Final salary but not final salary!

Shellbell107

I’m 38 and have worked for the same company since I was 21. I’ve always had a pension with them to which they contribute 15%. Ive never paid anything in addition to that. The problem I have is that in 2010 (I think!) they changed it from final salary to a defined benefit scheme. As a result, while they will continue to pay 15% of my actual salary, my pensionable salary will only increase by my wage increase, 2% or CPI each year (whichever is lower). Added to this, the company passed on increased NI charges to its employees in the DB scheme last year meaning I now pay £100 extra a month for just being in the scheme. Had I have stayed in the same job this would have been fine, but because I’ve had a few promotions my actual salary is about £56k while my pensionable salary is £20k. If it continues to increase at about 1.5% a year it will be ~ £30k-ish by time I can get it at 65. I’m hoping to retire at 58 so I plan to speak to a financial planner anyway about what else I need to do to manage that, but I’ve heard they won’t touch defined schemes like this with a barge pole. Before I do my research and find one who will look into it for me, does it seem like it might be worthwhile to consider coming out of the pension scheme? The only thing keeping me in at the moment is that it’s guaranteed income, even if it will be based on less than half of my salary by the time I retire (at least as this is based on me not moving further up the ladder)!

molerat

You completely misunderstand how pensions work.  You have 2 pensions, a DB for the years up until 2010 and a DC from then on.  The DB will pay out based on the period you were in that scheme increased by inflation in the same way as if you left the job and the DC will build up a fund based on the amount paid in and the increase with how it is invested with which you have many options at retirement . The increase in NI is likely because of you no longer being in a contracted out pension scheme along with your increase in pay, no responsibilities have been shifted on to you.  Do you really want to give up 15% of your pay by coming out of the pension ?  Yes IFAs are wary of moving you out of a DB scheme because in the vast majority of cases it is a stupid thing to do.

westv

I wish my first company had allowed me to join their pension scheme when I first joined rather than having to wait 9 years.

hugheskevi

The problem I have is that in 2010 (I think!) they changed it from final salary to a defined benefit scheme.

This does not make sense. A final salary is a type of Defined Benefit scheme, the term Defined Benefit includes everything that is not Defined Contribution (the type of pension where contributions are invested and a pot of money increases and decreases in value in line with market returns).

As a result, while they will continue to pay 15% of my actual salary, my pensionable salary will only increase by my wage increase, 2% or CPI each year (whichever is lower).

In a Defined Benefit scheme the employer contribution is usually irrelevant, it is the pension benefit you accrue that matters. How that pension benefit is funded (and what they think it costs them) is the employer's problem. It was common for employers to cap increases in pensionable pay as a way to reduce the cost of Defined Benefit schemes over time.

Added to this, the company passed on increased NI charges to its employees in the DB scheme last year meaning I now pay £100 extra a month for just being in the scheme.

The employer changed the scheme from a non-contributory scheme by introducing member contributions (the reason for this is irrelevant).

I’m hoping to retire at 58 so I plan to speak to a financial planner anyway about what else I need to do to manage that, but I’ve heard they won’t touch defined schemes like this with a barge pole. Before I do my research and find one who will look into it for me, does it seem like it might be wo

What you have heard is that it can be difficult to find advisers who are willing to advise on whether to transfer a Defined Benefit scheme to a Defined Contribution scheme or not. This is not your issue.

However, it is also difficult to find advisers who can advise on whether it is optimal to leave a Defined Benefit scheme in favour of an alternative scheme, which is probably what your issue is - does your employer offer another pension scheme if you leave the scheme? For example, they may well offer a Defined Contribution scheme to new starters, would you be able to join that scheme if you left the Defined Benefit scheme?

Before I do my research and find one who will look into it for me, does it seem like it might be worthwhile to consider coming out of the pension scheme?

Caps on pensionable earnings can make Defined Benefit schemes unattractive. A 2% cap is quite generous, some companies have a 0% cap, and that can make remaining in the scheme less attractive than leaving and receiving inflation increases on a deferred pension. So it is something that should be considered, but you should not judge the outcome in advance.

The only thing keeping me in at the moment is that it’s guaranteed income, even if it will be based on less than half of my salary by the time I retire (at least as this is based on me not moving further up the ladder)!

