Money Purchase Scheme help please?

INSPIRED

I have very liitle knowledge of pension schemes so please be gently with me.

My husband (55) has one pension and has started a new job which is offering a Money Purchase Scheme. He will pay 5% of income and they will pay 6%. He may only work for another 8 years at the most. They are quoting a growth of 6%. After 8 years (he will have contributed £14976 by then) he will receive £12000 in cash and £2200 per annum (taxable @ 40%) ie he will have to live past 79 to gain full benfit.

Now, my maths is no longer what it was and I am probably missing the point but I have calculated the following:

If he invested his 5% in a top ISA (6.05% Egg for example) every year, then he would have £19,715.86 after 8 years and then, if he invested that for a further 16 years he would have £50,464.56.

Where am going wrong with these calculations because it would seem to me that he would be better to opt out of the Money Purchase Scheme.

All assistance would be gratefully received. Thanks.

julbags

Not a pension expert at all (I delegate it to my pensions adviser friend) but the one thing that I would check is that him not paying in 5% still means that the company will pay in its 6%. The last company I worked for (and this company too) would only match what you paid in up to a set maximum - 8% or 6% currently. If I didn't currently pay in 6% of my salary my company wouldn't either, they would match whatever I paid in and the rest of their contribution would be lost to me.

INSPIRED

Hi - no, the company will not be contributing but it seems to me that he still makes more by self investing. All the company's contribution is obviously tied up in the annuity paying out the £2200 pa and is dependant on how long he lives.

Perhaps I am taking an extremely simplistic view on this and who know what will happen to interest rates on savings in the next 10+ years.

All I know is that we have to make a decision tonight and we are confused!

julbags

Hmm, I see your point. Tying money into a pension v. having money free to do as you want with it. I personally would invest in the pension as 6% of my salary is a lot of money to throw away, however, I'm 33 and my considerations are completely different from yours! I'm fortunate in that a friend of mine is a pensions advisor and is looking after some of my pension affairs - is there any way you can get professional advice at all ?

Can you opt in/out of the pension later if you change your mind on the course of action to take, I'm sure with my pension I can at the very least opt out of it?

Hopefully someone knowledgeable on this board will be able to help out.

dunstonh

The 6% projection is an example. It is not guaranteed. It could be lower or higher. It will not be reflective of the investment funds chosen.

The free money from the employer and the 40% tax relief will wipe the floor with a savings account.

INSPIRED

Thank you dunsonh

dunstonh wrote: »

The 6% projection is an example. It is not guaranteed. It could be lower or higher. It will not be reflective of the investment funds chosen.

The free money from the employer and the 40% tax relief will wipe the floor with a savings account.

Obviously I must bow to your expertise and therefore my calculations ARE too simpistic. However, I
do not understand and surely, it is better to be able to use the money rather than be fed £2200 pa before tax. He may not be able to take advantage of all the pension he is due and that is what concerns him.

Ian_W

I'm no pensions expert either but I do think you're getting a lot of things muddled up - or I am?

he will receive £12000 in cash and £2200 per annum (taxable @ 40%) ie he will have to live past 79 to gain full benfit.

Your hubby must be very well pensioned from previous employments if that's the case as his total income in retirement will need to be around £40K pa or more to start paying HR tax.

If he invested his 5% in a top ISA (6.05% Egg for example) every year, then he would have £19,715.86 after 8 years and then, if he invested that for a further 16 years he would have £50,464.56.

But he won't have had a lump sum of £12K or income of £2200 - try taking the lump sum away from the ISA amount - leaving £7715 - and paying the same income, by my calculation [and my sums ain't that good either!] it lasts for 4yrs then it's gone.

If he is so well pensioned maybe he can afford to turn down around £17K employer contribution, about £6K tax relief, take no lump sum and draw no income when he retires but otherwise I think the pension wins hands down!

dunstonh

Pension contribution gets 40% tax relief so its only costing 60% of the amount. So, that 5% contribution is only costing 3%. Then you have the employer's contribution of 6% to add on top.

