Can someone please help me figure out if my defined benefit pension is any good?

breadandbutter5

Hi, I'm completely new so I apologize in advance if I'm posting in the wrong place.

I (29) started a new job about 13 months ago. The job offered a defined benefit pension and all my colleagues (and employer) keep going on about how amazing our pension is and how it's very rare and the best in the market. 

I had some time to look into my finances and do some calculations over the Christmas holidays and I came to the conclusion that my pension is not that good at all (but I hope I'm wrong).

So the terms of my pension are as follows:

• I pay 6% into it
• I can get either a. 1/80th of the average of the last 12 months salary x years of service
• Or b. a lump sum of 3/80th of the average of the last 12 months salary x years of service
• It's linked to state pension age, which for me is 68 currently

My calculations show that based on my salary of £29k, I paid close to 2k into the pension so far. If I were to quit my job now, I would get £362 per year from whatever the state retirement age is in 40 years, to when I die.

If I were to go for option b, I would get a lump sum of slightly over £1k (this is almost half of what I paid in??)

Could someone please help me figure out what I'm missing? Why is everyone saying this is such an amazing pension? Is my maths all wrong? Would I be better off putting the money in a personal private pension?

QrizB

Welcome to the forum.

Are you absolutely certain that you don't get both the annual pension AND the lump sum when you retire?

Mark_d

Your DB pension is something that used to be commonplace but is now very rare.  It gives you security of knowing exactly what you'll get when you retire.

If you work for 40 years and your final salary is £60k, then you'd have a pension of £30k guaranteed.  This a good amount given that you'll ideally have paid of a mortgage on your home.

As you're only paying 6% into your pension (I pay in 35%), if/when you can afford it, you can save for the future using things like a Stocks & Shares Lifetime ISA.  You can also have a private pension in addition to your workplace pension.

NoMore

Presumably your hoping to have a long retirement ? For every £1740 you get £362.50 for life at retirement, you only have to collect it for 5 years and your ahead. This is ignoring the inflation linking that is probably included in the pension payment.

Also are you sure its or for a) and b), I would expect it to be either you get both or b) would also offer a reduced yearly pension as well as the lump sum.

breadandbutter5

QrizB said:

Welcome to the forum.

Are you absolutely certain that you don't get both the annual pension AND the lump sum when you retire?

Thank you! Fairly certain, yes. It says OR...

NoMore

breadandbutter5 said:

QrizB said:

Welcome to the forum.

Are you absolutely certain that you don't get both the annual pension AND the lump sum when you retire?

Thank you! Fairly certain, yes. It says OR...

Can you name the scheme, like QrizB, I will be extremely surprised if its OR, unless you get some reduced annual pension with the lump sum. 

Marcon

breadandbutter5 said:

Hi, I'm completely new so I apologize in advance if I'm posting in the wrong place.

I (29) started a new job about 13 months ago. The job offered a defined benefit pension and all my colleagues (and employer) keep going on about how amazing our pension is and how it's very rare and the best in the market. 

I had some time to look into my finances and do some calculations over the Christmas holidays and I came to the conclusion that my pension is not that good at all (but I hope I'm wrong).

So the terms of my pension are as follows:

• I pay 6% into it
• I can get either a. 1/80th of the average of the last 12 months salary x years of service
• Or b. a lump sum of 3/80th of the average of the last 12 months salary x years of service
• It's linked to state pension age, which for me is 68 currently

My calculations show that based on my salary of £29k, I paid close to 2k into the pension so far. If I were to quit my job now, I would get £362 per year from whatever the state retirement age is in 40 years, to when I die.

If I were to go for option b, I would get a lump sum of slightly over £1k (this is almost half of what I paid in??)

Could someone please help me figure out what I'm missing? Why is everyone saying this is such an amazing pension? Is my maths all wrong? Would I be better off putting the money in a personal private pension?

