Defined benefit v stakeholder

Secretsusie

Can someone explain this fairly simply please.   DD is starting a new job and has the option of a defined benefit pension or a stakeholder she 22.   Fors and againsts of each please ? 
She cant see past the costs. 5.4% for defined scheme against max 3% for stakeholder. 
I just know defined schemes are meant to be good but can't tell her why.  Certainly not to justify the extra cost.  
Help please 

bowlhead99

If she puts 3% into her pension she will not get very much out of it when she retires. With a defined contribution or stakeholder scheme, the money simply accumulates and is worth whatever it is worth. If she wants to retire in forty years and then live for forty years after that without a job, and would like to have £15-20k a year income from her pension for all that time when she's no longer working and saving, she might need £500k in the pension pot. Obviously it will need to be a lot more than £500k really in four decades time if she want's to get that value in today's money, real terms, because of inflation. But basically to get there, she needs to put lots of money away - usually a lot more than the minimum allowed.

With a defined benefit scheme, instead of agreeing with you how much they will put in every year (defined contribution) and letting the final pot of money be whatever it is worth... they define the benefits that they will pay in retirement instead.

So for example they may define that you get an inflation protected annual pension amount of 1/80th of your final salary (or career average salary) for every year you pay into the scheme. What they offer depends on the scheme rules. But with that example, working from age 22 to 62 you would get 40/80ths of your final salary (i.e., half) as an annual inflation-protected payment every year for as long as you live, and it may include death benefits or a pension for your spouse if you die when the pension's in payment.  This will generally be a much more lucrative amount than would have been built up in a defined contribution scheme, and all the risk of making sure that amount is guaranteed is taken on by the company - regardless of the performance of stock markets or interest rates. Because they are defining (fixing) the benefit that gets paid out, rather than defining up front what it will cost them to run the scheme (their contribution). Whereas if she used a stakeholder scheme, the eventual returns would be linked to how well the stock markets happen to do, over time.

Generally it can be a no-brainer to join a defined benefit scheme if young and have the choice and likely to be with the company a while. Employers tend to be closing such schemes because they are expensive for them to offer. They do usually require a greater contribution from the employee. And they are more lucrative for people who stick with the employer longer and build up to a more senior position with higher pay. But an employee that thinks they would prefer to make a smaller contribution may be on course for a considerably worse retirement. 

Andy_L

With the stakeholder she pays in less  the than DB scheme but the employee also pays in less.
With the DB scheme she pays in more bit the employer also pays in more.

Generally, with the DB scheme the extra amount that the employer pays is significantly higher than in the SH. Eg (made up numbers for demonstration) in the SH the employer might pay double the employers contribution, in the DB scheme it's 4 times instead.

This extra contribution is reflected in the better pension that the DB would provide come retirement.

Linton

Schemes vary - what are the £ benefits of your daughter's DB pension scheme?  It will be in terms of % income as pension per year employed. There must be some inflation matching but it may be limited - what is it? Without numbers we cannot give you concrete examples.

 - The DB pension payout is likely to be significantly higher per £ of employee contribution than the stakeholder.

 - DB pensions are guaranteed, stakeholders are not and will depend on stock market prices.

But

 - Stakeholders are more flexible than DB pensions - they can be taken early and can be drawn dfown as and when needed when above a particular age rather than a fixed amount/month.

Albermarle

Most private companies do not offer Defined Benefit schemes anymore , as they are too expensive for the company to fund , so she is lucky to even have the choice .
Another thing to think about is how long she is likely to stay in the job . If this is likely just to be a short term job, say less than two years , then the benefits of the DB scheme will be less obvious , than they would be over say 20 years.

Brynsam

Without knowing what the DB scheme offers, it's impossible to answer. If she is likely to be staying for only a short time (less than 2 years), then she might find all is she is entitled to when she leaves is a refund of her own contributions, less any tax relief. Join the stakeholder and she keeps her entitlement, including employer contributions, however soon she leaves. If she only builds up a tiny fraction of her pay for each year of pensionable service, the stakeholder might be no bad idea. Just not enough info...

Dazed_and_C0nfused

I wonder if it Alpha vs Partnership?

Someone posted a while back and think those were the percentages quoted.

If so the partnership scheme had significant employer contribution but even so Alpha was better for most I suspect.

crv1963

With the DB scheme she would know what she is getting on retirement and at what age whether she accrues a percentage of final salary or a percentage of this years salary - paid on retirement. With Stakeholder scheme she builds a personal pot of money that she can access at an earlier age most likely, but the income it will provide depends on how the markets perform.

For comparison my now 22 year old started his pension age 18 years old and puts 11% of his salary into it, to get the employers matching 11%- the maximum they will pay a DC scheme. He also is saving 2400 pa at a rate of 200 pm into a LISA to enable him to either use as a house deposit or for retiring earlier than SPA.

While 3% is better than nothing if she goes down the Stakeholder route she needs to save a higher percentage of salary. A lot depends on if she intends staying for a number of years or if she intends leaving in a relatively short space of time ie less than 2 years.

Secretsusie

Linton said:

Schemes vary - what are the £ benefits of your daughter's DB pension scheme?  It will be in terms of % income as pension per year employed. There must be some inflation matching but it may be limited - what is it? Without numbers we cannot give you concrete examples.

 - The DB pension payout is likely to be significantly higher per £ of employee contribution than the stakeholder.

 - DB pensions are guaranteed, stakeholders are not and will depend on stock market prices.

But

 - Stakeholders are more flexible than DB pensions - they can be taken early and can be drawn dfown as and when needed when above a particular age rather than a fixed amount/month.

We aren't sure of all the details yet as she still waiting on the pension options pack.  So currently all we have is the % of salary to go into the scheme.  We also know retirement age is 60 for the scheme.  

Secretsusie

Many thanks for all comments. She's currently saving in a help to buy ISA at the max £200 a month, and has had to move away from home to take his job and rent is taking quite alot of her income which is why she was looking to keep costs down. I think defined benefit scheme is the best especially  as she will probably stay with this employment long term, hopefully.  I was just struggling to explain why.  As soon as we get the pension option pack we will know more re 1/80 or 1/60.  It's civil service employment if that helps.

atush

DB for sure.