Advise Required on Works Pension Scheme

Moncs_2

Hi,

I am about to start contributing to my work's pension scheme and would Appreciate some advise. I have no idea about pensions so please forgive me if these questions sound silly.

I am (almost) 32 years old and have not had a pension plan before, I plan to contribute 5% to the plan.

I have been told that if I paid 5%, 4& of it would be paid into the main Final Salary Scheme of which the employer add's 11% making it 15% and the other 1% from the 5% which I contribute will be matched making it 2% and put into a seperate AVC fund.

Since by my calculations that is a total of 17%, and I have read that your contributions should be worked out as taking your age and halfing it and that is the percentage you should pay.

My question is, is my 5% contribution enough, or am I missing something?

Also, I have been told it is 1/80th scheme, which I do understand, however what I don't understand is if I say work 20 years, then I will get a quarter of my final salary as my pension, so what difference does it make how much I contribute each month?

Any help would be very grateful. :beer:

MarkyMarkD

Based on what you've said, you are being offered a very good deal indeed - membership of any final salary scheme is a rare thing for new starters nowadays, and matched AVC contributions are even better.

I should say that the amount you are putting in is quite acceptable although it depends on your anticipated retirement date. If it's 60, you'll only have 28 years in the scheme so your pension will probably be 28/60th of your final salary, which is some way short of the current Inland Revenue maximum of 2/3. The AVC fund will go some way towards meeting this shortfall, though.

For the final salary element, it's irrelevant what your contribution is - all that matters is the pension you are going to get on retirement which is based on final salary, not contributions.If you have the money spare, and they will match more than 1% of AVCs, I would put in the maximum - it's free money from them, after all.

Moncs_2

Thanks for the swift reply, just to confirm.

If as you say I retire at 60 as I plan to do, I would then get 28/80 which for
agruments sake say I retire on £50k, my pension would be £17k
(28/80 is 35% and 35% of £50k is £17k)

What is AVC and the maximum I can contribute to that is 4% which gets matched to make 8%.

MarkyMarkD

Like I said, matched AVCs up to 4% is a great deal. /80ths schemes normally give a tax-free lump sump on top, whilst /60th schemes normally give a tax-free lump sum by reducing the pension otherwise payable. So I don't think there's that much difference between the two in reality.

dunstonh

With pension simplification next year, expect some amendments to schemes regarding tax free lump sums.

Moncs_2

Thanks again for the advice

So in reality I will be getting three pensions when I retire... The standard govenment pension (if it still exsists), my Final Salary Pension and also my AVC pension?

How are AVC pensions calculated? For example if I contributed 4% to that and my employer matched that for the 28yr period, is it possible to work out some sort of figure?

Moncs_2

Moncs wrote:

Thanks again for the advice

So in reality I will be getting three pensions when I retire... The standard govenment pension (if it still exsists), my Final Salary Pension and also my AVC pension?

How are AVC pensions calculated? For example if I contributed 4% to that and my employer matched that for the 28yr period, is it possible to work out some sort of figure?

Anyone have an idea?

dunstonh

Most AVCs will be unit linked and will depend on the performance of the investment funds you have selected. For real caution, just take the gross contribution and mulitply it by 28 years and use that as the final fund value. Then assume 6% as an annuity rate (current ballpark figure). If you want to be a little less cautious, then assume 3% as a real growth rate (i.e. inflation plus 3%)