10 years to go- Worth joining work pension?

buel

Hi all,
Please can I have some advice? Basically, I had a 'discussion' with a work colleague regarding our company pension. He was saying that he doesn't think it was worth him joining (he already has a final salary pension due from a previous job) for 'just' 10 years and I was explaining that he was basically turning down free money.

The details are:
Employee contribution: £54.56
Employee tax relief: £13.64
Employer contribution: £51.15
Total: £119.35

Charges:
Group plan charge: 0.55%
Additional investment charge: 0.00%
Overall management charge: 0.55%

There was an initial charge of one full monthly contribution.

I know this is all subject to opinion and guesswork but please can someone give me an idea of what he would get after 10 years.

I would have had a guess myself but to be truthful I don't know how to start calculating such things as average pay increases over 10 years, possible performance over 10 years, etc.
Please could someone give me a ballpark figure. Ideally I would like a ballpark figure of what the total amount might be and then what it would/could provide by way of a monthly/annual amount if converted to an annuity.

If there are any more details you need, please ask me.

Thank you all.

bristol_pilot

Ball-park figure a total guestimate would be a pot around £15k, giving an annuity of around £60 per month expressed in today's money ....or he might be able to take the whole pot under triviality (don't count on it). Of this, around half is coming from the employer....so why turn down free money, even if it isn't very much? If it still exists in 10 years time, he would be able to take out 25% as tax-free lump sum anyway.

As with all pensions, whether contributing is 'worth it' depends on many factors including how long one expects to live which is thankfully unknown.

If this small extra pension might push him into 40% tax when he is a pensioner (if he has a really really really good pension from his previous job and other income), it might be a bad idea to join.

buel

bristol_pilot wrote: »

If this small extra pension might push him into 40% tax when he is a pensioner (if he has a really really really good pension from his previous job and other income), it might be a bad idea to join.

Thank you for that, no, it will not be anywhere near pushing him in to the 40% bracket.

Thank you again.

Linton

Assuming
- contributions increase with inflation.
- investment return of 4% above inflation
- annuity rates of 3% (inflation linked) and 6%(fixed)

At current values gross annuity is: £40/month inflation linked, £80/month fixed

So, for what he is paying in for 10 years he gets an equivalent value back (ballpark, before tax) for the rest of his life. Life expectancy at 65 for a male is currently around 85: - 20 years. That's for a total pot of around £16K.

The problem is that £50/month is a very low payment and 10 years is a very short time to gain the advantages of compound interest.

kidmugsy

Assuming that his contributions increase at a rate that matches inflation, and that his investments grow at the same rate, his pot will add up to £14322 of purchasing power in present-day money, of which he'll withdraw £3580 tax-free. So he'll have £10742 left. That will have cost him £54.56x12x10 - £3580 = £2967. The ratio £10742/£2967 = 3.62. So he will have more than trebled his money. Put another way, if he takes an annuity paying, say, 6%p.a. it will be equivalent to an annuity return of 6%x3.62 i.e. 21%p.a. If it's taxed at 20% that falls to 17.4%. So it'll have paid for itself in less than six years and the rest of his life he's in profit. Where on earth could he find the equivalent?

DigForVictory

Other's skills at maths awe me.

I wouldn't bother with numbers, I'd stick with "Free Money"! Even if I fell over dead after 9 years, I like the thought my spouse gets a bit extra widower's pension.
(I'd rather be alive of course, but Things Happen.)

bigadaj

DigForVictory wrote: »

Other's skills at maths awe me.

I wouldn't bother with numbers, I'd stick with "Free Money"! Even if I fell over dead after 9 years, I like the thought my spouse gets a bit extra widower's pension.
(I'd rather be alive of course, but Things Happen.)

People are very helpful but there are plenty of calculators on the sites of brokers and insurance companies that will allow you to do this as well, no great maths skill necessary just a sense check and worth doing on a couple of sites as a further check.

atush

I too would stick with free money in excess of 100% of what he puts in himself.

It is a no brainer.

Ganga

I have joined the company pension scheme and i am over 63,Why? as others have stated free money from my employer plus THREE YEARS SALARY IF I DIE IN EMPLOYMENT! i better watch what my wife puts in my sandwiches for work!( joking ) but what have i got to loose?

Ganga

buel10

Hi, just a quick question regarding the Employee contribution of £54.56, can someone tell me how much I/he will pay in net pay, as in how much will be taken from my 'take home' pay?

Thank you and apologies for the naive question.

PeacefulWaters

buel10 wrote: »

Hi, just a quick question regarding the Employee contribution of £54.56, can someone tell me how much I/he will pay in net pay, as in how much will be taken from my 'take home' pay?

Thank you and apologies for the naive question.

Your first post implies £54.56 is the net figure.

So £54.56.

Your friend could use this extra pot to retire earlier, before his DB scheme kicks in.

He'd be a mug not to. £7k in. £14k out. Plus investment growth.