It is a valuable benefit and the cost appears low and the cap on pensionable earnings isn't as low as it could be. So it may well be the best decision to remain in the scheme. Much may depend on what alternative pension may be available.

You are free to start your own personal pension (Defined Contribution) at any time, which is likely to be quite sensible as you can benefit from higher rate relief on your earnings over £50,000 (or whatever your personal higher rate threshold is) as well as possibly recovering any Child Benefit you may have lost from the high income charge.

Shellbell107

molerat said:

You completely misunderstand how pensions work.  You have 2 pensions, a DB for the years up until 2010 and a DC from then on.  The DB will pay out based on the period you were in that scheme increased by inflation in the same way as if you left the job and the DC will build up a fund based on the amount paid in and the increase with how it is invested with which you have many options at retirement . The increase in NI is likely because of you no longer being in a contracted out pension scheme along with your increase in pay, no responsibilities have been shifted on to you.  Do you really want to give up 15% of your pay by coming out of the pension ?  Yes IFAs are wary of moving you out of a DB scheme because in the vast majority of cases it is a stupid thing to do.

While I appreciate you taking the time to respond, I haven’t completely mis-understood how pensions work. My company has two schemes - DB and DC. I am in the DB scheme at the moment and have one pension which has run from 2003 (when I started working there) to now. They changed how pensionable salary was calculated in 2010, ie it is no longer based on final salary but based on my salary at the time of the change plus annual increases dependent on the factors I stated. The increase to NI was a result of increases to NI that my employer should be paying on behalf of members of DB schemes. So, quite the opposite to what you’ve said, I get charged it for staying in the scheme as opposed to coming out of it (which I haven’t done). Most companies in the same sector as my employer absorbed the cost. My employer didn’t and passed it onto members. And if I do choose to leave the DB scheme then I will receive the 15% of my salary each month to invest elsewhere (if I choose to), and my DB pension will freeze where it is now and I will still be able to claim it when I retire. So as I’m sure you’ll see now, this isn’t straight forward which is why I came on here asking for support and advice before I start hunting for a decent IFA.

Shellbell107

hugheskevi said:

The problem I have is that in 2010 (I think!) they changed it from final salary to a defined benefit scheme.

This does not make sense. A final salary is a type of Defined Benefit scheme, the term Defined Benefit includes everything that is not Defined Contribution (the type of pension where contributions are invested and a pot of money increases and decreases in value in line with market returns).

As a result, while they will continue to pay 15% of my actual salary, my pensionable salary will only increase by my wage increase, 2% or CPI each year (whichever is lower).

In a Defined Benefit scheme the employer contribution is usually irrelevant, it is the pension benefit you accrue that matters. How that pension benefit is funded (and what they think it costs them) is the employer's problem. It was common for employers to cap increases in pensionable pay as a way to reduce the cost of Defined Benefit schemes over time.

Added to this, the company passed on increased NI charges to its employees in the DB scheme last year meaning I now pay £100 extra a month for just being in the scheme.

The employer changed the scheme from a non-contributory scheme by introducing member contributions (the reason for this is irrelevant).

I’m hoping to retire at 58 so I plan to speak to a financial planner anyway about what else I need to do to manage that, but I’ve heard they won’t touch defined schemes like this with a barge pole. Before I do my research and find one who will look into it for me, does it seem like it might be wo

What you have heard is that it can be difficult to find advisers who are willing to advise on whether to transfer a Defined Benefit scheme to a Defined Contribution scheme or not. This is not your issue.

However, it is also difficult to find advisers who can advise on whether it is optimal to leave a Defined Benefit scheme in favour of an alternative scheme, which is probably what your issue is - does your employer offer another pension scheme if you leave the scheme? For example, they may well offer a Defined Contribution scheme to new starters, would you be able to join that scheme if you left the Defined Benefit scheme?

Before I do my research and find one who will look into it for me, does it seem like it might be worthwhile to consider coming out of the pension scheme?

Caps on pensionable earnings can make Defined Benefit schemes unattractive. A 2% cap is quite generous, some companies have a 0% cap, and that can make remaining in the scheme less attractive than leaving and receiving inflation increases on a deferred pension. So it is something that should be considered, but you should not judge the outcome in advance.

The only thing keeping me in at the moment is that it’s guaranteed income, even if it will be based on less than half of my salary by the time I retire (at least as this is based on me not moving further up the ladder)!

