Is this any good?

jono_greenwood

Been offered a pension by my employer just wondering what the general consensus is vs my ftse all share stakeholder I have atm.

+ A Defined Benefit Cash Balance scheme that will give you a lump sum at retirement.
+ There are two levels of involvement - ‘Core’ and ‘Enhanced’ - choose the option that’s right for you.
+ For every £1 you put in, you will get at least £4 back!
+ There are two levels of involvement - ‘Core’ and ‘Enhanced’
Core members pay 5% of banded earnings (currently £5,500 - £42,500)
Enhanced members pay 7% of all earnings (from first £1 to £300k)
+ The net cost is broadly 4% of pay for every member.
+ Contributions are made via salary exchange where you exchange part of your gross salary for a pension contribution; your
contribution is taken before tax and national insurance which means you pay less tax and NI.
+ Benefits accrue at 16% of annual earnings at both core and enhanced levels.
+ Each year’s sum will increase by a fixed 2.5% per year, until you retire.
+ You will receive a lump sum payout when you retire that we can estimate with certainty. See our scheme modeller below to see
how much you could receive.
+ Part of your lump sum can be taken as tax free cash.
+ The remaining part of your lump sum should be used to provide an income for the rest of your life; the most common type of
pension income is in the form of an annuity.

Linton

Trying to understand what all this means. It seems very complicated. So many questions.....

1) Is this £4/£1 guarantee at maturity independent of when you join the company and for how long you stay?

I assume it is. For your very early payments say at 18 with a retirement age of 68 that means about a 2.8% guaranteed annual return. This value of this guarantee would rise to massive proportions the year before your retire. But then your max annual contribution is limited so you can only take limited advantage of this.

2) What does benefits accrue at 16% of salary mean? Is this the amount you cant take out prior to retirement? If not what are these benefits? Why dont benefits depend on your contribution?

3) We have several possibly inconsistent guarantees. There's the 4X total payments, the 16% benefit accrual, and the 2.5% annual fixed return. How do all these tie in together?

4) What happens if you leave early? Most people will.

Thinking about it, its possible that the enhanced option is only really valuable fairly close to retirement when you are much less likely to leave and are gaining greatly from the 4X guarantee.

It looks an interesting scheme as there is no simple employer contribution but the various guarantees could of course prove expensive for the employer.

jono_greenwood

1. Not exactly sure. I'm guessing it means for every £1 they put in another £1 roughly and then there is tax relief and interest which means roughly £1 in £4 back, but I know as much as you.

2. Again I'm equally confused, we have a calculator on an internal site and it does say that the 7% makes a big difference when I put the numbers in, maybe they put in 16% not matter whether I put in 5 or 7%, but again I know as much as you

3. I don't know, it doesn't say anywhere how much they contribute so as such it seems impossible to work out

4. presumably you still keep the benefits

xylophone

I don't care for the use of "defined benefit" in this connection - it seems to me that this might lead to confusion with Defined Benefit pension scheme which this isn't?

It looks like a defined contribution (money purchase) scheme through salary sacrifice?
http://www.barnett-waddingham.co.uk/images/uploads/pdf/pdf_2dd05ce5bc82c8da9dadc1fc798ac864.pdf

At scheme pension age there is a "pot" for the member - he takes his 25% lump sum and uses the rest to buy an annuity/transfer into drawdown?

Or I've misunderstood?

jamesd

jono_greenwood wrote: »

Each year’s sum will increase by a fixed 2.5% per year, until you retire.

That's a horrible rate. For comparison, the UK stock market has averaged increasing at inflation plus 5.2% a year over the last hundred or so years, around 9% a year total.

What this means is that you are being offered a scheme which is a good deal for those close to retirement and a bad deal for those far from retirement.

Close to retirement the 5% cost to you to get 16% in the pot is a good deal.

Far from retirement the very low 2.5% growth rate means that you will probably end up with much less in the pension pot than you would have if you just paid into a personal pension of your own.

The break even time to retirement is whenever the higher expected growth outside this scheme overtakes the higher amount of money going into it.

So, if you're within say twenty years of retiring it's an OK deal that changes to a great deal gradually as you get closer to retiring.

If you're a relative youngster with say 40 years to go to retirement it's a terrible deal unless you can transfer the pot to a place that offers better investment growth potential.

If you're a younger member you should ask them to confirm that it is a defined contribution scheme and that you can regularly transfer your pot to another pension scheme without needing to get financial advice. Then you can take the higher initial amount and transfer it every few years into a pension with better growth prospects.

If you're a younger prospective member you should be complaining about the age discrimination embedded in the way this scheme works. A scheme that is structured to be a good deal only for older employees is not a fair one.

jamesd

jono_greenwood wrote: »

2. Again I'm equally confused, we have a calculator on an internal site and it does say that the 7% makes a big difference when I put the numbers in

Maybe the 7% level has 2% going into something that offers a worthwhile investment return.

It's worth trying to find out what difference the 7% makes.

Schemes like this one end up being cheap for an employer because of the low growth rate. It ends up being easy to invest relatively small amounts of money to deliver the benefits that are being offered, unless lots of employees are close to retirement age.

Linton

James - any idea what the "benefits accruing at 16% of salary" means? That could be something more valuable to a young employee.

xylophone

I have found this re "cash balance schemes".
http://www.annuity-rates.org/what-should-you-do-when-your-final-salary-scheme-closes-403/

jamesd

Linton wrote: »

James - any idea what the "benefits accruing at 16% of salary" means? That could be something more valuable to a young employee.

I take it to mean the total value of both the employer and employee contribution that is added to the value of the plan for each payment. So a good deal if you're about to retire, a bad one if you're far from retiring.

jono_greenwood

I'm 32 and have been saving into my stakeholder since 26. Is it best to stick with that or do both or just this.

jamesd

First find out whether this is a defined contribution pension and whether you can transfer the pension pot to a defined contribution scheme. If you can, then it's worth joining and doing that every few years, whenever the accumulated amount makes it worth doing that.

If you can't transfer into something with better investment options, at 32 you're probably going to be better off not joining this scheme but instead making contributions into a personal pension of your own.

You might also complain about the poor terms that make it so bad that you can expect to be better off doing that than by participating in this scheme. It's sad when places come up with terms that are so clearly discriminatory against younger employees.