Civil service pension

cherryblossomzel

Hello lovely people. I've been lurking on MSE for years. I've learned so much here, but have never joined because all of my questions were asked by other people and answered well. However, this one is specific to me.

I currently work in the private sector and have a group pension fund currently worth around £13,700~ish. I am moving to the public sector though, and have to choose between Nuvos and Partnership. I've read all I can, but can't figure out what the difference would mean for me personally.

A few details: I will be 34 when I join, my salary will be £27,792 plus a £3,000 living allowance which is pensionable.

Though of course I can't see into the future, I am the type of person who gets bored quickly and there is a good chance that I wil change jobs in 5 years or so, equal chance of staying or leaving the public sector.

I was all set to go into Nuvos, even if it would only be for 5 years or so but if Nuvs will change in 2015, is it still worthwhile? Or should I just go straight into a partnership, where I would probably contribute 8-10%, plus employer contributions of course.

Please feel free to tell me off if I'm beeing cheeky by asking so many questions on my very first post, I'm not really a forumite, so don't know all the etiquette:o. I am considering going to an IFA, but wanted to get a few opinions from knowledgable people.

Thanks muchly!!

hugheskevi

A few details: I will be 34 when I join, my salary will be £27,792 plus a £3,000 living allowance which is pensionable.

Based on the above, in Nuvos you would accrue £708.22 of annual pension, increased by CPI each year and payable from age 65.

That would be at a cost of £1,810.57 in member contributions (on an annual basis). (Based on contribution rates for 2013/14 and I'm assuming your living allowance doesn't push you into the £30,001 - £50,000 band of earnings on which contribution rates are based).

If that £708.22 increases by 2.5% each year (ie assume CPI is 2.5% each year) for the next 30 years it would lead to an annual income of £1,486.

Alternatively, you could join Partnership. That would have an employer contribution of 8%, and they match employee contributions up to 3%. For comparison purposes, assume you put £1,810.57 into Partnership. That would lead to a total contribution along with the employer contribution and match of £5,197.69.

If over the next 30 years that £5,197.69 increases by 8%, it would lead to a pot of £52,303. Based on current annuity rates of 2.96% for an RPI-linked joint life (50%) annuity that would give an annual income of £1,548. The comparable figure at 7% return would be £1,171.

There are other differences to consider around contracting-out differences and differences in ancillary benefits (death-in-service, ill-health, etc). Also, an income linked to RPI is more valuable than an income linked to CPI, but CPI linked annuity quotes are not readily available so RPI linked is closest for comparison purposes. RPI linked annuities are expensive (you only expect to get back about 75% of the capital value, compared to about 90% for a flat-rate annuity) and hence if you wanted to consider drawdown or a flat-rate annuity and bear inflation risk the comparison would move more in favour of Partnership.

On that (fairly crude) comparison, it looks like you would need to expect annual returns of between 7-8% for Partnership to be better than Nuvos in your situation.

In general, I would expect most people to prefer Nuvos given that required rate of return (Partnership would be better if you were younger and earned more), but if you have a high risk tolerance it may be worthy of further consideration.

I was all set to go into Nuvos, even if it would only be for 5 years or so but if Nuvs will change in 2015, is it still worthwhile?

Doesn't make any difference - you won't build up much in Nuvos but your eventual retirement income may well be made up of several different pension pots of varying sizes...it is quite unlikely to be made up of a single large pension pot.

Or should I just go straight into a partnership, where I would probably contribute 8-10%, plus employer contributions of course.

The funds on offer are nothing special, nor is the pricing. If you were to go into Partnership then you should consider regularly transferring out the funds (if permissible) to a better investment wrapper (ie more choice and lower charging). Putting in more than required to get the full employer match is unlikely to be as good as making separate personal pension contributions for the part of the employee contribution you don't receive any matching for.

cherryblossomzel

Hugheskevi if I could thank you more than once, I absolutely would! That was very helpful.

I am not a fan of putting all of my financial eggs in one basket in any case, so I think I will go with Nuvos but also pay a bit into another pot. I alreay have my current (company) fund, which I can stay in and as long as I pay in at leat £20 a month, my annual charge is only 0.6%. I'll have to check with them (Aegon) if there are any other charges, but that might be a good option.

Thanks again.

Promsan

Hiya,

Naturally I've seen the other related threads (numbers) here:
4353005
4206279
4120011
3895983
3730057
3612819
2788692
2678231
2533615
1731511
1552805
1449411
974823
581289

I'm in a similar situation... same options, similar pay (26,740), mid-30s (36). Thinking about opting for Partnership (Standard Life, as the other two - Scottish Widows and Prudential - reported on here to be less good) putting in 5%, which I understand will be matched, and there's an additional 3% making 13% total contributions (unless I've misunderstood). Married, with 3 young children; no mortgage; no major debts.

The jist I get is that Nuvos is better for the old and lower-paid public-sector employees; and Partnership is better for younger and higher-paid public-sector employees.

So perhaps some clearer definitions might help?
When we talk about pay, are we using the national average salary of about £26,000/year as the boundary between higher and lower paid; and is there a similarly-useful age range that tips things in favour of one direction or another?

I appreciate it's perhaps more like a set of bell-curves, where you'd have to overlay them to get a reasonably useful answer, but seeing as though lots of people are asking this question, I wonder whether it's possible to come up with some rules of thumb and pros and cons?

It seems to be almost tribal - some all for Nuvos; and some all for Partnership (although, probably very few would be for opting out!).

Any input would be gratefully received, and hopefully helpful to others.

Cheers.

hugheskevi

Thinking about opting for Partnership (Standard Life, as the other two - Scottish Widows and Prudential - reported on here to be less good) putting in 5%, which I understand will be matched, and there's an additional 3% making 13% total contributions (unless I've misunderstood).

