DB v DC

adonis10

Hopefully this is a basic question for you knowledgeable lot!

I am currently looking at applying for a new job and am trying to work out the best approach with regards to comparing my current DC pension with the DB scheme offered by the new role.

Current pension 
Workplace DC scheme, e’er contribution 16%, my salary sacrifice contribution 22%. Total circa £13k/annum on a £35k salary.

Potential DB scheme
9% e’ee, 20% e’er with a 1/54 accrual rate. Based on estimated salary 1/54 would be around £900/month. £48k salary.

Questions:
1. Let’s say the salary and contribution rates remain the same until retirement, for ease of calculation. 25-30 years to retirement (38 years old). In the DB scheme, for every year I accrue a pension of £900/annum so if we assume a retirement of 25 years, each year is effectively worth £22.5k (£900x25) over the lifetime of retirement. How would you compare that with the DC scheme?

2. Presumably there would be no point making AVC’s given that the total DB contribution on a higher salary is comparable to my current 38% contributions? If so, the new role would make me £850/month net better off, which is huge.

As I wrote that I realised that what I’m trying to ask is quite difficult to articulate over text so please ask questions which will hopefully make my queries more clear!

Albermarle

There are probably a few ways to look at this but here is one . Also it would be better if you stated the actual salary involved 
Working in todays money ( ignoring inflation ) and you work for another 25 years .
DB - You will have built up 25/54ths of your current salary ( currently £50K ?) = £22,500 pa
DC - You will have built up a pot of £500K assuming a modest 2.5% investment growth . From £500K you could take a safe drawdown income of about £20K pa .

So very similar except you would be saving on your own contributions by 13% with the DB scheme, although it is a very rough and ready calculation.

adonis10

Albermarle said:

There are probably a few ways to look at this but here is one . Also it would be better if you stated the actual salary involved 
Working in todays money ( ignoring inflation ) and you work for another 25 years .
DB - You will have built up 25/54ths of your current salary ( currently £50K ?) = £22,500 pa
DC - You will have built up a pot of £500K assuming a modest 2.5% investment growth . From £500K you could take a safe drawdown income of about £20K pa .

So very similar except you would be saving on your own contributions by 13% with the DB scheme, although it is a very rough and ready calculation.

Thank you. Salaries added to original post.

Appreciate it is rough and ready but so is the question so all good (I’ll no doubt be changing jobs and careers in that time but just need to work out what is best now and in the short-medium term).

Pension wise it’s looking fairly comparable but then I gain the extra 13% in saved contributions and increase in salary of almost £10k per annum, so financially a no brainer but getting the job is another matter!!

Terron

What sort of index linking does the DB pension have?

adonis10

Terron said:

What sort of index linking does the DB pension have?

It’s the NHS CARE pension so looks to be CPI+1.5%, unless I’m mistaken.

NedS

adonis10 said:

Albermarle said:

There are probably a few ways to look at this but here is one . Also it would be better if you stated the actual salary involved 
Working in todays money ( ignoring inflation ) and you work for another 25 years .
DB - You will have built up 25/54ths of your current salary ( currently £50K ?) = £22,500 pa
DC - You will have built up a pot of £500K assuming a modest 2.5% investment growth . From £500K you could take a safe drawdown income of about £20K pa .

So very similar except you would be saving on your own contributions by 13% with the DB scheme, although it is a very rough and ready calculation.

Thank you. Salaries added to original post.

Appreciate it is rough and ready but so is the question so all good (I’ll no doubt be changing jobs and careers in that time but just need to work out what is best now and in the short-medium term).

Pension wise it’s looking fairly comparable but then I gain the extra 13% in saved contributions and increase in salary of almost £10k per annum, so financially a no brainer but getting the job is another matter!!

Assuming we accept @Albermarle 's back of an envelope calculation (which doesn't seem unreasonable), the BIG difference here is that the DB option is guaranteed whereas the DC option is dependent upon you achieving that investment growth above inflation, and then not running out of money in retirement by drawing down 4% per year (sequence of return risks, longevity risks etc). It's hard to put a value on the guarantee provided by a DB pension, but if the calculation is remotely in the same ballpark (and the DB pension is inflation linked and uncapped) then it would be a strong selling point for the job for me.

The other thing to consider when trying to put a value on that guarantee is how much other guaranteed income you will have in retirement. Hopefully we should all have our full state pensions, but will you have any other DB income? If not, then again that would sway my decision towards accumulating DB pension now whilst you have the chance as that opportunity may not exist in 5 or 10 years time. Retirement is going to be so much more relaxing if you have £25-30k of guaranteed income and don't have to worry about running out of cash or managing a large investment portfolio in your 70's, 80's, 90's.

adonis10

NedS said:

adonis10 said:

Albermarle said:

There are probably a few ways to look at this but here is one . Also it would be better if you stated the actual salary involved 
Working in todays money ( ignoring inflation ) and you work for another 25 years .
DB - You will have built up 25/54ths of your current salary ( currently £50K ?) = £22,500 pa
DC - You will have built up a pot of £500K assuming a modest 2.5% investment growth . From £500K you could take a safe drawdown income of about £20K pa .

