Is it worth joining this pension scheme?

forevergrey

Having worked on an agency basis for a number of years, my wife has been offered a permanent employed position at the company, which she has accepted.

The DC pension scheme that they offer requires an employee contribution of 3, 4 or 5% which is matched by a company contribution of 5, 6 or 7% respectively. There is a death in service benefit attached which would cease if she opts out of the scheme. Previous pension benefits cannot be transferred in.

Legal & General manage the scheme and funds available are: World Equity Index; UK Equity Index; Gilts and Cash.

My wife is 57 so the dilemma is whether it’s worthwhile to opt into this scheme even with company contribution. She has two existing personal pension funds which are no longer being contributed to. Any observations on this would be welcomed.

EdInvestor

What is her likely income post retirement, including state pension(s) and how much does she have stashed away in capital/savings/investments?

dunstonh

Any money she puts into this pension is going to get tax relief at 22% (20% next year) and she is getting 7% of free money from the employer.

So, if she pays in £50pm, the tax relief and employer contribution is £70 and the tax relief is £11 then her contribution of £39net has returned on top of her contribution £81 immediately. Nothing can come close to that.

You dont say how much she earns but lets use £15,000 as an example and she does 8 years of service.

£15000 @ 5% = £750 gross which is £585 net. So her cost is £585 x8 = £4680 over 8 years.
The employer pays 7% so thats £15000 @ 7% = £1050 which over 8 years = £8400 (of free money).

If you take just 5% growth p.a. on those contributions over 8 years she would end up with a pot of £17560.

£17560 with 25% tax free lump sum = £4390 which is almost what it has cost her to be in the scheme. The reamining 75% providing an income would be about £800 a year for life.

Joining the scheme is a no brainer as she cannot lose money on it.

EdInvestor

Yet again one has to point out that pension salesmen often don't mention the salient point, even more important to someone near retirement, that pension income is taxed when you receive it.Other than the lump sum the so-called "tax relief" is just deferred. And also that you lose contr4ol of the capital forever.

Now if the individual is currently on basic rate tax and will have a taxable pension income over 10k when she retires, there is not much of a gain here to compensate for the loss of the capital. She might be better off, especially if she lacks savings, to use her contribution to max out her s&S ISA.

If however her pension income is going to be under 10k, then she will receive the income from the pension tax free and it is worth doing.

forevergrey

Thanks for replies Edinvestor and dunstonh.

My wife earns 22k, and is a basic rate taxpayer. Her pension funds total £90k with a pension age of 60, plus 100% state entitlement estimated at £107pw and has savings of approx £50k. The issues are although the pension age of the scheme is 65, she may decide to retire at 60; also it seems that she is on the borderline of the 10k taxable pension income.

dunstonh

Yet again one has to point out that pension salesmen often don't mention the salient point

Yet again, we have to point out how rude you are. Perhaps its time for me to be as rude as you.

Now if the individual is currently on basic rate tax and will have a taxable pension income over 10k when she retires, there is not much of a gain here to compensate for the loss of the capital.

Are you stupid?

WHat loss of capital is there?

She might be better off, especially if she lacks savings, to use her contribution to max out her s&S ISA.

Show us the figures then rather than being abusive and stating inaccurate opinions as fact.

jamesd

forevergrey, it's clearly worth contributing to this scheme because of the value of the employer contributions. If she may retire at 60, she might consider a 1/3 each split of World Equity Index; UK Equity Index and Gilts.

EdInvestor wrote: »

Now if the individual is currently on basic rate tax and will have a taxable pension income over 10k when she retires, there is not much of a gain here to compensate for the loss of the capital.

The poster could contribute 3% of salary and have the employer contribute 5% more. With all due respect, "not much of a gain" is not how I'd describe immediate risk-free 167% growth, ignoring the tax relief on her contributions and tax paid on the end result. That's a massive short term gain for someone near to retirement and 20% tax on it is insignificant by comparison.

forevergrey

jamesd - thank you for your comments. Your opinion and the others have helped to clarify the situation.

Dead_Eye_Jones

yep as is quite predictable, people can and will argue about the value of pensions. However when "free" money is being offered, ie the employer contribution, its hard to argue that its not worthwhile. But im sure someone will!

jamesd

forevergrey, EdInvestor was probably concerned about the potential to instead use the pension contribution money to increase the lump sum savings and investments, since one drawback of pensions is that the money is quite tied up and can't fully be taken in a lump sum.

One useful approach for her and perhaps you can be investing the maximum stocks and shares ISA allowance each year. If the savings are in cash ISAs from next April it's expected that those could be moved to stock and shares ISA holdings, so it wouldn't be helpful to take the money out of them directly, better to wait and switch an unlimited amount next year. This approach has two main advantages. First, the income from the ISA investments is free of additional tax, so more of her income will be untaxable. Second, she can take any amount as a lump sum if needed.

Putting her pensions into income drawdown for a few years and taking the maximum allowable income to invest in stocks and shares ISA investments might also be useful, as a way to shift as much as possible of her future income into tax free form with lump sum available.

Quick access to the money without much short term value risk could be obtained through putting some of it in corporate bond funds, which is where about 20-30% would probably go anyway just because of her likely risk tolerance, which I assume is medium or lower.

This can make quite large lump sums available for things like medical treatment, moving home, care fees and such, via careful planning now when you're probably both fit and reasonably happy to look after investments, compared to how interested you might be in doing that later. Her pension and other investments are also of sufficient value that paying an IFA to do this would make sense if you're not comfortable with it.

The IFA might also discuss inheritance tax planning, which could eventually favor use of an investment bond as the tax wrapper, but most likely only if the sum is at least 50,000, more likely 100,000, since that's where the costs tend to start to make sense for the benefits produced.

Now is a very good time to be doing this sort of planning, for both of you.

DavidLaGuardia

EdInvestor wrote: »

Yet again one has to point out that pension salesmen often don't mention the salient point

This is TOTALLY irrelevant in this case because of the emplyer contribution

The answer to the question asked is a no-brainer

To not join would be like chucking money on a fire.