As a 36 year old, the employer would contribute 10%, and match up to 3% any employee contribution. So if you put in 5% you would get 18% in total.

So perhaps some clearer definitions might help?

It is hard to be precise, as there are 7 different employer contribution rates into Partnership depending on age, and 6 different employee contribution rate into Nuvos depending on salary.

The nature of the benefits - Defined Benefit and Defined Contribution - are not straightforward to compare, especially with the Defined Benefit one being CPI revalued and indexed, but there are no CPI annuities on the mainstream market from which to get comparable prices for income derived from Defined Contribution arrangements.

When we talk about pay, are we using the national average salary of about £26,000/year as the boundary between higher and lower paid; and is there a similarly-useful age range that tips things in favour of one direction or another?

If I was putting a number on what a higher earner is, it wouldn't be below £30,000 [that being the start of a band of one of the contribution rates that depend on earnings]. But ideally it would be £50,000 or £60,000.

For age, I'd say below 30 is young, and ideally below 25.

I appreciate it's perhaps more like a set of bell-curves, where you'd have to overlay them to get a reasonably useful answer, but seeing as though lots of people are asking this question, I wonder whether it's possible to come up with some rules of thumb and pros and cons?

Given there are so many variables in play, it is ultimately something people have to understand and work out for themselves.

It is difficult, as calculating the key rate of return required is not straightforward and the simplifications used need to be understood (eg, a single person would find Partnership relatively better than a married person as they would not get the benefit of spouse benefits in Nuvos and hence may wish to use an alternative annuity single-life annuity rate), and even after coming up with a key rate of return needed, the appropriateness will then depend on an individual's risk preference.

Given all that complexity, I'd be very nervous of anyone relying on any rules of thumb for important financial decisions.

It seems to be almost tribal - some all for Nuvos; and some all for Partnership (although, probably very few would be for opting out!).

I've seen very few going all for Partnership, and if they did it would less on analytical basis and more on a beliefs basis, ie, they do not trust their counter-party in Nuvos and hence would take the more certain Partnership benefits where their pension fund is held with an insurer and consists of a real funded pension.

It seems to be more common for folk to be all Nuvos, relying on received wisdom being that Defined Benefit is superior to Defined Contribution - which used to be true but with some of the modern Defined Benefit schemes is a dangerous rule of thumb to rely on.

cherryblossomzel

Promsan wrote: »

It seems to be almost tribal - some all for Nuvos; and some all for Partnership (although, probably very few would be for opting out!).

It is difficult isn't it? And everybody seems so sure that their way is the best way. I'm not a stupid person, but this pension stuff is making my head hurt.

I still think that a good option for me is to go with Novus at work and then pay another 5% into my current pension scheme. I can put this extra 5% into medium/high risk funds, I think I'm still young enough to take bigger risks, and I will have the backup of the low(er?) risk Nuvos if it does all go belly-up.

Promsan

OK, so I'm old, and on a low income in terms of pensions.

What I've gathered is that Nuvos seems to be most worthwhile for those who intend to stay in the public sector until they retire; and Partnership seems to be more for those who anticipate that they may move into the private sector before retiring.

I take what's been said about it being complex and unique to each person - I dunno where to go for reasonably objective specific info.

I also take on board the emotional/psychological thing... with the private sector pension seeming more like a trip to the casino, and the tradition of a "civil service pension" being a coveted thing that had connotations of security and of being quite generous. Perhaps that ship has sailed; and nowadays there's less faith in the lack of control and the changing whims of indistinguishable governments who have to deal with a large deficit that doesn't look much like it's going to reduce in a hurry, so having a bit of both - the security blanket, and the flutter? I guess you can't really do that.

18% sounds pretty good, no idea what it means in reality. Given that I may have 30 years to go, I can't imagine that there's going to be much in it between the two, if I stayed in the same organisation, and never quite reached stratospheric heights of 50,000; having said that, I might well exceed that in the private sector a few years down the line, so I guess the two schemes are designed to reflect that and mitigate against the difference between pay and contributions to some extent.

Pensions seems to be about the hardest thing to get any training or advice on, which seems counterintuitive, given how important it might be.

atush

The way I see it is, that FS/CA pensions are a dying breed, virtually confined now to the public sector. So getting one, even for just a few years could be a great underpinning to your future retirement planning.

The only way I would not choose NUVOS, is if I was pretty sure I would not marry or have dependents. But I was pretty sure at 25 I would not. but I did in the end.

hugheskevi

What I've gathered is that Nuvos seems to be most worthwhile for those who intend to stay in the public sector until they retire; and Partnership seems to be more for those who anticipate that they may move into the private sector before retiring.

It doesn't matter how long you stay, as length of service does not impact on revaluation as it does in a final salary scheme. The comparisons above are independent of how long you stay with your employer.

Given that I may have 30 years to go, I can't imagine that there's going to be much in it between the two

As you age, both schemes improve. Partnership employer contribution rates increase as you get older, the nature of DB benefits means they get more generous with age too. Contribution rates also change in the next couple of years.

Quite what is best at any given point in time needs considering in light of the detailed comparison done at that time.

The way I see it is, that FS/CA pensions are a dying breed, virtually confined now to the public sector. So getting one, even for just a few years could be a great underpinning to your future retirement planning.

Whilst certainly a dying breed there are still over 2 million private sector active members of Defined Benefit schemes (with about half in schemes still open to new members).

The underpinning effect can be significant - if the rest of your pension is going to be primarily DC, then the Nuvos pension would be playing the role of your low risk assets (such as gilts). In which case, it is likely to be far more attractive than if the rest of your pension is predominantly DB and you don't value the lack of investment volatility so highly.

That is also another reason why you cannot use rules of thumb to say which is best in isolation.