Financial value of a job with a Final Average pension

Simon11

Hello all,

Appreciate this isn't easy to answer, but seeking to check whether my maths is on the right path.

I currently have a job with a DC and currently fill this with £40k per year.

I am shortly going to be attending a second interview for a job which offers a final average pension and trying to calculate the benefit of their pension (although I am ignoring the aspect of the security of a DB pension).

The cost of this pension for me is 10%, thus £8.4k per year.

Using the formula below (assuming a salary of £85k), each year I pay into the scheme will mean I will receive £1.2k per year in today's money. The pension can be accessed at age 62 and assuming I live till 84, that is 22 years. Thus the benefit of this pension is £27k for each year I pay into this pension (ignoring the lump sum?)

Even doing this maths, I am struggling to compare financially between jobs!

Thanks for your advice in advance!

Albermarle

Using the formula below (assuming a salary of £85k), each year I pay into the scheme will mean I will receive £1.2k per year in today's money. The pension can be accessed at age 62 and assuming I live till 84, that is 22 years. Thus the benefit of this pension is £27k for each year I pay into this pension (ignoring the lump sum?)

I think what you are missing is that the £1.2K would very likely be uprated each year due to inflation ( maybe not by the full amount) , so this makes it worth significantly more than £27K for each year.

Another way to look at it is that is that employers of DB schemes will almost always be pumping a lot more into the scheme, than those with DC schemes. A figure of 25% to 30% is often mentioned, although it will depend on the scheme and how much employees are contributing. Whereas with a DC scheme, employer contributions are usually in the 3% to 10% region, occasionally a little higher.

zagfles

How old are you? How does the pension increase with inflation? What does Final Average pay actually mean, presumably it's like a CARE scheme (career average revalued earnings) where pay is revalued rather than a simple average over the whole employment? These sort of details make a lot of difference to the value.

Might be worth looking up annuity rates for something as similar to the DB pension as possible (ie similar inflation increases, guarantees, spouse pension etc). But if you're relatively young need to consider potential investment returns vs inflation when comparing DC with DB.

Marcon

Simon11 said:

Hello all,

Appreciate this isn't easy to answer, but seeking to check whether my maths is on the right path.

I currently have a job with a DC and currently fill this with £40k per year.

I am shortly going to be attending a second interview for a job which offers a final average pension and trying to calculate the benefit of their pension (although I am ignoring the aspect of the security of a DB pension).

The cost of this pension for me is 10%, thus £8.4k per year.

Using the formula below (assuming a salary of £85k), each year I pay into the scheme will mean I will receive £1.2k per year in today's money. The pension can be accessed at age 62 and assuming I live till 84, that is 22 years. Thus the benefit of this pension is £27k for each year I pay into this pension (ignoring the lump sum?)

Even doing this maths, I am struggling to compare financially between jobs!

Thanks for your advice in advance!

zagfles said:

How old are you? How does the pension increase with inflation? What does Final Average pay actually mean, presumably it's like a CARE scheme (career average revalued earnings) where pay is revalued rather than a simple average over the whole employment? These sort of details make a lot of difference to the value.

Might be worth looking up annuity rates for something as similar to the DB pension as possible (ie similar inflation increases, guarantees, spouse pension etc). But if you're relatively young need to consider potential investment returns vs inflation when comparing DC with DB.

It's the Railways Pension Scheme: https://member.railwayspensions.co.uk/docs/default-source/Member-Guides/2084.pdf

Simon11

Thanks for your feedback, looks like there isn't a simple way to analyse it but several different factors to consider on both sides.

kinger101

Another thing worth remembering is that DB schemes are more generous in respect to the LTA.  The calculation is based on 20x annual pension plus lump sump. 
 

Dunky62

It is actually 20 x the annual pension plus lump sum.

kinger101

Dunky62 said:

It is actually 20 x the annual pension plus lump sum.

My bad, have corrected. Don't know why I typed 25

SMcGill

Unless the RPS scheme has changed recently I’d bite their hand off. As I recall it’s available at 60 without reduction and increases each year by uncapped RPI. 

Brie

And it's good to have the 2 types of pension schemes in your pocket so that you can deal with things in 2 different ways/times when you look to retire.  Having a DB scheme was simple for me to sort while having DC schemes are more complicated but has given me the flexibility to wait out the current low market value of these.

Albermarle

Brie said:

And it's good to have the 2 types of pension schemes in your pocket so that you can deal with things in 2 different ways/times when you look to retire.  Having a DB scheme was simple for me to sort while having DC schemes are more complicated but has given me the flexibility to wait out the current low market value of these.

Agreed, as we often say on this forum, having a DB and a DC pension is the 'sweet spot'