ISAs v Pensions: The Official Retirement Debate

Aegis

Corporate_Gifts wrote: »

I feel that it is not fair that we encourage for the searching for live forum then you act very bad.

What does this even mean...?

mistermoneysaver

jem16 wrote: »

As you are mentioning service to date, it sounds like a final salary pension.



Do not stop paying into this final salary pension. It has no investment risk to you and is based on years of service. Absolutely nothing you can do with an ISA will come anywhere near to this.

Who is your pension with?

Lafarge cement. Why?

jem16

mistermoneysaver wrote: »

Lafarge cement. Why?

Just trying to confirm if it is a final salary pension or not.

However it's not one I'm familiar with.

Can you confirm if it's final salary - also known as a defined benefit scheme?

mistermoneysaver

Yes it is final salary. So I need to keep paying in then i take it? I just got a tad confused with the comment from someone else. Shame though as it takes 10% of my salary!

jem16

mistermoneysaver wrote: »

So I need to keep paying in then i take it?

You don't need to but you'd be daft not to.

Shame though as it takes 10% of my salary!

That's 10% gross so only 8% of your salary if you are a basic rate taxpayer or 6% if you pay higher rate tax.

To get the same benefits you would probably have to pay in around 25%/30% to an ISA. You quite probably also have benfits such as life insurance and a spouse pension.

jamesd

Yes, you should keep paying in.

Normal rule is that if a final salary pension is available you rejoice and be glad you have the great opportunity that most people don't get with a new job these days. Your employer will be paying anything from 10-20% of your salary and taking all of the investment risk. That compares to an employer who might pay 5-6% into a money purchase pension, and the employee has the investment risk in those.

Most of the discussion in this topic has been about money purchase pensions vs ISAs. For final salary pensions the final salary pension almost always wins. The exceptions mostly come for people who want to retire early and who need some savings outside the final salary pension so they can spend all of that capital to pay for living expenses until they can take the work pension. Even those people end up with lower pension income.

grumpycrab

jamesd wrote: »

...Most of the discussion in this topic has been about money purchase pensions vs ISAs. For final salary pensions the final salary pension almost always wins. The exceptions mostly come for people who want to retire early and who need some savings outside the final salary pension so they can spend all of that capital to pay for living expenses until they can take the work pension. Even those people end up with lower pension income.

Sorry to jump into this thread. Why do those people [final salary scheme; early retirement; don't take early pension] end up with lower pension income? Do you simply mean that if they work longer they make more contributions and their final salary should be higher?

jamesd

For a final salary scheme the pension payment normally depends on how many years of service there were during which you contributed, typically 1/60th or 1/80th of your final salary per year that you were contributing. Pro-rated for partial years. More time at work also makes it more likely that you'll end up with a higher salary and gain that way. The pension payment is also normally reduced if you take it earlier than the normal scheme retirement date.

Those rules reflect investing reality. If you pay in less (fewer years) you spend less money buying investments, so the value is less. If you leave the money invested for a shorter time, it has less time to grow, so you lose some of the gains of compound growth. If you retire early you both have the money invested for less time and will be drawing on it for more years of expected life, so the amount that can be paid out per year has to drop, otherwise you'd run out of money (or the employer pension fund or insurance company would).

Those investing rules are also why women get lower annuities in the free market. They both retire earlier and already have a longer life expectancy, so the annuity payers end up having to pay for more years. The state pensions and final salary pensions don't normally allow for this but it's one reason why in a job with exactly equal benefits for men and women the women would have a lower gross salary: the employer would be paying them more in pension benefit value because they would live longer in retirement. It's one reason why money purchase schemes can end up being easier for an employer, since those treat the pension benefits identically and remove that as a reason to pay the women a lower gross salary.

mistermoneysaver

Thanks for all of your help.:money:

EdInvestor

http://www.thisismoney.co.uk/pensions/article.html?in_article_id=494818&in_page_id=6


Unusually thorough (for the press) comparison of the pros and cons of pensions and ISAs.