So very similar except you would be saving on your own contributions by 13% with the DB scheme, although it is a very rough and ready calculation.

Thank you. Salaries added to original post.

Appreciate it is rough and ready but so is the question so all good (I’ll no doubt be changing jobs and careers in that time but just need to work out what is best now and in the short-medium term).

Pension wise it’s looking fairly comparable but then I gain the extra 13% in saved contributions and increase in salary of almost £10k per annum, so financially a no brainer but getting the job is another matter!!

Assuming we accept @Albermarle 's back of an envelope calculation (which doesn't seem unreasonable), the BIG difference here is that the DB option is guaranteed whereas the DC option is dependent upon you achieving that investment growth above inflation, and then not running out of money in retirement by drawing down 4% per year (sequence of return risks, longevity risks etc). It's hard to put a value on the guarantee provided by a DB pension, but if the calculation is remotely in the same ballpark (and the DB pension is inflation linked and uncapped) then it would be a strong selling point for the job for me.

The other thing to consider when trying to put a value on that guarantee is how much other guaranteed income you will have in retirement. Hopefully we should all have our full state pensions, but will you have any other DB income? If not, then again that would sway my decision towards accumulating DB pension now whilst you have the chance as that opportunity may not exist in 5 or 10 years time. Retirement is going to be so much more relaxing if you have £25-30k of guaranteed income and don't have to worry about running out of cash or managing a large investment portfolio in your 70's, 80's, 90's.

Thank you, all makes sense. No other chance of any DB income so this would be the only one and I agreed about the value of having guaranteed income.

Thrugelmir

Do you have dependents? The DB would provide valuable benefits in the event of your early demise. 

adonis10

Thrugelmir said:

Do you have dependents? The DB would provide valuable benefits in the event of your early demise. 

Not yet but plan to in next year or two. To be fair, my current employer offers 8x salary payout in the event of death in service so I feel that is covered off.

jamesd

Thrugelmir said:

Do you have dependents? The DB would provide valuable benefits in the event of your early demise. 

DC would provide all of the capital to provide 100% of the income at normal pension age or reduced earlier. The trustees will decide who to pay if no nomination is made.

NHS CARE provides 33.75% of the tier 2 ill health retirement pension for one nominated adult Tier 2 is pension accrued to date plus pro-rated increase of half of the normal pension age payment, without age reduction. And 33.75% shared between two or more children, else half of that for one child, until age 23. Lump sums are also payable. The accrued at age of death pension is used instead of tier 2 ill health if death is more than 12 months after ceasing to be an active member. Children may get more if there's no adult pension payable, for example if cohabiting couple hadn't done the paperwork. NHS CARE is far better for active members with only a few years in the scheme but after many years the DC benefit is likely to be higher, NHS CARE is particularly good for older employees because of these benefits.

Bank and GP locums get a particularly nasty deal: if they work Monday to Wednesday nine to five they must die between 9 and 5 on Monday to Wednesday to qualify for active member benefits. 5:01, tough. Spouses or dependents may need to take particular care over when to withdraw life-sustaining care, lest they inadvertently lose large benefits. If you dislike this time of death lottery DC is the way to go. But the deferred member benefits are still highly valuable.

DC has no provision for the pension to be cut or withdrawn entirely in the event of negligence or misconduct, as there is in the NHS scheme.

Normal pension age for the NHS CARE pension is state pension age. DC offers considerably more flexibility, being available from age 55 until 2028 or for those with a protected age, else 57. DC reduction for taking earlier than state pension age is far lower.

Age when accruing the benefit matters, with younger ages meaning more time for compounded growth in DC. This DB has inflation plus 1.5% growth so provides some degree of matching of that growth potential for younger employees.

Overall this is an excellent DB scheme, with the benefit vs DC as usual in CARE schemes being greater the older you are. The plus 1.5% greatly inhibits the possibility of younger members being better off in DC instead.

Terron

adonis10 said:

Terron said:

What sort of index linking does the DB pension have?

It’s the NHS CARE pension so looks to be CPI+1.5%, unless I’m mistaken.

I was thinking of the index linking once in payment, but that will be full CPI for the NHS.

Private schemes are now required to have some index linking, but the law allows it to be capped at 2.5%.

I don't think you are going to be able to beat the NHS scheme.