should I opt out of my final salary pension scheme???

want2havemoney

Hi,

I'm 33 years old and have been paying into my final salary pension (DB) for 8 years which was set up through the company that I work for. The company has now made an offer to all employees that they will pay us 50% of our core salary (paid over the course of 3 years and will be taxed) to opt out of the scheme and join the defined contributions (DC)scheme.

I know that the DB scheme is the better option however, I'm told that many companies are doing away with it and putting their employers on the DC scheme without offering them any money and without giving them a choice. So should I count myself lucky?

I don't know what to do. If I stay in the DB scheme somewhere in the future the company could put an end to it and move us to the DC scheme anyway and not offer us any money like they're doing now. I could take the money and join the scheme and realise later that I should have stayed in the DB scheme.

The DC scheme that they are offering is a gamble within itself. I'll be investing my contributions into stocks and bonds and hope that by the time I retire the investment makes a good.

If you have any useful advice please share it.

thanks

Want2havemoney

xylophone

http://www.dailymail.co.uk/news/article-2156742/Bribes-leave-good-pensions-outlawed-effort-stop-workers-ditching-final-salary-schemes.html might be worth a look.

atush

What would be the employers contribution to the DC scheme?

xylo's link does imply it is now illegal to offer you this?

hugheskevi

Key question is how likely do you think you are to stay with the company for the medium/long term?

Secondary questions are how much do you expect your salary to increase over inflation in the foreseeable future and what is the generosity of the DC scheme like compared to the DB scheme.

Looking at how the scheme will evolve in the future, there would broadly be two directions. Give it a few years and people leaving now along with normal job churn will mean few employees are in the scheme. That might mean it isn't worth the trouble of closing it to future accrual (especially if senior management are amongst the few left in the scheme). On the other hand, if there are only a few in the scheme then it might be thought there will be few consequences of closing the scheme.

Come 2017, contracting-out will be abolished. That will mean most private sector Defined Benefit schemes will be reviewed. That could well mean closure for a lot of the schemes still open for future accrual.

You can compare the situations using the generosity of the DB and DC scheme. For example, your DB scheme may well be worth about 30% of salary to you, which is perhaps 25% employer contribution. The DC scheme might be an employer contribution of about 5 to 10%. So opt for the DC scheme, and you would lose about 20-25% of salary. So if you stay another 3 years (and the DB scheme stays open to you) then you would win on those numbers.

Xylophone - that story was about enhanced transfer values (incentivising people to transfer DB benefits), which is different to the issue here (incentivising you to cease future accrual in a DB scheme).

xylophone

Call me a cynic but I do not think that the employers are offering this out of the goodness of their hearts!

This is still a bribe (okay incentive) to opt out of a final salary scheme in favour of a DC scheme although presumably the benefits accrued to date would remain as a deferred pension?

warwicktiger

"should I opt out of my final salary pension scheme???"

In a word, no.

Why do you think your employers want you to opt out? You would be giving up a guaranteed benefit in exchange for something dependent on investment growth, annuity rates in approx 30 years time.

If you do you will take the risk and suffer underperformance, if you stay the scheme and therefore the employer takes the risk.

Fabius

Hi,

There's quite a lot to think about here. My first reaction at the title of the post was the same as Warwicktiger, but I've thought a bit since then.

Ok, so with assumptions all over the place, here goes one possible scenario:

The managers/owners of the company know that the DB scheme is a horrible mistress, but they also are all in it. They know that it won't last long as it is, so rather than spend the money going through the process of closing it and having the benefits bought out they see an opportunity to spend that same money incentivising others to leave so that they can stay in it.

Another scenario, the management know that the DB scheme is costing so much that it will have to be closed with some drastic action or it risks the whole company so they have put together a package that genuinely tries to soften the impact of change to the general workforce.

There are loads of reasons that this might be happening and those two scenarios try to illustrate the good and the bad.

You are right, you could stay in the scheme and then find yourself in the same position with no offer in a few more years. We don't know what 50% of your core salary represents, however, you could probably have this put into the new DC scheme with no tax consequences. Or could this capital help with other aspects of your lifestyle? Reduce a mortgage, or get one by having a deposit for a house perhaps? Think about this in a wider context, especially factoring that it might happen anyway in the near future.

Losing a DB scheme is a big event, but you are 22 years away from the current minimum retirement age and maybe won't retire for over 30. This gives you a much better chance in a DC scheme than older colleagues, plus you will have an underpin of 8 years DB with the DC pension you'll accrue.

It's a tough decision for sure and I don't envy you having to make it.

kidmugsy

atush wrote: »

xylo's link does imply it is now illegal to offer you this?

No, not illegal: "Laith Khalaf, a pensions expert at Hargreaves Lansdown, says: ‘The new code is a step in the right direction, but we are concerned it is only voluntary.'"

kidmugsy

What will be the employer's contribution to the DC scheme AND for how long will they guarantee to keep it at that level?

Have you any way of finding out whether anyone in the top management is going to accept these terms?

jamesd

A decent DB pension is worth far more than just half of your salary. Companies paying people who don't know the true value of what they are giving up is scandalous.

Be glad that yours is offering money, but don't accept the offer.

xylophone

And another thought - what other benefits might you also be giving up if you opted out of your FS scheme? (Spouse/dependant provision/ death benefit etc?)