Public v Private Sector Pensions

Your_Hero

Backbiter wrote: »

What is says is that most people have simply neglected to make adequate provision for their retirement.
It also says that averages are fairly meaningless, when they will include the pension pots of those who are in the early stages of their working lives and will not yet have built up a decent pension pot, which takes decades.
If the £30k figure were the average of those close to retirement, it would mean they could look forward to an annual pension of around £2000 a year, or £40 a week. If they have been making pension contributions for 40 years to build up that fund, they must have been minuscule.

True, pensions were neglected. Hence auto enrolment was introduced. But even then, the minimum contribution is 8% when 2018 comes. Most people will stick to this minimum.

My point is clear though, a £550,000 pension pot is simply not achievable for the vast majority of people.


Edit: no you have misunderstood. Average pension pot at retirement is around £30,000. It is actually £36,800 according to ABI last year.

jamesd

Your_Hero wrote: »

Whilst I appreciate the optimism in your post, it is fair to say that your assumptions are extremely unrealistic.

I agree but not for the reason you gave. Historic FTSE return is a bit over 5.1% plus inflation, not the lower value used. That greatly cuts the required contribution level and the fifty year pre-retirement planning period allows ample time for adjustments.

Your_Hero wrote: »

A 3% salary increase every year is probably unrealistic too - many people do not even have wage rises that keep up with inflation. Also, the inflation rate is normally assumed at 2.5%.

It's a bit unrealsitic because the normal long term UK result for pay increases is RPI plus 1%.

That's part of why we see pensioners becoming poor over time as wages increase above their inflation-linking so they gradually fall below 60% of average income even though their spending capacity hasn't changed.

Your_Hero wrote: »

All these factors would mean that saving £550,000 pension is unrealistic dream for most individuals. It is possible, but only for a very very small minority.

I do not agree. It is easily possible at low cost over the fifty year planing horizon being considered here. Just 6% employee contribution plus employer matching and tax relief will do the job if historic FTSE returns are achieved using a tracker product.

Your_Hero wrote: »

The average pension pot in the UK is £30,000. I think that says a lot.

More than one pot per person but also lots of non-pension options and a huge number of people not preparing much, wrongly assuming that the state pension will suffice. Though for a couple it might, at flat rate levels, in lower cost areas.

Your_Hero wrote: »

Auto-enrolment ought to help, but even when AE is at full steam in 2018, employer only have to contribute 3%, with a total contribution rate (employer, employee and tax relief combined) is only 8%.

Well, that would result in a pot size of £355,800 or so in real terms and ignoring the above inflation pay rises, assuming it is and remains an entry level job for life. That's around £14,230 of gross income. Add say £8,000 for the flat rate state pension and it's a £22,230 result, well above today's median pensioner income of a bit under £18,000. So lots of good potential for auto-enrolment if it does even reasonably decently well at the planned levels.

jamesd

Your_Hero wrote: »

Average pension pot at retirement is around £30,000. It is actually £36,800 according to ABI last year.

Would you be kind enough to provide a link to that so I can see just what they were using as their definition of an average pension pot? I'm asking in part because i normally associate their figures with average annuity purchase value and that's a very different thing.

For annuities in 2013 they report a mean purchase price of £35,600 and median of £20,000 and it's probably safe to assume that those are after taking a 25% lump sum. Many people will have more than one pension pot or make more than one annuity purchase so those numbers are likely to significantly understate the total pension pot sizes at retirement. But of course this isn't all retires and it also ignores non-pension assets used as part of retirement planning.

spock007

Wow, lots of replies!
Apologies, I will have to read them at the weekend - not being funny in any way but work has been mental and I've not got the time right now.
Look forward to it!

mgdavid

Your_Hero wrote: »

Whilst I appreciate the optimism in your post, it is fair to say that your assumptions are extremely unrealistic. There aren't many people who choose to afford to pay 25% (employer and employee combined) into their pension pot. .........

fixed that for you....

Thrugelmir

jamesd wrote: »

I agree but not for the reason you gave. Historic FTSE return is a bit over 5.1% plus inflation, not the lower value used. That greatly cuts the required contribution level and the fifty year pre-retirement planning period allows ample time for adjustments.

So dangerous to take historical data and project forward. The 50 years preceding 2007/08 were arguably of a totally different era. Far too simplistic just to take data without understanding the why's.

jamesd

The historic data used covered the years from 1899 to 2009 or so, I forget just which ending year. That covered the great depression, two world wars and many different eras.

The future will be different in many ways and monitoring and adjusting of where and how much to invest will undoubtedly be necessary. Still, that is fifty years of future investing during a full working life and perhaps another thirty of investing during retirement, with the whole world available to invest in.

Of course I wouldn't want to use solely that data with no safety margins and no monitoring. Personally I like 50-100% safety margins before retiring, with regular monitoring and adjusting as required.

Tromking

kidmugsy wrote: »

A better question is whether it is wise. Of course it isn't. Move 'em all onto DC for the future. And if that doesn't prove good enough to attract and retain staff, then pay 'em more. My guess is that across most of the country there wouldn't be the least need to pay the generality of employees more, but there are bound to be pockets of expertise where you'd need to, and particular places. No government would have the spine to do it of course.

The future you speak of is already here in my area of the civil service. Recruitment and retention rates are woeful and the government has now taken the unprecedented step of sending out begging letters to recently departed staff in an attempt to just provide a rudimentary service to the public. Only time will tell if our quality public services have been sacrificed on the altar of short term spending priorities.

jem16

BobQ wrote: »

Several posters on here seem to be under the same illusion. NUVOS has NEVER been a final salary scheme. It was introduced in 2007 and is a Career Average Scheme (CARE).

Thank you - I stand corrected.

Although it does have to be said that it is a Defined Benefit scheme and for those that stayed on a similar grade throughout their career, the outcome would not be greatly different from a final salary Defined Benefit scheme.

The Pension Calculated does seem high but whatever the calculation it not based on 80ths of FS. The benefits accrue at 2.3% of salary revalued by CPI.

Ok let's just take it as 2.3% with no revaluation for ease of working it out. On £23k 2.3% accrued would be £529. After 40 years this would simply be £529 x 40 which equals £21,160 so we can see where the OP is getting a £22k figure from.

However you cannot compare a £23k salary today with a £22k pension in 40 years and think it's wonderful, only £1k less in pension than what I'm earning today which is pretty much the inference from the OP.

After a lifetime of work in the public sector my pension will be four times what my first salary was. However it's less then half of my current final salary. With a CARE scheme it wouldn't be any different as I have remained non-management.

So I think it would be pretty fair to say that the OP's friend would be expecting too much if he thinks his pension in 40 years time will be just less than he will be earning in 40 years.

bigadaj

I think the real problem isn't the public v private debate but the inter generational unfairness. Young people now will be paying for the accrued final salary schemes for decades to come with no opportunity to benefit from them. It would be unfair to chnage retrospectively but it's also very unfair to force the kids and grand kids to pay for the future.