time to reply. It's very much appreciated.

David - Thank you doing the calculations, I can see what you mean by similiar figures. I don't get life insurance with the final salary scheme although I do get sickness insurance after been off work for 6 months. I guess that's a consideration. I also have to consider that this is the second time that the final salary scheme has been changed, the last time was 4 years ago when I was asked to pay additional contributions so that it accrued at 1/60ths. That has now changed. It's quite possible that it will change again in the future.

dunstonh - The IFA came highly recommended and even said that he would not be advising me to take the money purchase scheme route if he wasn't sure. As he said, his reputaton depends on advice like this and he doesn't want to go out of business. So you are right that he wouldn't have advised me to take this route without knowing the facts. He has had full details of both schemes and it's interesting that you mention the critical yeald. It was this (in the final salary scheme) that concerned him so much that in his opnion the money purchase scheme was the better option. As you say, no one can know for sure.

Your replies have been very helpful, thanks again.

Andy