Auto Enrolment Query

killerkev

My wife has been offered what of the face of it seems a good deal by her employer under auto enrollment where she will pay in 8% of her salary and they would put in 16% of her salary into her pot.
She would come out of SP2 where she has built up quite a good second state pension My main concern is that as she only has 2 1/2 years until she retires the final pot will not be be very large so will she be better off opting out and staying in SP2????

hugheskevi

She would come out of SP2 where she has built up quite a good second state pension

She can only do that if it was a Defined Benefit scheme.

What you have described above sounds like a Defined Contribution scheme.

What are the exact terms of the pension - something must make it a Defined Benefit scheme, perhaps it is some sort of cash-balance scheme?

killerkev

I have just looked at the paperwork again and there are 3 different levels only the one I have described (the top level) is a DB scheme
the pension is accrued at 1/60 average earnings so she will only build up 2/60 of earnings which is not a lot!
She can opt for this screme or take the other options where she can pay between 1% & 4% of salary into a DC account

Linton

killerkev wrote: »

I have just looked at the paperwork again and there are 3 different levels only the one I have described (the top level) is a DB scheme
the pension is accrued at 1/60 average earnings so she will only build up 2/60 of earnings which is not a lot!
She can opt for this scheme or take the other options where she can pay between 1% & 4% of salary into a DC account

It sounds like with DB over 2 years she pays in 16% * 0.8 (taking into account tax relief) = 12.8% of her salary.

In return she gets back 3.33% * 0.8 annually = 2.67% of her salary. So it pays for itself in about 5 years. And that is ignoring the benefits of inflation rises.

Looks like a no brainer to go for DB if my maths is correct unless she has some reasonable expectation of not living to enjoy the 20+ years of retirement the majority of people can expect.

killerkev

Linton wrote: »

It sounds like with DB over 2 years she pays in 16% * 0.8 (taking into account tax relief) = 12.8% of her salary.

In return she gets back 3.33% * 0.8 annually = 2.67% of her salary. So it pays for itself in about 5 years. And that is ignoring the benefits of inflation rises.

Looks like a no brainer to go for DB if my maths is correct unless she has some reasonable expectation of not living to enjoy the 20+ years of retirement the majority of people can expect.

I have done some very rough calculation (not my strong point !!) it looks like she will put in around £3000 and get back a pension of about £550 a year so as you say pay for it's self in around 5 1/2 years hopeful she will live longer than that ! ( also just realized it will pay out a 50% spouse pension as well ) So yes will join.