"Gold Standard" for retirement - what does it mean?

k6chris

Out of curiosity, it used to be said that a "2/3 final salary" pension was the 'gold standard' for pensions and that '50%' was the silver standard. I never really understood what this was based on and whether it related to gross or net income? Are these still the 'rules of thumb' used today and if not, what should be?

AnotherJoe

Its not related to anything and its meaningless. This was from an age where you got a pension paid, and when you died, that was it it was gone (except maybe with a smaller spouses pension to follow). Nowadays with "pots" of money, you make your own decisions about when to take your income and how much.

Everyone will have their own standards about what "gold" or silver emans, if they care, what most woudl care about is what their income would be, especially in an era where its much easier procedurally, if not practically, to trade off a higher retirement income against an earlier retirement age.

eg years ago "everyone (male) retired at 65.
Now, you might retire at pretty much any age you choose, finances permitting, and you might trade off say a pension which if its "100" at age 65 or 66 or whatever might be a pension of "90" at age 60 or "50" at age 40.

Malthusian

It meant that a 2/3rd final salary pension was really good and a 50% final salary pension was less good but still really good.

Nowadays it's a "gold standard" in a different way, i.e. a historical curiosity and no longer relevant except to students of economic history.

The analogy is silly even on its own terms. "Gold standard" means the currency is fixed to the value of gold, and "silver standard" means it is fixed to silver. A currency fixed to the gold price is not worth more than one fixed to silver. The value of a currency is determined by how much people want to acquire it in order to trade in it. When the fundamental value of the currency becomes divorced from the gold price (that is, the central bank can no longer afford to hand out gold bars to those who turn up with the right number of bits of paper) the gold standard is abandoned, as it was pretty much universally in the 1970s.

Kynthia

There's no official definition of 'gold standard' and 'silver standard' when it comes to pensions. DB pensions in general are often referred to as gold standard because they usually pay out a good amount with good benefits compared to the contributions paid, and don't suffer from investment risk or longevity risk. However they are inflexible, can't be inherited and now start paying our quite late so not everyone considers them best for their needs.

In the civil service scheme many preferred the max 40/80ths scheme to the max 40/60ths scheme because the contributions were lower and it gave you a lump sum. Others preferred the other scheme and you can't say who is right or wrong as pensions are based on individual circumstances and preferences.

Andy_L

It means whatever the person trying to sell you something wants it to mean

System

Hi

Old Police and FireFighters schemes gave the possibility of...

30 years service in a 60 ths scheme with a double up on the final 10 years.

Meaning after 30 years it had 40/60 ths or 2/3 rds.

Usual practice was to commute for a max lump sum.

EG:
Leaving Salary £30,000
Pension Value £20,000

Pension Taken £15,000
TF L/S @ x22 £110,000

So there is the 2/3 1/2 and whether it is a standard of any metal value is subject to interpretation.

But it may meet the criteria in the OP.

kidmugsy

johndough wrote: »

Old Police and FireFighters schemes gave the possibility of...

A blue chip scheme if ever I saw one.

Andy_L

kidmugsy wrote: »

A blue chip scheme if ever I saw one.

Just as well it was replaced with a less generous scheme 10 years ago then. Which was itself replaced with an even less generous one in 2015.

Although, ISTR, that in the old days (80s/90s) when I started with the civil service some of the big blue chip private sector companies would let you get the full pension with 30 years service as well

hugheskevi

Are these still the 'rules of thumb' used today and if not, what should be?

A better measure is the Pension Commission Replacement Rate Benchmarks. DWP updated these in 2013, and are as follows:

Pre-retirement income over £51,300=50%
Pre-retirement income between £32,000 and £51,300=60%
Pre-retirement income between £22,400 and £32,000=67%
Pre-retirement income between £12,200 and £22,400=70%
Pre-retirement income under £12,200=80%

The difference is to reflect expenses which will not be present as a pensioner, eg, pension contributions, National Insurance, mortgage, work costs (incl commuting), etc. Generally, the higher pre-retirement income is, the lower the % replacement rate required.

and whether it related to gross or net income?

Gross income, although even questions like that are getting a bit detailed for what is just a broad measure.

The table above is just a broad guide, as things such as how income is distributed across a couple may make a significant difference, as would whether a household is a single person or a couple. Similarly, a renter without State support will have higher costs than a house-owner without a mortgage and so on. Those wishing to retire much earlier than 'normal' are likely to want a higher replacement rate too, as their income may well be eroded relative to earnings over time...but very high earners managing their affairs so as to be able to retire very early may have a much lower replacement rate, if they are not living to the standard their income permits and so do not require a replacement rate based on their income but instead based on their consumption.

kidmugsy

hugheskevi wrote: »

A better measure is the Pension Commission Replacement Rate Benchmarks.
Pre-retirement income over £51,300=50%

Our experience is that the 50% covers routine outgoings, but that we need extra to cover the expenses that are in principle non-recurring, but in practice are just replaced by different non-recurring expenses.

So since retiring we've had two sets of expenditures on the house, one on helping family financially, one replacing the car, and one replacing furniture and kitchen machinery.