It is a valuable benefit and the cost appears low and the cap on pensionable earnings isn't as low as it could be. So it may well be the best decision to remain in the scheme. Much may depend on what alternative pension may be available.

You are free to start your own personal pension (Defined Contribution) at any time, which is likely to be quite sensible as you can benefit from higher rate relief on your earnings over £50,000 (or whatever your personal higher rate threshold is) as well as possibly recovering any Child Benefit you may have lost from the high income charge.

Thank you hugheskevi! I was mainly considering if it’s best to carry on with the DB scheme and set up a separate pot too, or if I should leave the DB scheme, and get the 15% every month to put towards a new pot along with the extra I’m planning to pay out anyway. From what you've said it sounds like both will be options to consider. My employer does offer a DC scheme so I’ll look into that too 👍🏻

WinceyWoo

Shellbell we might work for same company as the pension you describe sounds all too familiar (RBS/NatWest).  As my pensionable pay and actual pay moved further apart, I took the decision to defer DB scheme and start paying into the DC scheme.  Many colleagues have taken a different route and opted out.  

I would suggest you get some pension quotes to give you an idea on how much your pension will pay if you stay in/opt out and defer/CETV.  If you work for a RBS/NatWest you can access Willis Tower Watson via the intranet.

Marcon

Shellbell107 said:

 And if I do choose to leave the DB scheme then I will receive the 15% of my salary each month to invest elsewhere (if I choose to), and my DB pension will freeze where it is now and I will still be able to claim it when I retire. So as I’m sure you’ll see now, this isn’t straight forward which is why I came on here asking for support and advice before I start hunting for a decent IFA.

No, it won't freeze. If you leave the DB scheme, you will have the right to a deferred pension - and that deferred pension must, by law, revalue from the time you leave active membership of the scheme to the point where you access your scheme benefits.

Shellbell107

WinceyWoo said:

Shellbell we might work for same company as the pension you describe sounds all too familiar (RBS/NatWest).  As my pensionable pay and actual pay moved further apart, I took the decision to defer DB scheme and start paying into the DC scheme.  Many colleagues have taken a different route and opted out.  

I would suggest you get some pension quotes to give you an idea on how much your pension will pay if you stay in/opt out and defer/CETV.  If you work for a RBS/NatWest you can access Willis Tower Watson via the intranet.

You’re right - it is NatWest 🙈 I’ve done some quotes online already so I was planning to take them to an IFA ad I’m assuming they’ll need that detail. There’s just such a big difference between actual and pensionable salary for me now. I can’t find anything online to estimate what the DC scheme might pay in retirement if I start paying into that instead / too but I guess it depends on how well the investments perform. What does CETV mean?

Albermarle

Many posters on here want to transfer out of their DB scheme altogether , which is a potentially risky venture and it is necessary to pay an IFA for expensive specialist advice before it can happen . Many IFA's do not want this work and this is why you probably got the reaction you did.
However you do not want to transfer your rights in the existing scheme but want some advice on whether it is better to stay in it in future , or go for the DC option. In theory this should be less of an issue but the IFA is probably worried that if they advise you to move to the DC scheme, and the result is not great than you might sue them for not telling you to stay in the DB scheme.
Probably worth noting that most DB schemes are funded at a level of at least 25% to keep them solvent , as the cost of guaranteeing incomes well into the future is very high.
FYI if you bought an annuity in the open market at age 65 for a guaranteed income for life of £5K pa linked to CPI , it would probably cost in the region of £200K .

p00hsticks

Shellbell107 said:

WinceyWoo said:

Shellbell we might work for same company as the pension you describe sounds all too familiar (RBS/NatWest).  As my pensionable pay and actual pay moved further apart, I took the decision to defer DB scheme and start paying into the DC scheme.  Many colleagues have taken a different route and opted out.  

I would suggest you get some pension quotes to give you an idea on how much your pension will pay if you stay in/opt out and defer/CETV.  If you work for a RBS/NatWest you can access Willis Tower Watson via the intranet.

What does CETV mean?

Cash Equivalent Transfer Value - the sum that the pension trustees are prepared to pay you for you to give up your DB scheme and transfer out into another (defined contribution) pension. The vlaue can go up and odwn depending on your individual profile and economic circumstances.