Should i opt out of the Civil Service pension scheme?

Silvertabby

“ I suspect this is yet another example of a classic newby mistake, asked and answered many times during my time in the LGPS.

Q. Why am I being charged £1,500 a year in pension contributions but will only get back £500 a year pension?

A. Because the £1,500 is a one-off payment, whereas the (index linked) annual pension is paid for life. Ignoring index linked increases, £500 x average life in retirement of 20 years = £10K.

Not a bad return for £1,500, is it OP? OP? OP? - hello, are you still there ?
Originally posted by Silvertabby

silver918 wrote: »

Yes this is what i was concerned about. I have paid more than £1000 for one year yet my pension is worth way less than that. So let's say according to your calculation my pension is worth £500 and i am expected to live for 20 years after retirement does that mean i will get £10k a year?

No. The figures I used (£1,500 pension contributions for £500 pension) are just round number examples. The pension you actually accrue will depend on your salary and the yearly revaluation (which means that your pension will keep pace with inflation).

Sticking with these figures for ease of calculation, if you work for the Civil Service for 20 years then in that time you would pay £30K pension contributions in return for an annual pension of £10k (plus CPI annual revaluation). This means that you would get all of your £30K pension contributions back after just 3 years - yet your pension won't stop there, you'll continue to get £10K per year pension for the rest of your life courtesy of the taxpayer.


On the other hand, if you were to put £1,500 per year into a private pension scheme then after 20 years you may have £30K plus (compound) interest. Lets assume that your investment did very well and is worth £60K. Draw £10K per year pension and your pot will be empty after 6 years. What will you live on after that?

Kynthia

You pay a contribution to the scheme. In return for that contribution you get 2.32% of this year's pensionable earnings paid to you every year of your retirement. Next year you do the same, and you'll get 2.32% of that year's pensionable earnings paid to you every year of your retirement.

So when you get a pension statement that says how much your pension is, they mean you'll get that amount every year from state pension age no matter how long you live.

There are other benefits like your spouse/partner getting a percentage of it if you die, for the rest of their life and they get it from when you die even if that's young. Any children you have will get a percentage of your pension until adulthood should you die while they are children, which will help them cope financially without you. If you die while employed someone you nominate will receive a death in service grant. You will be eligible for ill heath retirement should you become permanently too ill to work. Maybe read the scheme booklets on civilservicepensionscheme.org.uk to understand what you have.

Kynthia

Bravepants wrote: »

As a member of Alpha, I have only one comment...!!!!!!?!


Seriously though, if you only have a limited amount of money to put away for your retirement put it somewhere that will guarentee income that rises with inflation! That's Alpha! You pay a standard 2.32% of your salary in and you company will contribute too. As your pay level rises so does your and your company's contribution. You are also saving tax and NI contributions.



Some general rules I save by...


If you wish to retire early consider the actuarial reduction before normal retirement age (55 to 67 or 68), and perhaps augment it with a SIPP.



If you want to retire EVEN earlier consider a S&S ISA.

I agree with your point. However I just wanted to say that I don't believe you save NI with the civil service pension scheme as the public sector pensions don't tend to be salary sacrifice. You also pay contributions greater than 2.32% but do bank 2.32% of your pensionable earnings as an annual pension each year.

It's a good scheme but it's also good to have a private pension and other savings, which as you say give you options for retiring earlier and are inheritable.

DairyQueen

I am just trying to think of a more stupid financial decision than opting-out of a public sector pension.
:think:
Nope, think this one even beats the 'invest whole pension pot in Bitcoin' suggestion.
:wall:

Bravepants

Kynthia wrote: »

I agree with your point. However I just wanted to say that I don't believe you save NI with the civil service pension scheme as the public sector pensions don't tend to be salary sacrifice. You also pay contributions greater than 2.32% but do bank 2.32% of your pensionable earnings as an annual pension each year.

It's a good scheme but it's also good to have a private pension and other savings, which as you say give you options for retiring earlier and are inheritable.

Yes, sorry, I mispoke...the accrual rate is 2.32%! I wrote the post first thing in the morning (for me!) and I was in a rush!



And yes I guess I never got my head around salary sacrifice and the difference.

AnotherJoe

silver918 wrote: »

Yes this is what i was concerned about. I have paid more than £1000 for one year yet my pension is worth way less than that. So let's say according to your calculation my pension is worth £500 and i am expected to live for 20 years after retirement does that mean i will get £10k a year?

silver918 wrote: »

Yes this is what i was concerned about. I have paid more than £1000 for one year yet my pension is worth way less than that. So let's say according to your calculation my pension is worth £500 and i am expected to live for 20 years after retirement does that mean i will get £10k a year?

And you are going to be working in government and making decisions which affect the public?

:wall:


The yearly pension you get depends how long you contribute to the scheme not how long you live for !


Example using the numbers bandied about here

year one pay £1500, pension due = 500 year.
year two pay £1500, accrued pension due = 1000 year (500 + 500)

year three pay £1500, accrued pension 1500 year (500 + 500 + 500)

......
year thirty pay £1500 accrued pension £15k/year


each year the £1500 you pay in buys you £500 a year and these are additive.



Totals; Paid in £45k. Total pension £15k/year.
Break even in 3 years.


This is probably 5-10x better than any company scheme you could get nowadays and its risk free.

Joey_Soap

DairyQueen wrote: »

I am just trying to think of a more stupid financial decision than opting-out of a public sector pension.
:think:
Nope, think this one even beats the 'invest whole pension pot in Bitcoin' suggestion.
:wall:

But it is a close run thing which is the most stupid of the two, it has to be said.

k6chris

DairyQueen wrote: »

I am just trying to think of a more stupid financial decision than opting-out of a public sector pension.
:think:
Nope, think this one even beats the 'invest whole pension pot in Bitcoin' suggestion.
:wall:

I can think of one, but perhaps this is not the forum for THAT debate.....

mgdavid

OP - just to add, do you have any realistic idea of your life expectancy? You are very likely to be drawing this pension for 30 years not 20, thus increasing your 'take' by 50%.

marlot

silver918 wrote: »

Yes this is what i was concerned about. I have paid more than £1000 for one year yet my pension is worth way less than that. So let's say according to your calculation my pension is worth £500 and i am expected to live for 20 years after retirement does that mean i will get £10k a year?

You've missed a bit ...

You've paid £1000, but that entitles you to £500 A YEAR in retirement.


Lets say that you retire at 68 and live to 88 (20 years). You'll receive £500 x 20 = £10k. And that's just from an initial investment by you of £1000!



But it's the gift that keeps on giving ...Next year you pay anohter £1000, and that entitles you to a further £500 a YEAR in retirement. And so on.