Final Salary Pension at RBS and options.

scottp_2

Hi,

At 17 I am currently ineligible for the RBS Final Salary Pension scheme, but from October (when I turn 18) I believe I will be. As I started working for RBS before the scheme was withdrawn, I can either choose to stay with this pension, or ‘opt-out’ and receive a 15% pay increase (around £100 a month, which would be saved, not frittered).
I do not plan to stay with RBS for much longer (probably no more than 3 years), so would it be worth staying with it, as because of my low wage (£1000 a month before tax) the contribution is not that high.
If I were to keep with it, what would my options be in respect to the accumulated fund?
If I were to move to an employer who does not contribute to a pension scheme on my behalf, what would my options be, as I want to start paying into a pension early so that I can keep costs low, rather than ‘catching up’ on lost years when I’m in my 30’s and 40’s.
If I were to start contributing on my own at say 23, what would be a sensible amount to put away each month? No way do I want to be like many now retired people, living on only state benefits or a small works pension that they forgot about!
I know that no advice can be given, and that I will have to consult an IFA when the time comes, but it would be nice to be given a step in the right direction now rather than later.

Thanks Alot for you help!

Scott

bigbloke45

Hi, scottp. I started to give you a reasoned and mathematically correct argument as to why you should go into the RBS scheme. Then I thought, would you really invest the extra 15% of salary if you took that choice?

Then I thought, you're not even 18 yet. Have you got your Playstation3, Ipod, Iphone, wii etc.? If not, how will you pay for them?(assuming you don't have a dad with bottomless pockets).

Go spend the extra 15%, you'll NEVER invest it really, will you? This way it may stop you getting into/further into debt.

I accept that this advice is totally financially and probably politically incorrect as well but, hell you're only young once!

I expect some flack for this, could be interesting!

darich

Given that final salary pensions are being done away with I'd advise opting in. Once you're out, you won't get back in.
I'm on a final salary and I've been paying into it since i was 17 - now almost 35. When i retire at around 55 (however, I'm aiming for closer to 50) I'll have a pension comaprable with other people's salary and it's because I'm on a final salary pension.

Bigbloke's advice is, as he put it "politically incorrect". Basically he's told you to opt out of one of the best pensions around and spend the payrise you'll get. Since he's also said "could be interesting" i suspect he's looking to start a debate or arguement - but I'm not rising to it.

The other way to look at it is this way.........a 15% payrise is pretty good.....but why would RBS offer you that much to opt out of a scheme? It's because long term you'd get more from them by opting in. And saying you'll only be at the employer for a few years is pointless - if it's good pay with a good salary why would you leave? You probably won't get the same pension scheme at your next employer.

I will agree with bigbloke in one respect - i doubt you'd invest the whole lot the way i pension scheme would invest it.

Go with the pension scheme.

Curious_Moose

If you have the chance to join the RBS final salary scheme, you should take it.

What you should do for your pension arrangements after you leave is a separate question. As far as whatever pension you had earned in the RBS scheme is concerned, you would have the choice of leaving it with the RBS or transferring the cash equivalent to another pension arrangement.

I am in a money purchase pension scheme. If I had the chance of joining the RBS final salary scheme, I would certainly do so.

Membership of the scheme is almost certainly worth more than the 15% salary increase. Put it another way, why would RBS offer employees the extra 15% to opt out of the final salary scheme if it was not a cheaper option for the company?

kavomix

From what I'm aware the age to join the RBS pension scheme is age 20, not 18. I worked for RBS at age 18/19 and remember I was not part of the pension scheme (not by choice, I would jump at the chance to be on their final salary scheme)

ahh just found this, it does state age 20 under the heading final salary pension

http://www.rbs.com/careers03.asp?id=CAREERS/SEARCH_AND_APPLY_FOR_JOBS/WORKING_IN_OUR_GROUP_FUNCTIONS_DIVISION/YOUR_REWARDS

here's what it states

Final Salary Pension Scheme
Do you want to feel your future is secure? We offer immediate membership of the RBS Group Pension Fund (from the age of 20). It costs nothing to participate and pension is based on final salary and length of service, subject to scheme rules. We are one of the very few employers still offering this benefit to new employees.

With this info and the fact you said you don't see yourself being there for more than 3yrs I would suggest taking the pay rise. I have made sure that the people I know still working for RBS are keeping the pension as they have now 2/3yrs built up, and more to come, so more benefical. But the thing that will decide for you is

Do you see yourself working for RBS for a long time?

bigbloke45

i, scottp, it's me again. In reality, I really think you should take the RBS final salary option. It is a rare opportunity nowadays and one that you may NEVER get again! kavomix has hit the nail on the head, do you yourself working for RBS for a long time? You say you only expect to be there for few years, but you might stay and then having not joined the final salary scheme would have been the worst decision you made.

