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

Somebody

Have you looked at the death in service benefits?  Most DB schemes come with guaranteed death in service benefits (a multiple of your salary payable to nominated benficiaries), as well as spouses/dependents pension should you die.

Albermarle

leosayer said:

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. 

Or to look at it another way.
If you were to buy a pension of £362 per year in the open market , at least partly linked to inflation at age 60, it would cost about £9,000. 

Universidad

DB pensions ought to offer confidence in your retirement income in a way that a simple pot of investments cannot. They pay out for life, so you never have to worry about running out of money, only about whether the amount you get each year is high enough to live on.

This confidence is, in the financial world, a very expensive thing to be able to offer. (As Albermarle points out, currently it would cost about £9000 for something similar on the open market, for something that you've banked in a single year of employment)

If you tell us what pension scheme it is, you might find someone on the board with good knowledge of the ins and outs of it. There can be nuances to look out for.

The main thing is probably whether there is an inflation cap on revaluation - this can cause your entire pension to be devalued in periods of high inflation, reducing some of the certainty you would otherwise have. Most DB pensions have some kind of inflation cap, so the presence of one is not a killer - but it makes a big difference if it's 2.5% or 5%+ for example.

breadandbutter5

NoMore said:

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.

I would hope so but it's a gamble isn't it .. In my mind the fact that it's linked to the state pension age (at the date of retirement) is not very favourable. That age is 68 now and it could well be 80 in 40 years' time?

NoMore said:

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.

You're right, I looked again and it appears to be both. This makes things better

BoGoF

breadandbutter5 said:

I would hope so but it's a gamble isn't it .. In my mind the fact that it's linked to the state pension age (at the date of retirement) is not very favourable. That age is 68 now and it could well be 80 in 40 years' time?

Normally you can take the pension before state pension age subject to actuarial reduction. It would be more of a gamble opting out and paying into a personal pension for the various reasons already stated.

breadandbutter5

leosayer said:

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. 

I definitely would but I doubt I will live for anywhere near 20 years from state pension age in 40 years from now. I'd be lucky if I get to 10.

The state pension age is 68 right now and the average life expectancy is 80 (been decreasing over the past few years). That's 12 years...

However they will keep rising the state pension age over the next 40 years and I doubt the life expectancy will increase much. Maybe I've got a very negative outlook on things but something about not even knowing if / when I'd be able to access this pension doesn't sit well with me.

QrizB

breadandbutter5 said:

The state pension age is 68 right now and the average life expectancy is 80 (been decreasing over the past few years). That's 12 years...

There's a lot of misunderstanding over life expectancy.

"Average life expectancy is 80" is at birth. It's only relevant if you're a newborn.

As you get older, you've outlived everyone who has already died and so your average life expectancy gets higher. For a man of 29, the average life expectancy is 85. For a woman, it's 88.

The calculator is here.

68 to 85 is 17 years.

breadandbutter5 said:

However they will keep rising the state pension age over the next 40 years and I doubt the life expectancy will increase much.

Do you have any evidence for this claim?
The current stated intention is, IIRC, that the average state pensioner will remain one for 20 years.

dunstonh

I would hope so but it's a gamble isn't it .. In my mind the fact that it's linked to the state pension age (at the date of retirement) is not very favourable. That age is 68 now and it could well be 80 in 40 years' time?

No its not a gamble.  The whole point of a defined benefit pension is that it pays you defined benefits.

If state pension age is 80 in year forty years time, it means life expectancy has gone up another 13 years.  Why do you consider living longer a problem?

I definitely would but I doubt I will live for anywhere near 20 years from state pension age in 40 years from now. I'd be lucky if I get to 10.

Do you have medical conditions that you are going to live significantly less than average life expectancy?
If you don't have any current medical conditions but are paranoid about life expectency, then you could take out life assurance.   With a low pension contribution of 6%, you have excess funds available that you could divert to that

The state pension age is 68 right now and the average life expectancy is 80 (been decreasing over the past few years). That's 12 years...

Where are you getting your figures from?  - they are wrong.
Depending on your age and gender, average life expectancy will be around 87.     A quarter will make 94,  And around 1 in 10 will make 99.

However they will keep rising the state pension age over the next 40 years and I doubt the life expectancy will increase much. 

Not correct.   State pension age is largely aligned with life expectancy.

NedS

Universidad said:

The main thing is probably whether there is an inflation cap on revaluation - this can cause your entire pension to be devalued in periods of high inflation, reducing some of the certainty you would otherwise have. Most DB pensions have some kind of inflation cap, so the presence of one is not a killer - but it makes a big difference if it's 2.5% or 5%+ for example.

Yes, this is very important.

One of my DB pensions (luckily the smallest in which I only contributed for a few years) has a 2.5% cap. Colleagues who worked there for 40 years are just now finding out how painful this can be when their gold-plated final salary pensions have been particularly hard hit in the last couple years of high inflation.

Anyone retiring at the start of a 10 year period of high inflation with a large capped DB pension would be particularly hard hit.

This is something to be aware of, but please do not let me scare you off as all the other comments above state, such a final salary pension scheme is still way better than most alternatives, and it is very unlikely you will work all your life with the same employer in the same pension scheme so extremely unlikely you will reach 68 having all your retirement eggs in this one basket. It's a far higher risk for someone in their 60s now, retiring with such a pension after 40 years of employment.

breadandbutter5

Thank you everyone for your helpful comments. I think I learnt I was wrong with a lot my assumptions and it seems that my pension is indeed as good as they say. Thanks again!