How to value pension - comparing two jobs

chile_paul

Hi all,

I'm in the lucky position to have just been offered a new job, however I'm looking for some advice on how to compare the value of the pension scheme on offer versus my existing companies pension.

I am really excited about the opportunities the new job offers - but I want to ensure that I'm not making a financial mistake that I will regret in years to come.

So, my existing companies pension scheme is a Defined Benefit scheme (career average) where I contribute at a rate of 10.5% which builds up in the pension at a rate of 1/55th.

The new company is offering a Defined Contribution scheme pension where my contributions of 6% would be matched by contributions by them of 9%.

Now clearly the new companies pension is nothing like as valuable as my existing employers - but how much worse is it and therefore how much higher would the basic salary need to be to make it comparable?

I'd be very grateful if anyone can point me in the right direction of how to calculate this.

Silvertabby

Unfortunately, there is no calculation because no-one can tell you how well (or how badly) your DC investments will do between now and when you retire.

If it helps, just have a look at one year of contributions in each scheme (I'm going to guess £40K salary but you can adjust):

Career Average:

You pay £4,200, your employer will pay considerably more (but remember that contributions don't determine the final pension in a DB scheme).

£40K / 55 = £727.27 (plus revaluation) = index linked annual pension for the rest of your life.

Defined Contribution:

You pay £2400, your employer pays £3,600

£6000 in your pension pot. Divide that by the number of years you expect to live in retirement - lets say 20 - and you get an annual income of £300.

I know which one I would go for (did go for!).

ischofie1

I would estimate the DB would need about 1/3rd of your salary to fund it, maybe even more.
Therefore 33% - your 10.5% contribution means your current Co will be contributing 22.5% to your pension.
This compared to the new 9% means you'll be 13.5% worse off.

WobblyDog

A few other things to consider:
- Does the DC scheme use salary sacrifice, allowing you to reduce your NI bill?
- What are the chances of your current employer closing their DB scheme to further contributions in future, and replacing it with a DC scheme?
- Are you planning to retire before state pension age. If so, does either scheme allow that, and on what terms?
- Do you have a spouse who will need a pension if you die first? Widow(ers) pensions are often included in DB schemes.
- Is there a substantial chance of you dying before you draw the pension, and if so how does the amount that the schemes will pay into your estate compare?

Triumph13

The other key pieces of the jigsaw are a) How old are you? and b)What's the standard retirement age for the scheme? 1/55th of your salary payable in 45 years time is worth a whole lot less than 1/55th payable next year.

Silvertabby

The other key pieces of the jigsaw are a) How old are you? and b)What's the standard retirement age for the scheme? 1/55th of your salary payable in 45 years time is worth a whole lot less than 1/55th payable next year. Posted by Triumph13

Public sector schemes apply an annual revaluation - so today's annual pension will increase in line with inflation (CPI).

Andy_L

Silvertabby wrote: »

Public sector schemes apply an annual revaluation - so today's annual pension will increase in line with inflation (CPI).

Not all of them revalue at CPI. Some revalue at CPI + a bit, although then have a lower accrual rate just to confuse comparissions

chile_paul

Triumph13 wrote: »

The other key pieces of the jigsaw are a) How old are you? and b)What's the standard retirement age for the scheme? 1/55th of your salary payable in 45 years time is worth a whole lot less than 1/55th payable next year.

Thanks, I'm currently 36. My existing pension is based on a retirement date of 65.

I fully expect to retire well before 65 but have other savings and additional pension provisions that I'm making through AVC's that would bridge that gap.

chile_paul

Andy_L wrote: »

Not all of them revalue at CPI. Some revalue at CPI + a bit, although then have a lower accrual rate just to confuse comparissions

I do know that my existing pension is re-valued at CPI but capped. Off the top of my head the cap is 3%???

chile_paul

WobblyDog wrote: »

A few other things to consider:
- Does the DC scheme use salary sacrifice, allowing you to reduce your NI bill?
- What are the chances of your current employer closing their DB scheme to further contributions in future, and replacing it with a DC scheme?
- Are you planning to retire before state pension age. If so, does either scheme allow that, and on what terms?
- Do you have a spouse who will need a pension if you die first? Widow(ers) pensions are often included in DB schemes.
- Is there a substantial chance of you dying before you draw the pension, and if so how does the amount that the schemes will pay into your estate compare?

Thanks, both schemes are based on salary sacrifice.

My existing DB scheme isn't closed to all future contributions. However any future pay rises aren't eligible to go into the DB scheme. These have to go into a DC scheme (5% contribution matched by 10% from the employer). It is a valid point that they may consider closing entirely to all new contributions, however given our unionised work force, that would be a difficult decision for them to make, so I don't anticipate this imminently.

Good point to consider the amounts payable on death - I will give this some consideration.

PeacefulWaters

There's a lot to be said for doing the job that will make you happiest.