Here are some sums; your current salary is £12,000, each year you will accumulate 1/60th. of this and, as your salary rises so will your benefit exactly in line with your salary increases. If you leave RBS, they will increase your leaving benefit (the number of 60ths. accumulated to the date of your leaving) by the rate of RPI until your normal retirement date.

Sounds boring, but the results aren't! If you stayed only 3 years, you would have accumulated £600 a year pension, but this would be increased with inflation. At age 60 this would be worth £2769 a year if inflation averaged 4%. You would need a fund of about £70,000 to buy this eleswhere. Not bad for next to nothing?

One last idea, every investment decision has an "opportunity cost" . This what you give up by not doing something different e.g. spending the money. You have to decide if £70,000 is worth giving up!.

scottp_2

Do you see yourself working for RBS for a long time?

The answer to that question would be a no. The salary is not that good, and I would probably have to be an area manager to get the basic salary of an independent mortgage adviser. The bank makes £££Billions, not by paying its staff excellent wages (well except those in the ivory tower! lol)
I just don’t see it as a lifelong career, more of a stepping stone into the financial world.
So if I allowed the money to be paid into the pension scheme, I would then be able to move it to a product of my choice at a later date, in other words, the money isn’t just wasted?
kavomix - Thanks for that, should have read the small print in the contract! I assumed I would be included as they keep sending me all the pension leaflets and letters.
So realistically we are looking at the most 3 years paying into the scheme, what would be a good option? I know what you’re saying about that I would kick myself if I stayed, but the way it’s looking, that isn’t going to happen.
bigbloke45 - Young I may be, but i am not stupid, I would not get myself into debt for material possessions, I have everything I NEED now, and have enough free income to buy what I WANT too. I don’t get bailed out by my parents for anything; I pay for everything I buy. Only when its birthday/Christmas do they get me anything significant (I'm not saying I am a deprived child by any means!). I have a 02 reg car that I paid for myself from my wages, I paid the insurance outright and I pay all the repair/running costs. I don’t owe anyone a penny! I am very sensible with my money and I know that I wouldn’t spend the extra 15% on rubbish. What you said was not politically incorrect, as many of today’s youth are getting into debt to keep up with the latest fashion and have the best gadgets!

Thanks a lot for your suggestions so far, please keep them coming!

Scott

firesidemaid

i would just like to add that there are probably many of us that also thought we could not see ourselves working for the same company for more than a few years, and hey presto here we are however many years later!

like you say there are many different jobs/roles within rbs and related sidelines.

i also would go into the scheme - find out meanwhile when you can join. are cos. allowed to state at what age people join? is that not age-ist?

even 3 years is a good 10th of 13th of your final salary per year. also there may be life cover and other perks too.

Andy_L

bigbloke45 wrote: »

Sounds boring, but the results aren't! If you stayed only 3 years, you would have accumulated £600 a year pension, but this would be increased with inflation. At age 60 this would be worth £2769 a year if inflation averaged 4%. You would need a fund of about £70,000 to buy this eleswhere. Not bad for next to nothing?

Except that will still only be £600 in real terms

darich

Andy_L wrote: »

Except that will still only be £600 in real terms

agreed - the amount would be frozen until it's time to pay out. I doubt the amount would increase while you're not paying into it

bigbloke45

Except that will still only be £600 in real terms

Yes, Andy L the INCOME will still be £600 in real terms, but I think you're missing the point here, final salary schemes are "defined benefit" schemes, this means that, assuming the employer doesn't collapse and the pension scheme become worthless ( don't expect any help from good old Gordon and his cronies here!), it is the BENEFIT that is preserved. I was trying to illustrate how much fund would be need at retirement to buy the equivalent benefit. It is the employer who takes the financial risk in a defined benefit scheme and not the member, in a money purchase scheme, a "defined contribution" scheme, it is the contribution that is defined and future benefits depend upon investment returns, annuity rates etc. and it is the member who takes the risk.

All the above means that, if you want to equal a £600 a year pension in real terms in 39 years time, you need to be able to invest at a sufficient rate of return to match this. scottp has said he would get 15% of salary if he opted out of the RBS scheme; this is little more than a "bribe". But if he did, he would net about £4212. Investing this in an ISA, he would need a constant annual return of about 7.5% to achieve the same result, if ISA's actually lasted that long. If you adjust the £70,000 to the present value using an inflation rate of 4%, this then equates to a fund of £15163, which gives an income of £600 (£606.64, but who's counting). On this basis, you can equate
a net salary increase of some £4,200 (3 years net of basic rate tax)to the present value of £15163.

Having read all I've written above, I think it just about encapsulates what a difficult decision this is. I can only say I think a "bird in the bush" principle might apply here. Scottp seems to be very on the ball when it comes to finance and doesn't seem to need to spend more currently. On balance I still think he should join the scheme!