Is it worth joining this pension scheme?

djbd1973

Dead_Eye_Jones wrote: »

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!

Totally agree. To get money via your employer is a good thing.

EdInvestor

Conventional advice would suggest that for a 57 year old, the pension should be invested in the cash or gilt funds. After charges even with an employer's contribution,such an investment strategy might not yield much more than cash in an ISA at current interest rates. The lady seems likely to have to pay back the tax relief after retirement as the new pension will take her over her tax free allowance.

These dowsides might make her think that she is better to save in an ISA where she gets to hold on to the capital and pays no tax on the income.

Women quite often prefer to have capital than extra income - as you can see in this lady's case, after she retires and takes out her tax free cash, her pension fund and savings fund will be equal in value.

The need for capital as well as income in retirement may not be so well understood by men as they don't live so long. But women are well aware that if the boiler/car/roof are going to collapse, they are almost certain to do so just after hubby has passed away and the household income has been cut in half as she only gets a 50% spouse's pension.[This pension will however be enough to top up her own income so that long term inflation is not a problem.]

So while it is almost always correct to take free money offered in a pension by an employer, there may be occasional circumstances where it's not as attractive as it seems.If she was working till 65 and was willing to invest in the equity funds, it might be a different story.

jamesd

EdInvestor wrote: »

Conventional advice would suggest that for a 57 year old, the pension should be invested in the cash or gilt funds. After charges even with an employer's contribution,such an investment strategy might not yield much more than cash in an ISA at current interest rates.

If she's retiring in 8 years, please say which cash ISA pays 15% so I can deposit some of my money in it. If she's retiring in 3, please tell me which one is paying 39% so we can all put our money into it and retire early.

Lets assume retiring at 60, in 3 years and cash or gilts that produce no growth at all, also completely ignoring tax relief:

7% : 5% = 140% return. That's 33.9% a year return.
6% : 4% = 150% return. That's 35.7% a year return.
5% : 3% = 167% return. That's 38.7% a year return.

Now lets consider retiring in 8 years at 65, well into the period where something other than cash should be used. Again I'll completely ignore any investment return and tax relief:

7% : 5% = 140% return. That's 11.57% a year return.
6% : 4% = 150% return. That's 12.14% a year return.
5% : 3% = 167% return. That's 13.1% a year return.

Now add some gilt yield to the 11.57% and your claim is that you can get something over 15% from a cash ISA.

EdInvestor wrote: »

as you can see in this lady's case, after she retires and takes out her tax free cash, her pension fund and savings fund will be equal in value.

Just let her know which cash ISA paying 15% or 39% she should use.

EdInvestor wrote: »

If she was working till 65 and was willing to invest in the equity funds, it might be a different story.

Ah, OK, you were assuming 3 years, so you know a cash ISA that's paying 39%. Which one?

Please don't make such absolutely ridiculous claims.

jamesd

EdInvestor wrote: »

The need for capital as well as income in retirement may not be so well understood by men as they don't live so long. But women are well aware that if the boiler/car/roof are going to collapse, they are almost certain to do so just after hubby has passed away and the household income has been cut in half as she only gets a 50% spouse's pension.

dunstonh wrote: »

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.

As dunstonh notes, she could have saved a total of 4680 over 8 years into a cash ISA and if she put it into the pension instead she'd have a tax free lump sum of 4390 plus the remaining 75% paying a pension.

Assuming a cash ISA pays 7% the lump sum from that after interest is 6286. Assuming the same return on the pension the lump sum is 4835 and at 6% the remaining 14500 in the pension fund could produce a pension of 870 a year. With just 1451 lump sum difference to catch up on that's not going to take long.

The pension route is also best for the lump sum building after three years of retirement.

DRS1

jamesd suggests a 1/3rd split between World equity index, UK equity index and gilts if she is going to retire at 60. Edinvestor suggests (correctly) that gilts/cash would be more conventional advice for someone with only 3 years to go. What do people think she ought to do? if it were me I would play safe and go with the gilts/cash options.

Also she may want to think about the other 90K pension pot and how that is invested.

jamesd

DRS1, the problem is the "may" part of retiring at 60 and the adverse return consequences on acting on that basis if she actually retires at 65, which I took to be the primary plan, with 60 as the maybe.

Once she decides it would be a good idea to start switching more to cash-equivalents as the annuity purchase date approaches. If she's going to use drawdown instead of an annuity, that would make less cash a good idea, since she would be staying invested instead of having a fixed end date.

forevergrey

Thanks to everyone who has contributed since my last post, particularly the number crunching of dunstonh and jamesd, not a strong point for either myself or the OH.

Jamesd, I may have misled over the retirement age. 60 would be the preferred choice, which is why I was keen to solicit opinion over whether joining the scheme would be worthwhile over all timescales. Also, despite now being employed, the position along with others in the company, is subject to various contracts being renewed with clients, so ironically within two years her job may not exist!

Worse case scenario is a return of contributions less tax relief if that happens. Opinion here seems to favour joining even over a short timescale. Of her existing pensions, 12k has a GAR, and of the remaining 75k, currently in a cash fund, 8k is protected rights. The lifeco won’t allow drawdown for that sum so it’s either a transfer to one who will or a SIPP.

jamesd

Hmm, with 67k of non-protected rights money, if she was to go with a balanced investment spread instead of cash then annuity purchase she'd have a large enough pension pot to make going for income drawdown interesting. If you're comfortable either with managing the investments or having an IFA do it for you it should deliver higher income than the annuity route, but with less certainty than an annuity.

If going with an annuity instead of income drawdown then more cash than I mentioned is the appropriate choice with that 3 year timescale.

tele2

I have been putting off joining the company pension for many years now, and would like some advice on whether to join the company pension scheme, or invest the money in something else .
i have 27yrs till retirement, and can put £170 a month into the pension fund (scottish equitable)
my company will put in another £45 a month, also with the pension fund comes life insurance and critical illness cover.
Iam a little old fashioned, and think the money would be best saved in a bank
so, should i start the fund or should i invest or save some other way?
I would really appreciate any help

dunstonh

Iam a little old fashioned, and think the money would be best saved in a bank

Will your bank give you £45 of free money for every £170 (gross) that you pay in?


You are throwing money away by not being in this scheme.