Pension or shares?

R_P_W

If you have the opportunity to pay 5% and then your employer pays 11% on top why wouldnt you do that?!

andy013

Unfortunately no. I emailed Morrsisons about this very thing a few days ago but I am yet to hear back. Perhaps I will phone them if they don't respond soon. It does say in the information provided that you can transfer out after 3 months in the scheme. I'm not sure of the T&Cs though.

RPW, it all depends on if you can transfer the money out of the scheme for free to one that pays more interest. For example: if I pay in to the scheme for 5 years and then just leave the money there until I retire. I would have more money if I had just paid into an index tracker assuming 8% return, over the long term. Of course in the short term the employee contributions are great, but it's not much use if it's just sitting there going down in value as the years pass by.

Linton

R_P_W wrote: »

If you have the opportunity to pay 5% and then your employer pays 11% on top why wouldnt you do that?!

Because the investment return is fixed at inflation capped at 2.5%. The scheme isnt a normal DC one.

taktikback

andy013 wrote: »

Yes, I know. If you had bothered to read my post you would see I am asking if it best to put money into an index tracker directly (with an isa wrapper) or use a private pension to do the same thing. I am also interesting in comparing these options to my employers pension scheme to see what is best.


I pay 5% of my pensionable pay. Morrisions pays 11%. This equals a total of 16%. This money then stays in the pension only increasing by a max of 2.5% depending on the CPI.


.

I can't believe that any scheme with an 11% employer contribution could underperform an arrangement without one. And then it's CPI linked. How much better do you think you can do than that?

Linton

taktikback wrote: »

I can't believe that any scheme with an 11% employer contribution could underperform an arrangement without one. And then it's CPI linked. How much better do you think you can do than that?

Share investments can be expected to do significantly better than CPI inflation. Over the past 10 years even something basic like a FTSE100 tracker would have returned over 100% whereas CPI is up 25-30%.

OK 10 years ago was a fairly low point after the dotcomm crash, but you get the general idea. You can expect to get about 3% dividends from a cheap FTSE100 tracker, this on its own is better than you would get from the Morrisons scheme at any time never mind any share price increases.

taktikback

I understand that that the investment return on shares is better than CPI, but surely not better than compounding in an 11% employer contribution?

grey_gym_sock

taktikback wrote: »

I understand that that the investment return on shares is better than CPI, but surely not better than compounding in an 11% employer contribution?

it certainly can be worse.

you put in 5% and your employer puts in 11%, making 16%. so you've multiplied your money by 16/5 = 3.2

suppose you're in the scheme for 40 years, and you could get 3% per year higher returns from a normal DC pension. in that time, a DC pension would about exactly catch up (because 1.03**40 = 3.26).

i'd say 3% per year is probably an underestimate for how much better DC would do.

if you can transfer out early, of course multiplying your money by 3.2 is a great head-start.

marathonic

taktikback wrote: »

I understand that that the investment return on shares is better than CPI, but surely not better than compounding in an 11% employer contribution?

I suppose it depends on the term and, as a consequence, your total pension pot.

Returns on shares, in my opinion, should be about 2.5% dividends + 2.5% inflation + 2% GDP = 7%.

If this pension only grows at 2.5%, you're losing 4.5% of your potential annual returns.

If you are earning 20k and have a 120k pot, you are losing 15% annually over having that same pot invested in a normal defined contribution pension.

I haven't read the other posts but, if you leave morrisons, your money may well be tied up in a poor performing product until retirement. Is this the case?

atush

But, each year you get more, ie 11% employers free money year on year.

given the annual % restrictions I would say not to put all your extra cash there, but worth a punt on the basics.

I agree though, you need to have the scheme details re transfers if you leave.

grey_gym_sock

atush wrote: »

But, each year you get more, ie 11% employers free money year on year.

to compare like with like, each year you could contribute your own 5% to a normal DC pension, or put your 5% together with your employer's 11% into the employer scheme.

and each year, the same calculation applies, i.e. you can multiply your money by 3.2, in exchange for a poor annual rate of return.

if it wasn't worth it in year 1, when (let's assume) the poor rate of return lasts for 40 years, it's only marginally less bad in year 2, when it lasts for 39 years.

unless you can transfer out. e.g. if your can transfer out after 10 years (or are only 10 years from retirement now), it would be well worth it.