Opt out of 2015 Police pension

hugheskevi

Assume:

OP is 34
OP earns £40,000
Contribution rate is 13.44%
OP could get annual 6% return in a SIPP
OP leaves scheme in 2016 after 1 year of membership
OP State Pension Age is 68
CPI is 2% in all years

The OP would accrue £723 of pension in the police scheme. This is uprated by CPI+1.25% in year one, then by CPI after the OP has left. This would reach, in cash terms, £1,436 at age 68.

The member pension contribution for that year is £5,376. By age 68 this would grow to £38,982 if invested in a SIPP returning 6% (net of fees).

Using the annuity calculator at MAS suggests an annuity rate of 3.36% for a 68 year old wanting an inflation linked annuity with 50% spouse pension and 5 year guarantee, taking no tax free lump sum.

That suggests an annuity of £1,308 could be purchased (assuming no change in annuity rates) if the contribution were instead invested in a SIPP and the pot of £38,982 used to buy an annuity.

That is still inferior to being in the scheme (annual pension of £1,436), but not massively so. If the OP instead remained in the scheme for longer the scheme would become increasingly advantageous.

Could those who argue this scheme is so massively good that alternatives should not even be considered (particularly when OP stated he may leave the service - "Given the state of Policing at the moment I don't know if I will serve the full 26 years until I reach 60") back up those assertions with some figures?

PeacefulWaters

Give me a guarantee over an assumed growth rate any day of the week.

greenglide

And any chance of promotion leading to a salary increase in service?

Andy_L

greenglide wrote: »

And any chance of promotion leading to a salary increase in service?

The new scheme is Career average so the the benefits of promotion aren't backdated over previous pension accrual as used to be the case with final salary schemes

AlanP_2

Andy_L wrote: »

The new scheme is Career average so the the benefits of promotion aren't backdated over previous pension accrual as used to be the case with final salary schemes

Not always the case that career average differs from final salary in this way, but I realise it may do for Police Pension Scheme.

LGPS has just moved to career average but the number of years in FS scheme (up to April 2014) will be carried forward as 60ths or 80ths (changed in 2008 I think) against YOUR FINAL SALARY when you retire / leave with career average calculations for the post 2014 years running alongside.

hyubh

hugheskevi wrote: »

Could those who argue this scheme is so massively good that alternatives should not even be considered (particularly when OP stated he may leave the service - "Given the state of Policing at the moment I don't know if I will serve the full 26 years until I reach 60") back up those assertions with some figures?

How do the numbers change on the hypothetical scenario of a year's extra membership in the 1987 scheme? (Lower deferred NPA - 60 not SPA - but lower accrual rate too, given the OP won't have reached 20 years.)

hugheskevi

How do the numbers change on the hypothetical scenario of a year's extra membership in the 1987 scheme? (Lower deferred NPA - 60 not SPA - but lower accrual rate too, given the OP won't have reached 20 years.)

Annuity at age 60 could be purchased for £602 p/a, compared to a scheme pension of £1,116. The higher NPA of 68 in the previous example allows for quite a few years (34 compared to 26) years of compounding, so the difference between CPI of 2% and assumed investment return of 6% has a longer time to close the gap, and as with all compounding it is the final years that matter most (there is a separate argument that would suggest assumed returns should be lower in later years to account for de-risking, but these are just illustrative examples to highlight that for early leavers, staying in schemes may be a much closer decision than many are suggesting).

If the comparison was to final salary schemes with NPA of 65 and either 60th or 80ths accrual rates, the post 2015 schemes may well be more favourable to early leavers, particularly in those schemes which do not have enhanced revaluation for active members (LGPS and Civil Service) and so have much higher accrual rates than the final salary schemes.

Give me a guarantee over an assumed growth rate any day of the week.

But at what price?

6% net of fees looks to be a good price, and it would need a high risk tolerance to consider trading at that.

But what about 4%? Or 2%?

At some level you would be being recklessly cautious to always choose a guarantee regardless of the price. A good example is Morrison's guaranteed cash balance return - members get a guaranteed 'return' of CPI capped at 2.5% each year. That is a guarantee which would be far preferable not to have (except possibly for older members soon to retire) - as it guarantees long-term poor performance and exposes members to inflation risk.

