Age/Pension Pot

hugheskevi

I wonder how this doesn't breach the Equality Act? Surely it's illegal age discrimination?

The age discrimination resulting from age-related contribution rates in Defined Contribution arrangements is rarely as significant as the difference in Defined Benefit schemes.

In a Defined Benefit scheme 'equality' is achieved by members accruing the same amount of annual payment. But if the annual income accrued is revalued by an amount lower than a normal rate of return it is inevitable that it costs less to provide that income for a younger member than for an older member.

For example, in the post 2015 Civil Service pension scheme the employer contribution will be worth about 8% for a 22 year old, compared to about 38% for a 64 year old (full calculation here), although both will accrue the same annual pension (in CPI terms).

Southend1

hugheskevi wrote: »

The age discrimination resulting from age-related contribution rates in Defined Contribution arrangements is rarely as significant as the difference in Defined Benefit schemes.

For example, in the post 2015 Civil Service pension scheme the employer contribution will be worth about 8% for a 22 year old, compared to about 38% for a 64 year old (full calculation here).

However with DB the benefit is equal for all ages I.e. pay in 6% employee conribution for e.g. and receive 1/80 FS in retirement. Employer contributions will be whatever is needed to provide the DB. Whereas with DC the emphasis is on the contributions and the employer in this case is directly discriminating against younger workers.

hugheskevi

However with DB the benefit is equal for all ages I.e. pay in 6% employee conribution for e.g. and receive 1/80 FS in retirement. Employer contributions will be whatever is needed to provide the DB. Whereas with DC the emphasis is on the contributions and the employer in this case is directly discriminating against younger workers.

If the definition of equality is benefit being equal for all ages, then the logical consequence is that tiering DC contributions by age has to be fine, as the only way to make benefits equal for ages in a DC arrangement is to have that tiering. Having a single DC contribution rate for all will mean younger members can buy much more benefit than older members with the same contribution.

It all depends on how you define equality, but I struggle to see how anyone could simultaneously view DC contributions tiered by age as discriminatory without also viewing DB arrangements as discriminatory (particularly career-average arrangements, as links to final salary can make the picture less clear-cut).

Imagine if an employer offered a career average scheme with an average scheme contribution rate of 15%. They then consider offering members a choice of a DC arrangement with an employer contribution of 15% (eg perhaps some members objected to the DB scheme, maybe considering that it wasn't Sharia compliant). However, their advisors warn them that doing this would mean younger members would rationally go into the DC arrangement, moving into the DB arrangement at a later age. So instead they implement contributions tiered by age with the intention of replicating the DB arrangements. As long as it is accepted that the DB isn't guilty of age discrimination, I think the company would have a strong justification for their actions with the DC scheme should someone bring an age discrimination case. And if they are not guilty of age discrimination then I would think it is unlikely a company operating a similar arrangement without also running a DB scheme would be guilty?

marathonic

Southend1 wrote: »

If it were me I would take advice as its entirely possible that you should have been entitled to higher contributions at a younger age.

There seems no logical reason for structuring the contributions in this way.

There's a lot to be said for steady employment in a company that treats you well. I accepted the job knowing full well what contributions I'd be entitled to.

I'm not the type of person who would try to exploit some EU law, if it truly exists, to try and backdate benefits and leave the company out of pocket, a company who have treated me fairly in the past and are likely to do so for many years to come.

However, I know full well that there are a lot of others in the company who probably would, given half the opportunity.

somethingcorporate

planteria wrote: »

just out of interest, why do you pay the extra 2% in, rather than set something else up? is the scheme really good?

Good question, I am a higher rate tax payer and I can pay by salary sacrifice so I save NI and it brings my tax burden down. It's not a huge figure either, 2% is only £50 a month in my pocket (but is £1,000 pa extra in my pension).

Plus, it is all in one place (Standard Life).

planteria

somethingcorporate wrote: »

Good question, I am a higher rate tax payer and I can pay by salary sacrifice so I save NI and it brings my tax burden down. It's not a huge figure either, 2% is only £50 a month in my pocket (but is £1,000 pa extra in my pension).

Plus, it is all in one place (Standard Life).

ok, i am pleased that works for you, and bringing your tax burden down has to be right. if i was able to take advantage of an employer's scheme, i would certainly ensure that i extracted the maximum contribution from them. further that that, unless i really liked what they had in place, i would probably start something external, to run alongside.

planteria

Southend1 wrote: »

If it were me I would take advice as its entirely possible that you should have been entitled to higher contributions at a younger age.

There seems no logical reason for structuring the contributions in this way.

i'm no expert on the sort of terms offered by employers, but it seems like a decent overall 'deal' to me. however, i can see Southend's point...i can't understand why they would band their contributions by age. and, clearly, if a younger employee wanted to contribute more then their contributions would have longer to grow. rather than take anything to court, it might be worthwhile to just ask if those rules can be bent, based upon your keenness to invest for your retirement.

planteria

just been reading a Telegraph Guide, by Ian Cowie, in association with Skipton Financial Services...

they tell a story under the heading "Time Not Timing"

"The sooner you start to make the most of your money with a disciplined approach to saving and investment the easier it will be to achieve your financial aims. The effects of compound interest over long periods of time can be substantial. Take, for example, the City tale of two mythical sisters; Prudence and Extravaganza. When they are both 18 years old, Prudence starts investing £20 a week while Extravaganza hardly notices the same sum disappear at the shops. Assuming for the purpose of simplicity that Prudence achieves a return of 10 per cent per annum, her first year's investment of £1,000 will have rolled up into £6,700 after 20 years. But that is only part of the story because in each of the intervening 19 years she put aside the same sum which would have grown into a total of £57,000 by the time she reached the age of 38.

Even if Prudence stopped any further savings at that point, compound interest of 10 per cent per annum in this example would cause her investments to grow to more than £500,000 by the time she reaches 60 years of age. By contract, if Extravanganza starts investing £20 a week when she is 38 and receives the same compound return of 10 per cent per annum until she reaches 60 years of age - and so has invested for two more years than Prudence - the total fund value achieved by Extravaganza will be only £79,000 or about a sixth of that achieved by Prudence. The explanation is that Prudence had time on her side and used it to achieve her financial objectives."

planteria

10% is a high return, but the point is clear.

i started properly very late, but i am investing hard now, and still have a long time to allow investments to grow. i intend to have above £100k invested by the time i am 40...is that enough for a comfortable retirement:question:

hugheskevi

The explanation is that Prudence had time on her side and used it to achieve her financial objectives."

Not making any adjustments for inflation to that £20 a week contribution despite looking at a 42 year timespan and assuming a very high rate of return go a long was to explaining it too.

I doubt Prudence did achieve her financial objectives, given she failed to index her contributions at all for 20 years and stopped saving over 20 years before retirement - I suspect her investments fell well short of her aspirations despite the stellar returns.

If Prudence had earnings of £15,000 at age 18, and her earnings increased each year by 5% and at age 60 she purchased an annuity at a a rate of 5% (assume no lump sum), her pot would give her 23% of her final salary.

She probably made the mistake of looking at everything in cash terms, and not real terms or relative to average earnings and got carried away with big numbers

Mind you, assuming her sister had the same earnings profile, what on earth was she thinking, saving less than 3% of salary despite not starting saving until 38? And due to not indexing the contribution, saving less than 1% of salary at retirement...