Is this a good company pension scheme?

cupofjava

Hi all,

I've recently started a new job, and they're asking if I want to enroll onto the company pension scheme - this would be my first pension as i'm only 23.

Initially, I can see that paying into a pension (when the company is also paying in) would always be a good decision, based on the fact that you're essentially getting free money. Now, I've been saving money for years, and have a good savings fund going already, and want to be able to continue to pay into that each month.However, I'm not really sure whether this is actually a good plan or not, so some advice would be gratefully appreciated so I can decide whether to continue putting money into savings, or diverting some away into a pension...

Basically, I earn £18,000. I pay 3% of my earnings into the pension, and the company pays 3%. It's a group pension, and the management charge is 0.76%.

The real kicker, however, is there's a financial advisor's charge for the first year of £50/month (apparently its for "setting up the contract" - arranged by the company). Since my contribution is £45, the employers contribution is £45 and tax relief is £11.25 - for the first year this FA charge wipes out any significant benefit. The only plus is that after that year is over all the money is indeed mine.

To me this doesn't sound like that good of a deal, but I don't really have the knowledge or experience to compare it, can anyone help?

thanks!

dunstonh

To me this doesn't sound like that good of a deal

The deal sounds fine. If the employer doesn't pay the administrator/adviser then you have to. Rather than have it in commission form, it is in fee form. So, the charges of the product are lower but the charge for the adviser is explict.

mania112

The Adviser, presumably, has found you a solid plan which he/she thinks will provide you with a higher income in retirement than just going for a default alternative.

Therefore, it's a long term gain for short term pain.

You could pay £600 extra into the pension in year one to make up for the loss?

kidmugsy

cupofjava wrote: »

... there's a financial advisor's charge for the first year of £50/month ... Since my contribution is £45, the employers contribution is £45 and tax relief is £11.25 - for the first year this FA charge wipes out any significant benefit.

That charge is more tolerable the longer you stay with the company. If you are sure you're going to leave within the year, it's not worth contributing: save your money until you are with an employer with a better deal. But, however etc: lots of people who have decided not to join a pension fund on those grounds have found themselves with the same employer twenty years later, and then they really kick themselves for missing 19 years of free money - and bigger, late-career money too.

hyubh

dunstonh wrote: »

The deal sounds fine.

Says a true insider! It's pure rent seeking - if any DB scheme administrator were so costly per member (admin + investment management), it would be out on its ear.

hugheskevi

I've recently started a new job, and they're asking if I want to enroll onto the company pension scheme

So this isn't an automatic enrolment scheme - has your employer not reached their staging date?

Is this a good company pension scheme?

No, pretty poor. A 3% employer contribution is disappointing.

Does it offer salary sacrifice? And does the employer rebate any/all of the employer National Insurance savings? That would make it much more attractive.

the management charge is 0.76%.

A bit higher than a typical 0.5% charge typical in many workplace pensions, but not excessively so.

The real kicker, however, is there's a financial advisor's charge for the first year of £50/month (apparently its for "setting up the contract" - arranged by the company). Since my contribution is £45, the employers contribution is £45 and tax relief is £11.25 - for the first year this FA charge wipes out any significant benefit. The only plus is that after that year is over all the money is indeed mine.

Worth noting that DWP has decided to prohibit this sort of charging for automatic enrolment schemes.

Depending on your employer's arrangements (including staging date) and the outcome of the review in the link above about existing consultancy charge arrangements, you might find that after a year or two the consultancy charge would be dropped anyway, meaning there would be no benefit of suffering the year where you are effectively not getting an employer contribution.

dunstonh

hyubh wrote: »

Says a true insider! It's pure rent seeking - if any DB scheme administrator were so costly per member (admin + investment management), it would be out on its ear.

Defined benefit schemes have economies of scale. Small businesses do not. Unlike defined benefit schemes, the requirements on an adviser are far higher, costly and time consuming. Employers are given the choice to pay for it. Most small employers prefer to pass the cost on to the employee.

mgdavid

dunstonh wrote: »

Defined benefit schemes have economies of scale. Small businesses do not. Unlike defined benefit schemes, the requirements on an adviser are far higher, costly and time consuming. Employers are given the choice to pay for it. Most small employers prefer to pass the cost on to the employee.

How do you know it's a small business?
OP called it a group pension - I reckon it's a pretty poor employer who expects the employees to pay first year charges - and DWP seem to agree.

cupofjava

thanks for the input so far guys, it's really helping. As far as i'm aware, it's not an auto enrolment scheme (I was told i could join after a 3 month probation period) - it was sold to me on joining as a 'company benefit', and yes, it is a small company.

I understand that it's only a cost for a year, however i see it as being quite a hefty cost for doing very little (considering that cost seems to be per member). As for how long i'll stay with the company, I have no idea. I'm young, and it depends on how things progress over the next year. I'll always be looking to better myself.

It's also probably worth noting that the scheme can be carried on once i leave the company - does that make a significant difference?

As i understand it, there is no salary sacrifice. The employer matches the 3% contribution along with the tax relief, that's it.

Perelandra

A slightly different perspective to the above-

It wouldn't be a bad idea to join- the alternatives would be to either not pay into a pension at all (which probably wouldn't be a good choice!), or to set up a personal scheme (which you might never get round to doing, and in the long run will not be able to compete with the free money that's going in).

The scheme isn't great, but it is better than doing nothing at all, and you'll probably thank yourself one day for joining it.

dunstonh

How do you know it's a small business?

Mainly on the basis that an adviser would not typically be involved in largescale schemes. Medium size maybe but typcially advisers deal with the smaller companies and administrators deal with the larger ones.

OP called it a group pension

Group personal pensions are typically small to medium size.

however i see it as being quite a hefty cost for doing very little

With your knowledge of these things, how would you cost it?