CARE vs. DC pension

sparkles_on_water

Is someone able to explain if and why a CARE pension is better than a DC or personal pension?

At the moment I pay about £100 into a CARE pension. The way I understand it, every year 1/49th of my pay is put into my pension account which is about £400. However, if I put that £100 a month into a DC or personal pension, at the end of the year I would have £1200. I know that a CARE pension is guaranteed and that the DC/ personal will rise and fall with the market but is CARE really worth it?

Sorry if I'm being stupid, thanks in advance.

german_keeper

CARE is a type of defined benefit pension, based on career average earnings rather than final salary. As a starter just google defined benefit and defined contribution and have a read. Not being awkward but always better to read up yourself. Then come back with any questions.

Bravepants

sparkles_on_water said:

Is someone able to explain if and why a CARE pension is better than a DC or personal pension?

At the moment I pay about £100 into a CARE pension. The way I understand it, every year 1/49th of my pay is put into my pension account which is about £400. However, if I put that £100 a month into a DC or personal pension, at the end of the year I would have £1200. I know that a CARE pension is guaranteed and that the DC/ personal will rise and fall with the market but is CARE really worth it?

Sorry if I'm being stupid, thanks in advance.

Presumably by "every year 1/49th of my pay is put into my pension account which is about £400", you mean that your pension accrues by £400 per year.  This means that after 40 years of working (assuming you stay at your current place of work your entire career) you would have an annual pension of £16,000 in today's terms - if you include an average inflation uplift of 2% per year (this is what the UK government tries to achieve) then that will be about £24,000 in 40 years. This doesn't take into account salary increases or pensionable bonuses. This is your annual pension before tax - but you should check your projection on your pension statement each year. The annual pension you get increases by £400 per year not the size of your pension pot as there is NO pot.

Now, if you put your £100 per month into a DC pension, that's £1200 per year, let's assume that your pot increases by growth of 5% each year (this assumes a global mixed asset fund of 60% equities and 40% bonds  - you know what one of those is right?) So at the end of 40 years you COULD have £144,960 in your pot in total - nice! Which you would draw down at say maximum 3.5% in the first year of retirement (and subsequently adjusted each year for inflation) as this is probably the best Safe Withdrawal Rate (you know what that means right?) in order to be able to live 30 years without running out of money - maybe.   This would give you an income of about £5000 per year before tax. The pot would of course be subject to the whims and fancies of the stock market, crashes etc. So it would be a good idea to keep a couple of years drawdown in cash somewhere. Complicated isn't it? And for no benefit compared to your DB pension!

General consensus around here is that DB pensions are the BEST sorts of pensions. Where else are you going to get a guaranteed, index-linked income every year, with no worries about the performance of the stock market? You should take advantage of any increases in contributions that your employer matches. There is a place for DC pensions (SIPPs etc.) and their tax efficiency if you want to draw down on them to bridge over a period of early retirement before your DB pension kicks in.

Dazed_and_C0nfused

I suspect the key thing you are overlooking is that with CARE you get the £400/year from your schemes retirement age.  Every year.  For the rest of your life.  And possibly a spouses pension when you die.

With the DC pension you have £1,200.  That's all.

JoeCrystal

sparkles_on_water said:

Sorry if I'm being stupid, thanks in advance. 

You are not stupid. You made the best possible financial decision ever by joining this outstanding scheme. There are many sadly many in the past who are even stupider by opting out of such generous schemes. 

jamesd

sparkles_on_water, your CARE accrual rate is good, do that.

Bravepants said:

General consensus around here is that DB pensions are the BEST sorts of pensions. Where else are you going to get a guaranteed, index-linked income every year, with no worries about the performance of the stock market?

The state pension. There have been a few occasions where doubling the income of a poster above initial state pension has been obtainable by transferring out of DB and deferring. The limit being how long it takes.

DB aren't always best in the younger years but gradually get better. That's because accrual has no investment growth over time while DC does. Age-related comparisons using your preferred 3.5% SWR:

Age 18, 50 years of 5% growth on £100pcm to pot £266,865, income £9,340 a year. DB at £400/year £20,000. 2.1x 
Age 28, 40 years, pot £152,602, income £5,341. DB £16,000. 3.0x
Age 38, 30 years, pot £83,225, income £2,912. DB £12,000. 4.1x
Age 48, 20 years, pot £41,104, income £1,438. DB £8,000. 5.6x
Age 58, 10 years, pot £15,528, income £543. DB £4,000. 7.4x

While that shows the age effect what it mostly does is show that however old sparkles_on_water is, the £400/year DB accrual is the better choice assuming normal life expectancy.

Of course this comparison is DC with no employer contribution vs DB with a hefty one. 

Bravepants

jamesd said:

sparkles_on_water, your CARE accrual rate is good, do that.

Bravepants said:

General consensus around here is that DB pensions are the BEST sorts of pensions. Where else are you going to get a guaranteed, index-linked income every year, with no worries about the performance of the stock market?

The state pension. There have been a few occasions where doubling the income of a poster above initial state pension has been obtainable by transferring out of DB and deferring. The limit being how long it takes.

DB aren't always best in the younger years but gradually get better. That's because accrual has no investment growth over time while DC does. Age-related comparisons using your preferred 3.5% SWR:

Age 18, 50 years of 5% growth on £100pcm to pot £266,865, income £9,340 a year. DB at £400/year £20,000. 2.1x 
Age 28, 40 years, pot £152,602, income £5,341. DB £16,000. 3.0x
Age 38, 30 years, pot £83,225, income £2,912. DB £12,000. 4.1x
Age 48, 20 years, pot £41,104, income £1,438. DB £8,000. 5.6x
Age 58, 10 years, pot £15,528, income £543. DB £4,000. 7.4x

While that shows the age effect what it mostly does is show that however old sparkles_on_water is, the £400/year DB accrual is the better choice assuming normal life expectancy.

Of course this comparison is DC with no employer contribution vs DB with a hefty one. 

I agree with you entirely. My angle was, though, to highlight the uncertainty of DC pensions compared to DB.

sparkles_on_water

Dazed_and_C0nfused said:

I suspect the key thing you are overlooking is that with CARE you get the £400/year from your schemes retirement age.  Every year.  For the rest of your life.  And possibly a spouses pension when you die.

With the DC pension you have £1,200.  That's all.

This is what I was missing, thank you.

kinger101

The £100 a month you are putting into a pension is only part of the pension.  In a CARE scheme, the employer will also be contributing typically around 17-20%.  About another £300 pcm.

Some employers have the option of DC or CARE scheme you can use.  In these circumstances, provided the employer is also putting something decent into the DC scheme, this might give a better outcome for younger employees during the earlier years.  The problem is you might not be able to opt back into CARE when the balance tips the other way.  If the employer doesn't have a DC scheme, opting out will be a very bad idea.

I'd stick with the CARE scheme regardless. One 49th of salary is a generous amount by today's standards, particularly when you consider it's likely going to be index-linked and pay 1/3 to 1/2 to a surviving spouse.