Double EE's contributions but same benefits

am001

My Pension Scheme is changing September 2005. The long and short of it is that my contributions are to double to retain the same benefits upon retirement. Would it be better for me to invest the extra contributions that I shall have to make in September into a Mini a cash ISA or remain with the Scheme?

dunstonh

From April 2006, the tax free lump sum rules are changing which means some occupational schemes are going to see a greater reduction on their assets in the future. It is fully expected to see a number of changes occur before then. I would think Pal is probably in the best position to give more info on occupational schemes (hopefully he will see this and respond).

If the scheme has employer contributions then you would be daft to leave it. Its free money.

MarkyMarkD

Exactly what I was going to say, dunston. It doesn't really matter what level of contributions you are required to make. If it's a defined benefit scheme, it's a lot more secure than a contribution-based scheme. Even if it is a defined contribution scheme, any non-employer scheme is going to be hard pushed to produce the same investment return as a scheme to which an employer is contributing.

Pal

As DD and MM say, it is very rarely worth opting out of these schemes as the free money that the employer contributions is always worth having.

Think of it like this. You pay 3% and the company pays 10%. The following year they ask you to pay 6% and they pay 12%. While in percentage terms the deal is worse and the increase in your contributions is not ideal, you are still getting an extra 12% of your pay for nothing. Definitely worth having.

dunstonh wrote:

From April 2006, the tax free lump sum rules are changing which means some occupational schemes are going to see a greater reduction on their assets in the future. It is fully expected to see a number of changes occur before then.

I don't get your point about tax free lump sums changing? The changes in 2006 that should allow more tax free cash will be better for most pension schemes. This is because the conversion factors for changing pension to cash mean that the pension liability usually reduces by more than the value of the cash being paid out. While the amount of assets goes down, the amount of liabilities goes down by more, making the scheme better funded.

dunstonh

I wasnt sure how the potential increase in lump sum payments would impact on some schemes when combined with the income arrangements, if at all. This is why I said you would be in a better position to answer it.

Pal

It wasn't so much that, just that I didn't see the link between the original question and your comment about Tax Free Cash Sums. Is this something to do with the local government scheme discussion thread?

dunstonh

The OP said that the occ scheme was changing. I was remarking that the potential changes to lump sum payments may be the reason for the change. After all, we havent been given much to go on.

Pal

Oh I see. What a strange path your mind takes....

dunstonh

it was a bit of a leap I know

thirdparty

It depends on the financial security of the company. Will it still be around by the time you retire and how well funded is the pension scheme?

It is usually foolish to leave a DB scheme.

Obtain a copy of the annual report for the pension scheme to see how well funded it is.

The contributions you are paying bears no resemblance to the benefits you should be receiving. This is because the employer is making up the difference

You will be shocked at the amounts of contributions you need to pay if you had a personal pension plan or a member of a DC scheme to obtain the same benefits.