Opt out of 2015 Police pension

LXdaddy

I don't know any of the details of previous or current Police Pension schemes. But if the current (or future) scheme is a Defined Benefit scheme it would be very difficult to find an outside scheme which would come close in benefit.

Schemes where the employer (or the taxpayers at large) takes the risk of funding a proportion of final salary (or even career averaged salary) have got to be more attractive to those where the employee is taking the risk of investment performance being sufficient.

If your employer offers a pension scheme it seems sensible to take it.

hugheskevi

I don't know any of the details of previous or current Police Pension schemes. But if the current (or future) scheme is a Defined Benefit scheme it would be very difficult to find an outside scheme which would come close in benefit.

If you don't know any details, how are you in a position to assess whether an outside side could come close in benefit? As I said earlier in this thread:

"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."

Schemes where the employer (or the taxpayers at large) takes the risk of funding a proportion of final salary (or even career averaged salary) have got to be more attractive to those where the employee is taking the risk of investment performance being sufficient.

So if I guarantee you a pension income of £1 per annum, that is better than offering you 10% of salary into a DC scheme, as I am taking the risk of funding?

At some level of critical yield a pension with risk is preferable to a guaranteed pension. Whilst it is arguable what level that is, there is certainly a level. For young members of the new uniformed public service pensions (and even young members of schemes such as the Teachers' Pension where revaluation for active members exceeds revaluation for deferred members) there is a very legitimate question about whether the pension is of better value than investing the member contributions elsewhere.

If your employer offers a pension scheme it seems sensible to take it.

In the vast majority, but not all, cases this is true.

atush

sadcop2 wrote: »

She is yes but thatnks for pointing that out as I'm sure many cops forget to do it.

Not to mention, if not married, and w/o a will she would inherit nothing from you. Even including the roof over her head if her name isn't on the paperwork.

Marriage has a legal framework, because it is a contract. That can protect both parties. Do it, and save on hassle and tax.

LXdaddy

hugheskevi wrote: »

If you don't know any details, how are you in a position to assess whether an outside side could come close in benefit?.

I am not qualified to asses the benefits of the Police Pension schemes. It may be a special case. But from all that I have read or seen about DB and DC schemes in general. DB is usually better for the employee than a DC offered by the same employer.

I don't think that many employers closed their DB schemes to new members or transfered existing members to DC schemes out of a sense of altruism. Companies made the switch because providing a DC scheme for their employees is less costly to the employer.

You are quite right, a ridiculously poor DB scheme is worse than a ridiculosly generous DC scheme - but any employer with a DB of £1 per annum would not be offereing to put 10% into a DC scheme.

hyubh

LXdaddy wrote: »

You are quite right, a ridiculously poor DB scheme is worse than a ridiculosly generous DC scheme - but any employer with a DB of £1 per annum would not be offereing to put 10% into a DC scheme.

That's not what he's alluding to. If we take the old (1987) police scheme as an extreme case, that has always had relatively high employee contribution rates yet for very generous benefits, given current life expectancies - years 20 to 30 in the scheme count double to enable a normal retirement on 2/3rd your final salary in your 50s.

What if someone joined in their 20s and left a couple of years later though? No double counting then, and moreover, given their leaving salary will be pretty similar to their starting salary, no retrospective inflating the value of 'banked' membership as the years go by. Despite this, such a person would still have paid the same (*) high contribution rate as anyone else in the scheme. Further, while their pension in deferment won't be 'frozen', it will only increase with inflation, which if you're young you would expect to easily beat if the money (hypothetically speaking) were invested instead.

Historically, structuring a DB scheme so that long serving employees benefitted from far more than short serving ones was usually intentional, since one of the main purposes of a final salary scheme was employee retention. Nevertheless, this isn't to say a DB scheme has to be like this, or even that where such an inequality of benefit exists, that in itself is reason enough for a young person expecting to leave within a few years to opt out - it all depends on the details.

(*) Banding by salary was belatedly introduced a few years back, but with not much difference between rates.

Thrugelmir

hugheskevi wrote: »

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).

6% net of fees. That would be some investment performance.

What rate are you assuming for CPI?

hugheskevi

6% net of fees. That would be some investment performance.

Far above the risk-free rate, but below the long-run return on UK equities.

Personally it would be quite a bit too high to tempt me compared to a DB alternative. The 6% rate of return is needed in the particular example illustrated to get the final outcomes close, as the OP is assumed not to be a very young member in the example (34) and index-linked annuity rates are used (which only return about 75% of the expected value, and hence significantly increase the break-even point compared to a draw-down strategy).

Recalling that the purpose of the example was not to suggest a DC alternative was preferable, only that the calculations are not so clear-cut as to be confident to dismiss considerations of alternatives without any calculations.

What rate are you assuming for CPI?

2% in all years - which is a bit low, although it the Bank's target, many calculations use a bit higher than 2% as their central point.