Also worth considering how watertight the guarantee is - the RPI/CPI change reduced pension values by huge percentages in some cases, eg 40% or more depending on the scheme involved, member status and member characteristics (particularly age). But the change did nothing to DC pensions.

None of which is to say one scheme, pension type or strategy is better than another in all circumstances, but to simply dismiss questioning of whether the new public service pension schemes are good value or not for individual members is premature. Pensions are increasingly complicated, and old rules of thumb such as DB=Good or public sector pensions=amazing simply are not accurate in all circumstances any more.

Particularly in the new pension arrangements for uniformed schemes with high member contribution rates and strong disadvantages for early leavers there is a very real question about the value of the pension for younger members. Particularly as the scenarios in which the pension is of best value are linked to scenarios where there is a long period of employment, and vice-versa. That may unfortunately be putting all eggs in one basket - with your pension doing particularly well in a scenario where you are already doing well in employment, but unfortunately vice-versa here too.

buytwolet

Sadcop, I really hope you're not as sad as your monika suggests?! You are still in a very strong position and the 14% contribution would have to be more like a third of your gross salary to get something comparable in a private pension.

As a compromise you might consider paying an equivalent amount into a SIPP and/or a ISA that can be drawn up on as you approach full retirement.

I think the boat for making huge sums on property has long left the harbour. There'll be a lot of people found swimming naked when the tide goes out.

sadcop2

Hi all... apologies for the not very inspired username but as you can gather I'm another one, one of many many thousands who are still waiting to receive full details of the new 2015 Police Pension.... we have just a few weeks to make what seems to be a hugely important decision.

Sadly when we ask about finances in a public arena I can't help but feel people think that we've got it great, have the best pensions etc. and that may well be true buts it's not quite so easy to see that on the inside. For most cops they give up on it all and just accept the status quo... not that we can actually do anything to protest of course (we have no employ right).

I'm grateful for the comments here, especially Hugheskevi who has tried to look and present the relative pro's and cons... there are so many variables and two pension schemes PPS and NPPS currently that for most of us we just don't have a clue.

Following on from SadCop's situation, I joined later - a mature joiner and am currently 44. I started work in the public sector back in 1987 then did some time in the private sector (wish I had put more money aside the for sure!). I've always been employed, never out of work and always paid something towards a pension (except for two years in my early 20's). Then when I joined the Police I was given the option to consolidate everything I had into the the 2006 New Police Pension Scheme which I did thinking at 38 I would do the job until I was 57 or so and take whatever the pension was worth at that time (remember this was pre-recession and austerity). Consequently I now have around the equivalent 11 years of police pension, I think my pensions teams said the fund was worth about £40k.

I won't bore you with the details but a lot more than just pensions has changed and I no longer have any intention of staying until I retire. Indeed the government reforms have it seems actively placed policies that seem designed to prevent someone achieving a full pension (not that I ever could anyway). I don't think I can leave just yet (various reasons) but certainly within 3 years I think.

My salary for example is currently £36k and that is likely to increase slightly over the next few years taking into account annual incremental rises, but my pension contributions will increase from 11.5% I believe currently to 13.7% I am a homeowner with dependent teenage children, I live with my partner of many years but we are not married, our household income is topped up by her 25 hours or so a week at minimum wage, we can't afford to put anything in a pension for her and I have no idea what we'll do when we reach retirement, sell the house I guess?

I am mindful of the relative benefits of the new career average scheme but I really think there is no future in policing for me and leaving will ultimately be a certainty. I realise my employer will be contributing around 14.3% and this is great but it's still much lower than what I thought I was going to get as an employer contribution (24.2% currently I believe). I naively justified joining and taking a large pay drop thinking that my employer would be investing in my pension to such a degree.

The one benefit that does make me very unsure what to do is the death in service benefit (currently 3 x gross annual salary I believe). In the last 15 months three colleagues have died prematurely, aged 42,43 and 51 - I've never worked in a job where there have been such regular loses of good, it concerns me (for my family's sake) that it could happen to me and where that would leave them.

kidmugsy

sadcop2 wrote: »

I won't bore you with the details but a lot more than just pensions has changed and I no longer have any intention of staying until I retire.

If you no longer enjoy the job, and are unhappy with the T&Cs - including the pensions - then you'll be right to leave. If enough leave, the government of the day will need to decide how to incentivise attraction and retention. So be it.