Do employer contributions count towards my amount of final pension?

bigonroad

I'm in the NHS pension scheme. I just asked for a breakdown of my contributions, and it came with a note saying the below:

Why are employer contributions not recorded in my statement?
Your statement does not include a list of employer contributions because this information is not relevant to you. The contributions paid by your employer can be seen as the 'cost' that secures entitlement to pension benefits but is not related to the actual calculation of those benefits. The employers’ contribution rate is currently set at 14.38% of pay and is subject to change.

I've been under the impression that my pension pot grows based on the amount I pay in and the amount my employer pays in. I'm regularly given advice that paying into a pension is a good idea, not just because its tax free, but also because my employer also contributes.

The above implies that non of the employer contributions go into my pot, and don't affect my final pension, which seems very counter to what the government advice says - won't let me share link but google "gov workplace pensions" ...

Your advice is appreciated!
Thanks, C

molerat

The employer contribution is of no relevance as their is no pot. Your contributions are also of little relevance but they can tell you how much you have paid in. You instead have a promise to pay an amount at retirement based on your earnings and how long you have worked for them which is underpinned by HM Treasury. 
 

Thrugelmir

bigonroad said:

I've been under the impression that my pension pot grows based on the amount I pay in and the amount my employer pays in.

There's no personal pot to speak of with an NHS pension. You are accruing a pension at a predetermined rate. 

Dazed_and_C0nfused

Assuming you are in the normal NHS pension scheme then you don't have a pot.

Each year you work you are accruing a guaranteed amount (which will rise with an element of inflation proofing).

You can just ignore the employer contribution as it has no direct relevance to your pension.

For example let's say you are earning £30k and contribute 9.3% in the NHS 2015 pension scheme.

£30,000 x 9.3% = £2,790 (real cost after tax relief being £2,232).

In return you accrue a pension of £555.  Which will be revalued for inflation each year under the scheme rules.

AlanP_2

Take a look at https://pensionadvice.org/defined-benefit/defined-benefit-vs-defined-contribution/ to see the difference between a Defined BENEFIT scheme like the NHS and a Defined CONTRIBUTION scheme which is what that vetry generic government advice is about.

Under a DB scheme the employer is saying I will give you £x per year, for life from retirement age and you will have to pay a bit towards the cost of that (your contribution). Whether the employer needs to contribute £0 / 0% a year, 14.38% or 95% makes no difference you will get the defined BENEFIT, the cost is their problem.

A DC scheme is the complete opposite - you and the employer pay agreed %'ages in. What it is worth at Age 67 and what you can safely spend a year out of that pot between retirement and your death is your problem, your ex-employer isn't going to give you a few more quid at 97 just because you lived longer than you thought you would.

Marcon

It might help to think of it this way: you pay a set % of earnings in return for a guarantee of a pension based on a formula set out in the rules of your defined benefit scheme. Your employer (or in this case the taxpayer) is on the hook for paying as much as necessary to ensure that promise is fulfilled. It's a wonderful deal - most of the country envies you!

bigonroad

Thank you so much to each and every one of you who has taken more time to help that the pension agency has in 10 months. Amazing. Now I understand!

bigonroad

@Dazed_and_C0nfused So is my DB based on my earnings? What is the calculation? Where did you get £555 from? If I have a good year and earn £100,000 and a bad year and earn £10,000 how will that be reflected?

Dazed_and_C0nfused

If you are in the 2015 scheme then it is based on a % of your earnings.  And that varies for different salary bands.

It may be that not all earnings qualify towards your pension but you would need to check the scheme rules to check that in more detail.

There is a bit in this link which covers the bands are different contribution rates.

https://www.nhsemployers.org/pay-pensions-and-reward/pensions/pension-contribution-tax-relief

But let's say you are earning £100,000 and this is your full time equivalent pay as well.

£100,000 x 13.5% = £13,500 (real cost after tax relief being £8,100)
Your pension accrued that year would be £1,850.

The pension accrual rate is 1/54th (or 1.85%) but an important element of the NHS scheme is the annual revaluation which ensures that the pension accrued is attempting to keep up with inflation. 

The NHS seem to have a good deal as there is a fixed element of 1.5% and then an annual inflation element added on top of that so some years you might get say a 3% increase in the value of what you have accrued.

The other key bit I think you have appreciated but not everyone always does is that although you have paid out say £13,500 (or £8,100 after tax relief) that was a one off for that year.

The £1,850 pension you have accrued will be paid each and every year from the schemes normal pension age until you die.  So you could be getting £1,850 (which will have increased due to the annual revaluation) for say 30 years.

30 x £1,850 = £55,500

Not a bad return for a years contributions.

rjmachin

bigonroad said:

@Dazed_and_C0nfused So is my DB based on my earnings? What is the calculation? Where did you get £555 from? If I have a good year and earn £100,000 and a bad year and earn £10,000 how will that be reflected?

The 2015 'career average' scheme 1/54th of your pensionable earning each year to your NHS pension, so if you did earn £30k this year, that would add £555 to what you would get each year.
If you earned £30k for 10 years, you would then have £5,550 that you would get each year from retirement age.
That is before the revaluation for inflation each year under the scheme rules.
As mentioned above, it is something most would envy, including me

bigonroad

That's amazing, does the annual revaluation stop if I stop paying in? Say I stop work at 55, but don't take the pension until 68
If there is no "pot" does there no max pot size I can hit to stop the annual revalidation any more?
Somewhat annoyed that the two IFAs I've spoke to have never been as clear as you lot on a forum in ten minutes!