So, if you want to compare the pension against savings then you have to use the savings account at 3% against the pension at 11%. The 3% is the true cost of the pension.

So, redo your figures on 11% and 3% to see the difference in the final value.

The pension can then have 25% taken from it tax free with the other 75% buying an annuity (use 6% gross as the calculation example then compare that net).

The 25% and income should beat the savings account figures with a lot of room to spare.

Example using £40k as income.

40,000@11%= £4,400 a year. Over 8 years @ 5% that gives a value of £44,143.

40,000@3%= £1200 a year. Over 8 years @ 5% that gives a value of £12,043.

Take 25% lump from the pension and you have £11,035 and an annual income of £1986 gross. If your husband is still a higher rate tax payer then that works out net at £1191 a year.

So pension would give £1191 a year net and £11,035.
Cash ISA would give £12,043. Virtually the same as the pension lump sum. The pension would beat the ISA in the first 12 months.

EdInvestor

Hello Inspired

INSPIRED wrote: »

My husband (55) has one pension and has started a new job which is offering a Money Purchase Scheme. He will pay 5% of income and they will pay 6%. He may only work for another 8 years at the most. They are quoting a growth of 6%. After 8 years (he will have contributed £14976 by then) he will receive £12000 in cash and £2200 per annum (taxable @ 40%) ie he will have to live past 79 to gain full benfit.

Could you just clarify a few things?

1.Is hubby already receving income from his other pension?If so, how much is it?If not, how much does he expect to get when he takes that other pension?How much is he expecting to get from his state pension(s)- there are 2 of them and he can get a forecast on how much they will pay out here: https://www.thepensionservice.gov.uk

2.Is he a higher rate taxpayer now?Is he also likely to pay HRT after he retires?

3.What is his official "retirement date" from the company (is it in 8 years time?)

4.Does he have lots of other money saved up and invested in ISAs already?

Almost certainly he will be best advised to join this pension and get the free money, but in a few cases the tax position might change that view.

INSPIRED

Hello and thank you to all those who have contributed. Yes, as someone suggested, I am getting muddled here! Perhaps, if I answer these questions it will all become clearer (I hope so) but first, I must correct something I said earlier: the company is contributing 10%, not 6%.

EdInvestor wrote: »

Hello Inspired



Could you just clarify a few things?

1.Is hubby already receving income from his other pension?If so, how much is it?If not, how much does he expect to get when he takes that other pension?How much is he expecting to get from his state pension(s)- there are 2 of them and he can get a forecast on how much they will pay out here: https://www.thepensionservice.gov.uk

2.Is he a higher rate taxpayer now?Is he also likely to pay HRT after he retires?

3.What is his official "retirement date" from the company (is it in 8 years time?)

4.Does he have lots of other money saved up and invested in ISAs already?

Almost certainly he will be best advised to join this pension and get the free money, but in a few cases the tax position might change that view.

1. Yes, he is receiving approx £30,000 per annum from his first pension. No idea about state pensions as he has not asked for a forecast yet. It is on the "to do list"

2. Yes, he is an HRT payer now but will not be once he retires.

3. He is 55 now and only wants to work another 8 years at the most. Things may change of course but these are the figures we are working on.

4. No savings whatsoever just two endowment policies (taken out in the 1970's) which will almost pay off the mortgage. Equity on this house and on a flat we own. Also, some debt which is reducing all the time.

So, to recap -

His contribution is 5% and the company's is 10%

Projected figure after 8 years is £47,700 with 12K in cash (taxfree) and £2200per annum (taxed)

We suggested that it would be more beneficial to invest the 5% in ISAs. Obviously, we were wrong but are still playing with all the figures everyone has given us and we are still not convinced that the money scheme is the answer!

EdInvestor

The new scheme could easily push him into higher rate tax in retirement, depending on what he gets in state pension, and whether or not his main pension is index linked.This would lose much of the benefit.

So you should get the state pension forecast before making any decision about the new money purchase scheme.