Defined benefit v stakeholder

ratechaser

DB all the way. I have the grand total of 9 months of accrued DB benefit from my first employer that will be worth about £3000/year at age 60. 9 months....! what sort of DC contribution would be needed to get a 3k pension??

hyubh

Secretsusie said:

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.

Alpha (DB) vs. Partnership (DC) then. Alpha is CARE, accrual rate 2.32% (so, just under 1/43), which is absurdly generous compared to private sector standards (and in fact, better than many other public sector schemes). Employee contribution rates in the CSPS up to perhaps the highest band are also very low by any standard (someone on £50K still only pays 5.45%, whereas a local government employee on the same salary would be paying 8.5% in the LGPS, and a police officer 13.44% in the PPS). 

The Civil Service scheme is unusual in having both good quality DB and DC options, though the DC part (aiming for some kind of actuarial equivalence with the DB option) does band employer contributions by age. For employees under 31, it's 'only' 8% + max 3% match to the employee contribution. On the other hand, you won't find many private sector employers paying 11% employer contributions for a 22 year old.

ratechaser

hyubh said:

Secretsusie said:

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.

Alpha (DB) vs. Partnership (DC) then. Alpha is CARE, accrual rate 2.32% (so, just under 1/43), which is absurdly generous compared to private sector standards (and in fact, better than many other public sector schemes). Employee contribution rates in the CSPS up to perhaps the highest band are also very low by any standard (someone on £50K still only pays 5.45%, whereas a local government employee on the same salary would be paying 8.5% in the LGPS, and a police officer 13.44% in the PPS). 

The Civil Service scheme is unusual in having both good quality DB and DC options, though the DC part (aiming for some kind of actuarial equivalence with the DB option) does band employer contributions by age. For employees under 31, it's 'only' 8% + max 3% match to the employee contribution. On the other hand, you won't find many private sector employers paying 11% employer contributions for a 22 year old.

Well my employer will pay up to 17% if you put in 7% yourself, so there are some good private schemes out there.

hyubh

ratechaser said:

hyubh said:

On the other hand, you won't find many private sector employers paying 11% employer contributions for a 22 year old.

Well my employer will pay up to 17% if you put in 7% yourself, so there are some good private schemes out there.

Which hardly contradicts the statement of mine you emphasised... The Office of National Statistics' 2019 report into workplace pensions found '72% of private sector employees with a workplace pension received employer contributions between 2% and less than 8% of their pensionable income'. And this was a big improvement on the previous year when 30% not 8% received employer conts of less than 2%...!

https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/workplacepensions/bulletins/annualsurveyofhoursandearningspensiontables/2019provisionaland2018finalresults#contributions-to-workplace-pensions

swindiff

Be crazy not to go for the DB scheme. We have a youngster started at our place. Options given to him for pension was 3% into NEST DC scheme which the employer matched with 3% or 5.8% into the DB scheme. He had gone for the NEST not really understanding the implications of his decision. I told him to switch it to the DB scheme straight away which the employer contributes 19.2% to, this mich higher level of employer contribution should be a clue to how much better the DB scheme is.  I think our HR department should really be explaining the benefits of the DB pension  to youngsters but it doesn't happen. Presumably because it is much more expensive for the employer. 

hyubh

swindiff said:

Be crazy not to go for the DB scheme. We have a youngster started at our place. Options given to him for pension was 3% into NEST DC scheme which the employer matched with 3% or 5.8% into the DB scheme. He had gone for the NEST not really understanding the implications of his decision. 

However, the DC alternative in the civil service isn't employer matching to 3% only, it's (for a 21 year old) employer paying 8% plus matching up to 3%. And older members get more than the 8% base. So, although I'd personally advise the DB option, it's not 'crazy' for a civil servant to opt for the DC one.

Malthusian

swindiff said:

I think our HR department should really be explaining the benefits of the DB pension  to youngsters but it doesn't happen. Presumably because it is much more expensive for the employer. 

And also because they aren't authorised to give financial advice. But it's certainly convenient that they're not.

swindiff

I think you could explain the benefits of one scheme compared to another without necessarily giving advice?

Malthusian

You could describe the benefits of both, that's just information. "Explaining the benefits of the DB pension", in the context of your post saying that the DB pension is better and the youngsters should join that one, is advice.

"Describing the benefits and risks of the DB pension and the DC pension" would not be advice. Comparing them in such a way that implies one option is better is advice.