Start with the easy one: Would I be better off putting the money in a personal private pension? No, because you'd miss out on the employer contribution - which is impossible to calculate in a DB scheme, but is along the lines of 'however much is needed to provide the benefits promised by the scheme'.

You'd get a lump of 3/80ths PLUS a lower annual pension (a point someone else has already made above).

Don't overlook the fact that you are looking at your pension based on 'today's money' - and it will all be based on your earnings at, or close to, the point where you actually left the scheme - ie the average of your 12 months salary at the time you leave.

If you leave before you reach retirement age, it will go on 'revaluing' until such time as you access your retirement benefits under the scheme.

breadandbutter5 said:

My calculations show that based on my salary of £29k, I paid close to 2k into the pension so far. If I were to quit my job now, I would get £362 per year from whatever the state retirement age is in 40 years, to when I die.

If you quit your job now, you'd only get a refund of your own contributions (minus tax). You need at least two years in a DB pension to qualify for a 'deferred' pension (one payable when you reach the scheme's retirement date).

Once you hit the two year mark, you have a right to a deferred pension and as I mentioned above, that would increase steadily between the time you leave the scheme and the time you draw your scheme benefits, so it would be much more than £362 a year.

You're in a great scheme, so stay in it!

Brie

How lucky you are to have the DB pension.  Don't be silly and quit it please!  You may be paying 6% but your employer is also paying in to it and that is all free money for you.  

I suspect if you investigate further you will find that should you leave this employer in a few years that your pension will continue to grow by RPI or CPI or some minimum %age per year.  

DB schemes are generally considered such a positive thing that there's practically a ban on ever transferring them into other DC work schemes.  

fyi - re your option B - with my DB scheme I was able to get a lump sum vaguely equivalent to what on a DC scheme would call a 25% tax free lump sum and a decent annual amount with an additional amount payable to my spouse for his lifetime should I die before him.  Excellent value.

leosayer

It is a very good deal.

If a bank offered to pay you £362 per year for 20+ years at a one-off cost to you of £2,000 would you take it? You'd be mad not to. 

dunstonh

So the terms of my pension are as follows:

• I pay 6% into it

• I can get either a. 1/80th of the average of the last 12 months salary x years of service

• Or b. a lump sum of 3/80th of the average of the last 12 months salary x years of service

• It's linked to state pension age, which for me is 68 currently

Looks like a pretty traditional DB scheme.    And at 6% contribution, that is a very valuable.

My calculations show that based on my salary of £29k, I paid close to 2k into the pension so far. If I were to quit my job now, I would get £362 per year from whatever the state retirement age is in 40 years, to when I die.

See how good it is.  Already, after just 13 months, you have got that figure.     You are very lucky.

If I were to go for option b, I would get a lump sum of slightly over £1k (this is almost half of what I paid in??)

Not sure why you are linking it to your contributions made.   Clearly the pension benefit is massively better than the contribution.

Could someone please help me figure out what I'm missing? Why is everyone saying this is such an amazing pension? Is my maths all wrong? Would I be better off putting the money in a personal private pension?

No alternative will beat that pension.     
Its hard to say what you are missing but the wording in your comments suggest you are:
a) ignoring indexation
b) treating the pension benefits as if it they are only paid for one year, when in reality, its likely to be closer to 25-30 years 

80ths schemes usually default to 1/80th for every year of service and 3/80th as a lump sum.  Often you can adjust the ratio of lump sum to income (usually taking less lump sum and an increased income is better value)

So, if you did 40 years, you would get 40/80ths of your pensionable salary on leaving plus a lump sum.

If you wanted to pay into a personal pension to match the benefits of the DB scheme, you would need to pay around 30% of your salary.

swindiff

As others have said I would be very surprised if it is either/or.  Much more likely to be 1/80th annual pension plus 3/80th lump sum.  This was what my pension was when I started working for a university (but was enrolled into LGPS, due to my lower grade) 35 years ago.