Understand Defined Benefit vs Defined Contribution at last

FatherAbraham

A defined-benefit pension plan is one where the employer will go bankrupt providing you with a decent pension.

A defined-contribution pension plan is one where you will go bankrupt trying to save enough to get a decent pension.

Work 'til you drop? Young workers could have to slog non-stop to AGE 77 for the same pension as the last generation

• 'Gold standard' pension of two thirds of salary with inflation protection and death benefits for a spouse could be a lost dream
• Young people face working and saving from age 22 to 77 to achieve it
• And they would have to build up a full state pension entitlement as well

Read more: http://www.thisismoney.co.uk/money/pensions/article-3444432/Young-workers-slog-AGE-77-decent-pension-finds-Royal-London.html#ixzz40WjIlovq

Warmest regards,
FA

atush

And this is new news?

Dont think so.

Orwell

However if the employer is the State, then the hard-pressed taxpayers will lose their hope of any pension in the battle to keep the public sector in the style to which they have become accustomed.

E.g Goodbye to proper pension tax relief shortly.

PensionTech

To be fair it wouldn't be hard to build up a full state pension entitlement if you were working for 55 years...

Whilst I think Royal London's report is useful for a bit of scaremongering to show why people shouldn't rely on the auto-enrolment minimum for decent pension provision, it doesn't have much meaning beyond that. The "half your age" rule of thumb should already be a hint to the younger generation that they (we) need to save more than the AE minimum, and to be honest I think it unrealistic in the extreme to suggest that a 2/3rds index-linked joint-life replacement ratio should be achievable for everyone.

Besides, with less than a month before the pensions system gets turned on its head for the thousandth time, what use is there in trying to predict the future of pensions so specifically?

greenglide

Who gets 2/3 of salary in pension?

Is this comparing net income (take home pay) in both cases?

And it assumes the purchase of an annuity although I do see logic in this as the majority of the population in this country struggle mightily in converting capital sums into an income stream.

8% isnt enough. I pay almost that much into a final salary scheme ands also almost half my gross salary by salary sacrifice into AVCs in the same scheme.

Retirement provision is a major issue in this country and currently I dont see auto-enrolment being the cure.

kidmugsy

Mind you, the young to seem to get paid more than we did, and taxed less - at least their income tax rates are lower. So they ought to be able to afford to save for their pensions.

My FIL's generation suffered from losing all their accumulated FS pension if they changed employer: that might be worth mentioning too.

princeofpounds

Work 'til you drop? Young workers could have to slog non-stop to AGE 77 for the same pension as the last generation

Would be funny if it wasn't so serious.


I think that the quote above tells you as much about how generously the previous generation awarded themselves pensions, as it does about conditions today.


It's easy to write a cheque to yourself if you're not the one that's going to pay it.

Paul_Herring

Young workers could have to slog non-stop to AGE 77 for the same pension as the last generation

It looked at how long an average earner who saved at the 8 per cent contribution level - the minimum auto-enrolment requirement from spring 2019 - and built up a full state pension would have to work to get the same pension as their parents.

So, anyone saving, say, 16% or even the 'half your age' or anything over that 8% really, won't have to "slog non-stop to AGE 77" then? Or if they don't have a spouse to support after death since their spouse will probably have their own pension anyway.

Sounds like the usual hyperbole to be expected from the DM. Or simply picking the worst of all circumstances (lowest %age, highest pension at the end of it) to generate a headline.

PensionTech

In defence of the DM (not that I ever expected to say that), this is how a number of other news outlets reported it too, and it is Royal London's main "finding". They could have been even more extreme and looked at the outcome for higher earners; RL says they will need to work to mid-80s for the same thing (because of course a 2/3 pension of a higher salary will be correspondingly higher, and AE contributions don't keep up with higher earnings), triggering at least one reporter to lead with the claim that "even high earners will have to work into their mid-80s", in an attempt to imply that lower earners would have to work EVEN LONGER than that.

All a bit hysterical.

Paul_Herring

PensionTech wrote: »

All a bit hysterical.

"A bit"? :rotfl:

jamesd

One key aspect of the Royal London approach is explained by this phrase:

"would buy an annuity at retirement"

It shouldn't be surprising that a person who throws away half of their potential income by buying an annuity would need to invest a lot more money. Naturally, Royal London sells annuities, so will want to try to maintain an expectation that people would continue to buy them even though sales have fallen by two thirds and the percentage of sales to existing customers has increased from 40% to 60% as those who don't shop around become the dominant buyers.

Another by this:

"8%"

That's way below what is paid in to a defined benefit scheme to get its benefits and it is unsurprising that paying in perhaps half to a third as much causes the time taken or income level to differ.

And by this:

"Investments in the pension fund rise at 5 per year, and the annual management charge is capped at 0.75 per cent"

UK stock market long term return has been a bit over 5% plus inflation and you can get a tracker that will do that for 0.1% plus whatever a platform charges. I assume that Royal London charges 0.75% and didn't want to offer a good deal on the growth.

Assuming £28k as average wage, that 8% on all is paid in (can be but an employer can choose to pay in less) that's £186 a month of pension contributions. Over 50 years the difference between a 0.75% and 0.25% charge in return is £385,559 vs £455,832. A person could reach the lower £385k level in 47 years instead of 50. Or could take the 18% higher income.

And by this:

"Someone on twice the national average wage of £27,600 a year would have to work until they were 85 to get the 'gold standard' two thirds of pre-retirement income if they only contributed the statutory minimum of 8 per cent into a pension."

When in fact at least one study has shown that the required replacement rates fall as income level increases, with those on low earnings needing 100% replacement and those on twice the national average requiring far less.

They also appear not to be doing much to deal with the state pension changes, which will mean that pensioner couples are likely to start out with index-linked state pensions of £16,000 a year if they put in even a little planning work and spending to buy years for a non-worker. That provides 57% replacement rate of a single average income of £28k before tax but 72% after tax.

Deferring for £40k worth of spending - 5 years - on those two 8k state pensions will increase the state pension income for the couple to £10,320 each, £20,640 for the couple. Assuming that all of this is tax free it provides 67% replacement after tax effects of a single income of £40,760 which is about 1.5 times a £28k income and within a couple of thousand of the higher rate tax threshold.

Paying attention to preparing for retirement is good but I'm not sure it's helped by firms promoting their own products and giving unrealistically high claims about how expensive it is when so much money is being wasted by inefficient choices. People don't need to be encouraged to give up on retiring well as unachievable by firms making such claims.