How to value pension - comparing two jobs

chile_paul

PeacefulWaters wrote: »

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

Ahhh, yes! I completely agree. If you could tell me which of the two jobs that will be I'll be eternally grateful

I'm clearly in a very lucky position to have a job offer, but the decision making process if much more stressful than I ever expected!

chile_paul

Silvertabby wrote: »

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!).

Thanks, so using this example, effectively with my current employer (and very simplistically, only in a single year) I'm buying a £727 a year pension in return for £4200 this year.

In order to get the same £727 a year pension from a DC pension pot I'd need approximately a £14500 pension pot at the point I retire.

However assuming this was invested and over the next 29 years that investment grew at a rate of 3% above inflation, that would mean that I would need to put about £6,200 into the DC pot this year.

Other than the fact that I'd be taking all of the investment risk, that is no different than the proposed pension from my new employer.......?

I think I'm missing something in my calculations, where am I going wrong?

marlot

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

This is true - and makes it hard to compare even similar career average schemes.

Civil Service Alpha - CPI
NHS - CPI + 1.5%
LGPS - CPI
Teachers - CPI + 1.6%

Source: The FDA (click the link towards the bottom of the page for the booklet): http://www.fda.org.uk/Pensions2015/Pensions-2015.aspx

chile_paul

chile_paul wrote: »

Thanks, so using this example, effectively with my current employer (and very simplistically, only in a single year) I'm buying a £727 a year pension in return for £4200 this year.

In order to get the same £727 a year pension from a DC pension pot I'd need approximately a £14500 pension pot at the point I retire.

However assuming this was invested and over the next 29 years that investment grew at a rate of 3% above inflation, that would mean that I would need to put about £6,200 into the DC pot this year.

Other than the fact that I'd be taking all of the investment risk, that is no different than the proposed pension from my new employer.......?

I think I'm missing something in my calculations, where am I going wrong?

I think I may have answered my own question in that I haven't factored inflation into the question.

So, making an assumption of 2% inflation between now and retirement would suggest needing a retirement income of £1200 per year to equate back to the current £727 a year.

Again, using the same simplistic assumptions as above, that would require a pension pot of £24000, which would require an input this year of closer to £10000.

That would mean that I would need to top up the DC pot with an additional £3800.

That is more in line with my expectations - have I missed anything obvious in my calculations?

Alexland

Generally DB schemes are worth an employer contribution of between 20% and 25% depending on the details. So if your new job offers a 9% contribution (which is still good for a DC scheme) then this benefit is reducing by between 11% and 16%.

However if staying and your salary growth would go into a DC scheme anyway this additional benefit will be erroded over time. In the medium term (circa 5-7 years) then I would guess the additional benefit is worth just over 10% depending on what future pay rises you could secure.

There's not much point being more precise as Peaceful Waters says enjoying your job and developing your career is more important than single digit percentages.

Alex.

IanSt

chile_paul wrote: »

Ahhh, yes! I completely agree. If you could tell me which of the two jobs that will be I'll be eternally grateful

I'm clearly in a very lucky position to have a job offer, but the decision making process if much more stressful than I ever expected!

Hi, you said in your original post that you have been offered a new job which I assume means that you've gone out and looked for it because there was some aspect of your current job that you were unhappy with.

If the new job looks as though it would satisfy that then I'd definitely be leaning towards taking the new job.

Triumph13

chile_paul wrote: »

I think I may have answered my own question in that I haven't factored inflation into the question.

So, making an assumption of 2% inflation between now and retirement would suggest needing a retirement income of £1200 per year to equate back to the current £727 a year.

Again, using the same simplistic assumptions as above, that would require a pension pot of £24000, which would require an input this year of closer to £10000.

That would mean that I would need to top up the DC pot with an additional £3800.

That is more in line with my expectations - have I missed anything obvious in my calculations?

Nope, you were right the first time - you were already taking inflation into account in your assumption of Inflation plus 3% on investment growth. At your age the two pensions are pretty damn equivalent - you get the advantage of certainty with the DB, but 3% real return is a fairly conservative growth assumption.
The big difference is that the DB gets better value in each and every subsequent year as the DC for that year has less time to compound.

atush

You obvs know the new pension isnt as good as the old one. But you can always up yur contributions. Will the salary be more? Will you have a fast track to future promotions in the new role? Equity participation in the company?

Any side benefits to the new role? Like an easier commute, better work/life balance?

Alexland

Also worth considering if you would still make as substantial a contribution into the DC scheme to compensate as regardless of percentages you could be setting yourself up for a worse retirement.