I'm so confused!!

stephga23

Hi guys,

I'm 24 and have worked at my current company for 6 years this year.

When I first joined there was a pension available (defined benefits?) that you had to join within 6 months of starting the company or if you wanted to join at a later date you would have to join the normal company pension.

As it happened I never joined but they sent me a last chance offer last month (apparently they do this on the anniversary of your 5th tax year with them)

I earn around 23-25k per year and there were two options available to pick from for contributions basic (5%) or enhanced (9%) I picked the 9% one but actually have no idea what I've done!! :eek:

I should have been more savvy then just picking the box where I put the most away and I should have actually worked out my contribution as this month it was £192 :eek: (although tax and in reduced)

To get the point and stop rambling is there any need at my age to pay this much as people in work are saying this is what you would normally pay when you gt to 40 and I really have no idea about returns (it's all in the booklet I just don't understand it and it's in fractions)

Where would you go to gt this kind of advice?

Many thanks in advance,

Steph

atush

you turned down the chance to join a defined benefit scheme!!!!! And are now stuck with Money purchase? you poor poor very silly girl. BIG mistake. I am so sorry to tell you that pension was like gold dust.


But good on you for joining a pension now, even if it will pale in comparison it is better than nothing. So all is not lost.

anyway, 9%. Is this what you put in? What do they put in (ie do they match it with another 9%?) If so, this would be 18% and will go a long way towards what you might have gotten in the old DB plan. As a basic general guide, someone your age should put in 12% total as a min, so you may be over this- good. If you had started a pension at age 40, it would be more like 20%. And to match a defined benefit scheme you should put in 25-30% as a guide.

as for returns, that will all be based on where/which funds YOU choose within that pension. And it will take a year or mroe to tell how it is doing (as equity investments rise and fall but tend to rise over longer periods so don't panic). Some will do better than others.

As a contrast, you would not have had to worry abt the DB pension as it would not have been you choosing funds or taking any risk- all investment risk in a DB scheme lies with the employer.

stephga23

I'm just reading the rest of your reply but no no I took that pension (defined benefits) as they gave me another chance to take it in my5th tax year,I just didn't take it upon joining the company

JoeCrystal

stephga23 wrote: »

I'm just reading the rest of your reply but no no I took that pension (defined benefits) as they gave me another option,I just didn't take it upon joining the company

That WOULD explain the fractions in your booklet. Basically you buy certain amount of years based on accrual rates. So if it is on 1/60, then with ten years' service, you would get 10/60 or 16% of your average or final salary by retirement age. That varies of course depending on the scheme's rules so ask any questions on anything you are not sure of in your booklet.

No need to worry about stock exchange crash, no need to worry about anything really apart from potential case that company get bankrupt in which case Pension Protection Fund picked the burden up, . Just make sure you keep paying into defined benefit pension scheme. You are very lucky.

By the way, atush. I was also going to start a rant about the foolishness on refusing DB scheme, before I clicked refresh to see if anyone else replied. stephga23's post was not that clear either!

stephga23

I put in 9% and I believe they put in the same, if not more? I would check but I can't find the booklet!! If I check tomorrow and get back will this give you more information on helping me to understand it, or am I better seeing someone?

jamesd

If that's a defined benefits pension you've probably made a very good choice. Defined benefits pensions are gradually vanishing due to the cost for the companies so it's best to exploit them whenever they are available however old you are.

Fractions normally means that it is a defined benefit scheme. What happens in a final salary scheme is that for each full year you pay in you get 1/80th or 1/60th of your salary when you retire as your pension income. The fraction says how much, lower numbers after the / are better. Say you worked in a scheme at 1/80th, if you paid in at the normal rate for 40 years you'd get 40/80ths = half of your final salary as your pension when you retired.

There are variations on final salary schemes that use average salary. Those aren't quite as good as final salary but they are still usually a good deal compared to most company pensions.

A woman of your age can expect to live perhaps 30-40 years after reaching age 65, so you're likely to get a lot of money paid to you for a long time in retirement as a result of fairly modest payments into the pension by you now and larger ones by your employer.

The 9% is probably taken out before tax and national insurance so its cost to you in net pay is more likely to be something like a 6% drop in your take home pay. Your employer is probably adding something over 20% of your pay on top of this.

If you can tell us what the booklet says about the numbers and how they vary based on the normal or enhanced we might be able to say more but the overall picture that is' probably a great deal and an excellent decision by you to sign up is unlikely to change.

A routine private sector pension today might have the employer paying in as much as the employee with a cap at 6%, so employee pays in 6% and employer pays in 6% for a 12% total. No final salary guarantee, just buying investments and getting whatever they can buy. Yours is probably more like you paying in 9% to get at least 29% total, quite possibly more for the enhanced.

jamesd

If it's a fairly big company there's probably a web site with some information somewhere that we might be able to find. If you don't want to make the name public you could tell me privately and I'll see if I an find it then say a bit more here in public without revealing the company based on what I find, if anything.

stephga23

JoeCrystal wrote: »

That WOULD explain the fractions in your booklet. Basically you buy certain amount of years based on accrual rates. So if it is on 1/60, then with ten years' service, you would get 10/60 or 16% of your average or final salary by retirement age. That varies of course depending on the scheme's rules so ask any questions on anything you are not sure of in your booklet.

No need to worry about stock exchange crash, no need to worry about anything really apart from potential case that company get bankrupt in which case Pension Protection Fund picked the burden up, . Just make sure you keep paying into defined benefit pension scheme. You are very lucky.

Ah thanks Joe! I think the fractions say 1/67th? Anyway now you have explained when I read the booklet tomorrow it should make more sense to me, it does say that once every tax year I can change my contribution so as I pay 9% now it said I could lower to 5% and then I'm free to change it back the next tax year, if this was you would you leave the contribution at the higher amount forever or switch between?

Many thanks for your help, I'm trying to thank you but the options have gone on the post? Must be something to do on my side up I won't forgt to thank you

stephga23

jamesd wrote: »

If it's a fairly big company there's probably a web site with some information somewhere that we might be able to find. If you don't want to make the name public you could tell me privately and I'll see if I an find it then say a bit more here in public without revealing the company based on what I find, if anything.

Thanks James, I just can't believe how confusing it all is!! I just wanted to make sure I was making the best decision for my future, you and Joe have assured me of that. I'll drop you a PM with the company on but I'll dig around on my HR site tomorrow and try and get the figures if nothings on the Internet about it.

I'm really grateful for both of your help! My mam and dad never had a pension and normally I would flee to them for help but on this occasion they weren't able to help me!

stephga23

[QUOTE=JoeCrystal

By the way, atush. I was also going to start a rant about the foolishness on refusing DB scheme, before I clicked refresh to see if anyone else replied. stephga23's post was not that clear either![/QUOTE]

I know I'm rubbish aren't I!!! Ha! I must work on my clarity!

atush

Oh Thank Goodness!!! I thought you had thrown away your chance. I can't beleive they let you back in!!! And although you have missed out earning 6 years, you are still young and have a long working life to go- so Great!

Anyway, you do need to look at your scheme. If you have the choice between 5 and 9%, that extra 4 % is buying something. added years or AVCsm not sure. but if it a good choice for you (or if you have other shorter term things to save for) let us know.

in the mean time, if you don't have 3-6 months spendings in cash saved (and into ISAs as you pay tax) then do it as well.