Final Salary Pension Confusion

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Do all deferred DB scheme benefits increase in line with inflation?

https://www.barnett-waddingham.co.uk/comment-insight/blog/2012/07/24/revaluation-for-early-leavers/

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goldeneagle69 wrote: »

I am currently a member of the Tesco Defined Benefits pension scheme. I know this is going to change soon, but I am trying to work out how much money I currently have in the scheme and how much I will get back assuming that I stay working for Tesco until I retire.

I am 48 years old and have been paying approximately £85 each 4 week period into the scheme for the past 6 years. I believe that this equates to about 5% of my salary, and that Tesco are paying more into this than I am. Does anybody know how much Tesco are paying in? I heard somewhere that it is about 11%. How do I find out what the total amount is that is saved up?

My main question is based on the fact that this is a Final Salary pension, which is what is confusing me. Lets say that between now and when I retire, I reduce my hours down and as such my annual salary goes down because of this. At the moment I am earning around £21K per year, but when I retire in say 16 years this could be only £10K. Will my pension be based on the £10K (ie my final salary) or on 1/60th of my annual salary for each year I have worked and will work for Tesco? If it's all based on the £10K then I am wasting my time paying into it now?

at your age, the amount required to be paid by Tesco is about 20% of your salary, or perhaps a little more.


As this is a defined benefit, rather than defined contribution scheme, you can know exactly how much will be paid out in benefit, but not exactly what that's worth (as a pot).


your total yearly pension will be the number of years of service divided by 60 multiplied by your final salary. If you've reduced to part-time hours, then that fraction of a year is just that fraction of a 60th, but still multiplied by your full-time salary.


so, for example, if your normal hours are 40 per week and you work full-time for 14 years followed by half-time (20 hours) for 3 years, then you will accumulate a total of 15 and a half 60ths of your full-time salary. At £21k, that's about £5425 per year.


the bottom line is that it's a great scheme and if you were to buy £5425 a year of index-linked pension from a provider with your own money (or a defined contribution pot), it would cost a 60 year old about £150k!


hope this helps.

OldBeanz

You may also want to check out paying into an AVC. At one time you could use the AVC as a tax free sum so keeping your pension higher. Unfortunately it may be a better prospect than buying Tesco shares through the staff scheme at present.

caileag

The current Tesco scheme is not technically final salary, it is salary-average, or something like that... the difference is as follows

Each year you accrue 1/60th salary, assume you earn £30K per year for 9 years, then £60K for 1 year, then retire.

Final salary: you get pension of 10/60ths (1/6th) of final salary = £10,000

Tesco scheme: you get 9/60ths of £30K (9 years earning at that rate) and 1/60th of £60K = £5,500

So, Tesco scheme is worst than final salary if you have a salary that increases over your career, but it is better if you have a more variable income, or if you chose to wind down to retirement.

Not that this matters really, as it is all being stopped soon.

greenglide

It is a Defined Benefit scheme and it is "Salary Related".

If it is now a "career average" scheme (like most of the public sector schemes) if your salary increases by less than inflation (generally CPI) then these schemes actually pay more. The big benefit is that the benefit is no longer subject to "uncertainties" due to events such as people getting huge salary increases just before retirement. The majority of members, of course, cannot arrange these things but in some (especially public sector schemes) they can be arranged reasonably easily!