Morrison's Pension and HSBC Stakeholder.

seven-day-weekend

Posting obo my son.

He joined Morrison's Pension scheme last year, since then I have found out via this forum that it isn't a terribly good one for someone his age (almost 34) - don't quite understand why.

Before that he was enrolled (via Morrisons) into a Stakeholder Pension with HSBC for a couple of years. We thought that this had been transferred into the Morrisons Pension.

However today he has had a statement from them and amongst other things it says he can continue to pay into it if he wishes. It is invested in FTSE All Share Index Tracker Fund.

Given that the Morrison's Pension is not brilliant for someone his age, should he pay into this Stakeholder Pension as well (I assume there will be no Morrison's Contribution). Or just one or the other. Or can he (and should he) transfer the Stakeholder into the Morrison's one.

My son does not earn much, he has a 24 hour contract at £6.56 p.h. He is hoping to get more hours at some point in the future. He pays a percentage into the Morrison's one (but I can't remember what it is) and Morrisons contribute as well.

He is not married and has no children (although he does have a live-in long-term partner) and has a mortgage of £40k which he has paid for two years.

I will do my best to answer any questions.

Your thoughts welcomed.

Link to Morrisons Pension:

http://www.mymorrisonsretirementsaver.co.uk/

opinions4u

He pays a percentage into the Morrison's one (but I can't remember what it is) and Morrisons contribute as well.

If he's paying 5% in and Morrisons are adding 11% to it, then it's a fairly decent defined contribution scheme. Better funded schemes will be few and far between and it's almost certainly going to be the best options for him.

There also seems to be some sort of volatility guarantee on contributions to stop them falling in value in year one, but I've not quite got my head round how this works.

So his first 5% of pension contributions should go in to the Morrisons scheme (and probably already do).

Beyond that 5% (plus employer contribution) the choice is up to him. I suspect on a low income I wouldn't actually contribute anything elsewhere. Looking in to the charges of the Morrisions AVC scheme and comparing them to the HSBC choice might give him an idea of value. What it doesn't tell him is which fund will grow fastest!

seven-day-weekend

Thanks, opinions4u. I will take on board what you have said. Love your signature quote.

hyubh

opinions4u wrote: »

If he's paying 5% in and Morrisons are adding 11% to it, then it's a fairly decent defined contribution scheme.

Going by the link it's a cash balance scheme where the revaluation rate is inflation capped to 2.5%. For a younger person at least that's clearly not as good as a DC scheme with an employer rate of 11%, given the value of earlier years' membership will progressively decrease in real terms (unless inflation stays ultra-low over a long period of time).

Better funded schemes will be few and far between

No doubt they're the devil incarnate etc. etc., but as we're talking supermarkets, Tesco's current scheme is a proper CARE one...

There also seems to be some sort of volatility guarantee on contributions to stop them falling in value in year one, but I've not quite got my head round how this works.

It seems to be a DB scheme where what is defined is not a given amount of pension, but a given amount of money to buy a pension with.

Linton

The reason why there is some concern here about the scheme is that considering two options:

A) join scheme at 20 and work till 65

Pay same employee contribution into private scheme until 40 and then join Morrisons scheme until 65

It turns out that (B) is likely to give a better return than (A). The reason is that the Morrisons scheme only increases the pot by CPI inflation up to 2.5% annually whereas a private pension would get investment returns of say 5% or more. Over a long period this becomes more significant than the employers contribution. Under those circumstances one could say that the scheme is relatively unfair to young employees.

However your son is 34 and not 20. I have put together a spreadsheet calculation which shows that at that age opting in to the Morrisons scheme is worthwhile compared with the private pension option.

As to whether he should put extra in I agree with Opinions. Its a marginal call - saving regularly into a cash ISA initially and then perhaps into an S&S ISA may give him more flexibility in the future on his low income.

seven-day-weekend

Thanks for your comments, they have really helped. I will suggest he carries on with the Morrisons pension and saves regularly into an ISA.

jamesd

seven-day-weekend wrote: »

since then I have found out via this forum that it isn't a terribly good one for someone his age (almost 34) - don't quite understand why.

Because there is no compound investment growth on the money, just the flat initial employer addition. After a while the value of that growth exceeds the value of the employer contribution and it becomes better not to be in the Morrison's pension scheme. The break even point is in the 20-30 years from retirement sort of range. Within 20 years it's probably better to be in it, for the extra certainty, more than 30 years away and it's probably better not to be in it for the extra value you end up with. In the middle it depends more on investment results and desire to retire before scheme normal retirement age.

