13% non-contributory pension - cash or contribution?

martinbsp

Bit of background...our organisation pays a 13% non-contributory pension. I'm 43 and have been in the plan for just over 3 years. Total payments amount to circa £18,000 to date.

I used the pensions 'estimator' on the pension provider's website to estimate my pension at age 65 (assuming current pension contributions stay the same) and it worked out that I'd get just over £2,500 per year (lowest estimate). That's really made me think whether this is worth it.

I'm now wondering whether I shouldn't opt-out of the scheme and ask to be paid the money straight up and put it into an ISA. £2500 a year is incredible, I've rather naively thought it would be a lot more than that.

If I start putting those contributions into an ISA instead I'm thinking I'd be a lot better off come 65 (assuming I don't spend it) as I'd have access to all the money.

Thoughts? Anyone already doing something similar?

dunstonh

I used the pensions 'estimator' on the pension provider's website to estimate my pension at age 65 (assuming current pension contributions stay the same) and it worked out that I'd get just over £2,500 per year (lowest estimate). That's really made me think whether this is worth it.

First of all, it is not an estimate. It is an example projection rate using a number of assumptions. Did the assumptions you used realistic? Were they in todays terms or future money terms?

I'm now wondering whether I shouldn't opt-out of the scheme and ask to be paid the money straight up and put it into an ISA. £2500 a year is incredible, I've rather naively thought it would be a lot more than that.

Pensions and ISAs have the same investment options and charges. So, if we work on the basis of that, the only difference is the maturity process and tax. In the unlikely event your employer agrees to it, they and you would have to pay NI on it as well you paying tax at your highest rate.

So, the amount going into the ISA would be lower. Therefore the final pot will be lower than the pension. ergo, the income you can take will be lower as well.

Thoughts?

My gut feeling is that you have not understood the assumptions used. I suspect that the figures quoted to you were todays money terms using a joint life annuity with annual indexation. How does the ISA compare when you have calculated it using the same assumptions?

if the assumptions are not suitable for your situation, have you changed them so they are?

Lokolo

I also think its highly unlikely your company will pay it as additional salary.

After tax that 13% contribution comes to 8.84% (7.67% inc student loan). After higher rate tax, which you OP seems to suggest, it's 7.54% (6.37% inc student loan).

CLAPTON

if three years of contribution are 18k then presumbaly you are paying in 6k per annum?

so over 22 more years you will pay in 132,000
so you will have 150,000 assuming no growth what so ever (in todays terms)

even at 3% annunity that would give 4,200 pa so there is something pretty wrong

martinbsp

Actually that's the very reason I'm asking as I have been given the option of taking it in cash (as I'm prepared to accept the tax implications you've outlined above). I asked and they agreed subject to my demonstrating that I've taken advice and subsequently acted off my own accord (by advice they mean proper advice). If I'm told by the IFA that I'd be nuts to give up the pension but still want to do so having sought advice then my company would be prepared to do so.

I assumed I was retiring at 65 (well that's the rather rosy/unrealistic ideal).

No idea how that stacks up against an ISA. I was just blown away by the small amount of annual return.

Vis-a-vis assumptions, here's what I selected:

- I would make no additional payments myself
- the pension contribution would stay exactly the same over the remainder of the period
- that the pension would keep up with inflation
- ticked joint life annuity (or its equivalent)

I don't believe there were any other options to choose from save adjusting the sliders for retirement age/extra contributions.

And you're right, I probably don't fully understand the implications of what was produced in the estimate, no doubt about that. But what I was really questioning is whether having access to ALL the money via ISAs (and assuming it hasn't been squandered on the way) would not be better (broadly speaking) than receiving what on the face of it seems to be a very low amount of money per year.

Lokolo

What calculator did you use?

martinbsp

CLAPTON wrote: »

if three years of contribution are 18k then presumbaly you are paying in 6k per annum?

That's roughly what my company pays in, yes.

martinbsp

Lokolo wrote: »

What calculator did you use?

One provided by my pension provider on login

McKneff

but you will be putting more money into your pension surely for xxx amount of years.

N1AK

martinbsp wrote: »

Actually that's the very reason I'm asking as I have been given the option of taking it in cash (as I'm prepared to accept the tax implications you've outlined above). I asked and they agreed subject to my demonstrating that I've taken advice and subsequently acted off my own accord (by advice they mean proper advice). If I'm told by the IFA that I'd be nuts to give up the pension but still want to do so having sought advice then my company would be prepared to do so.

I assumed I was retiring at 65 (well that's the rather rosy/unrealistic ideal).

No idea how that stacks up against an ISA. I was just blown away by the small amount of annual return.

Vis-a-vis assumptions, here's what I selected:

- I would make no additional payments myself
- the pension contribution would stay exactly the same over the remainder of the period
- that the pension would keep up with inflation
- ticked joint life annuity (or its equivalent)

I don't believe there were any other options to choose from save adjusting the sliders for retirement age/extra contributions.

And you're right, I probably don't fully understand the implications of what was produced in the estimate, no doubt about that. But what I was really questioning is whether having access to ALL the money via ISAs (and assuming it hasn't been squandered on the way) would not be better (broadly speaking) than receiving what on the face of it seems to be a very low amount of money per year.

Firstly you said that was the 'worst case' projection. You need to consider it, but also consider how likely it is.

If they gave you the 13% then after tax you'd be talking about having saved ~£9k by now instead. How much do you really think that £9k would let you spend each year in retirement?

You've also selected options that ensure your pension would be paid to your spouse if you die until their death and for it to be inflation linked. That means that if either of you lived until 100 then the pension would have paid out the equivalent of £2k, in real terms, every year for 35 years.

martinbsp

N1AK wrote: »

Firstly you said that was the 'worst case' projection. You need to consider it, but also consider how likely it is.

If they gave you the 13% then after tax you'd be talking about having saved ~£9k by now instead. How much do you really think that £9k would let you spend each year in retirement?

You've also selected options that ensure your pension would be paid to your spouse if you die until their death and for it to be inflation linked. That means that if either of you lived until 100 then the pension would have paid out the equivalent of £2k, in real terms, every year for 35 years.

Good point. But let's assume for arguments sake that I saved £3k a year in an ISA meaning I'd have £60,000 ISA savings. I'd have access to all of that. That would provide a £2k income every year for 30 years (up to age 95), so 5 years short of the 35 years the pension provides me with*

So surely extrapolating the argument above it comes down to whether I want to secure an income between the age of 95-100?

(*My maths is terrible, the logic probably starts falling apart by this stage)