I'm curious about how Linton gets a higher number of years to retirement age.

But initially at least, no change on the "he should be in the Morrison's scheme" part of the answer from the last discussion.

haf63 wrote: »

However today he has had a statement from them and amongst other things it says he can continue to pay into it if he wishes. It is invested in FTSE All Share Index Tracker Fund.

Given that the Morrison's Pension is not brilliant for someone his age, should he pay into this Stakeholder Pension as well (I assume there will be no Morrison's Contribution). Or just one or the other. Or can he (and should he) transfer the Stakeholder into the Morrison's one.

Given his specific limits on intellectual capability which I recall from our previous combination, while the Morrison's one isn't a good deal at his age, I think it's still useful for him to have the certainty of being in that one, but combined with using a personal pension for additional money.

haf63 wrote: »

He is not married and has no children (although he does have a live-in long-term partner) and has a mortgage of £40k which he has paid for two years.

I wonder whether that might be clearable at 55 using a pension lump sum from a personal pension. It's the most efficient way I know of to pay for mortgage equity.

The stakeholder can probably be replaced by a cheaper personal pension these days. FTSE trackers costing around 0.2-0.4% are available. He should really be using a global including UK tracker and/or perhaps some sort of mixed asset fund rather than just UK, though. Stakeholder does beat Morrison's for extra contributions, this is just tweaking to see that he gets the lowest costs overall for the non-Morrisons bit.

jamesd

Linton wrote: »

It turns out that (B) is likely to give a better return than (A). The reason is that the Morrisons scheme only increases the pot by CPI inflation up to 2.5% annually whereas a private pension would get investment returns of say 5% or more.

I'm puzzled by this. Inflation-adjusted UK market has been around 5.2% plus inflation. And the Morrisons value is also fixed in inflation adjusted terms. Yet you appear to be adding additional inflation adjustment to Morrisons or not using the pre-inflation value from the non-Morrisons option. So I wonder whether you might not have a mistake in your calculation?

We agree that there's a break-even point, your number is just sufficiently far away from mine that I want to understand why there's such a difference. At the moment doubled inflation adjustment looks likely to be it.

Linton

jamesd wrote: »

I'm puzzled by this. Inflation-adjusted UK market has been around 5.2% plus inflation. And the Morrisons value is also fixed in inflation adjusted terms. Yet you appear to be adding additional inflation adjustment to Morrisons or not using the pre-inflation value from the non-Morrisons option. So I wonder whether you might not have a mistake in your calculation?

We agree that there's a break-even point, your number is just sufficiently far away from mine that I want to understand why there's such a difference. At the moment doubled inflation adjustment looks likely to be it.

I am using a lower investment return than you - 2.5% above CPI inflation of 2.5%. I feel your 5.2% figure, although it may have historical backing, is a bit too ambitious for a private pension with funds chosen with little investment knowledge and possibly more cautious than would be ideal. Also the certainty of the Morrison return compared with a normal fund investment must be worth something, though rather difficult to quantify. On the other hand should inflation exceed 2.5% for a significant period the Morrisons option would lose out.

However the figures are in the same ball park given the arbitrariness of the assumptions and we agree on what would be sensible for the OP.

As far as I know we still dont know what happens to early leavers. This as we discussed previously could change everything, given that most low paid Morrisons employees are presumably not likely to spend their working lives there anyway.

jamesd

Thanks. Could I persuade you to use historical returns, less some tracker charges, and a range for under performance, the 20-30 year sort of approach I used? Would be nice to see say a range of years for different assumed returns, some better than the past, some worse. I like the education that inherently comes from showing the uncertainty to people explicitly.

If not in general, would you mind running the numbers with historical returns once - say 5% to allow for charges of 0.2% - just so I can confirm that we're in good agreement if those are used? No reason why I might not be missing something and a cross-check is always useful.

I agree that the certainty of return of Morrisons has value and also with the inflation risk aspect that has negative value.

seven-day-weekend

Thanks all, great advice.

I would just like to say to James D, there is nothing wrong with his intellectual ability, he is very intelligent, but the way he is 'wired' makes certain numerical things beyond him. His Pension is one of these things. . It's like a particular type of dyslexia, he just cannot get his head round it. (He has mild Aspergers Syndrome).

He can talk about String Theory in great detail though

He'll stick with the suggestion of the Morrison's Pension and ISA. If by any chance he does leave Morrisons, he still has the HSBC pension he can pay into.

Thanks again all.