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

hugheskevi

amanda1024 said:

Possibly a third one is being unduly pessimistic about state pension provision in future. ( Older people vote in greater numbers than younger ones, so no Govt wants to reduce it, in fact the opposite has been happening)

I'd say this is realistic rather than pessimistic. Precisely *because* older people vote in greater numbers (and are more likely to vote for the current lot https://www.theguardian.com/politics/2019/dec/21/age-not-class-is-what-divides-british-voters-most), the value of the state pension is being maintained/boosted, but the age of entitlement continues to go up, which affects younger people rather than older people (who are already entitled). This is sometimes contrary to the trend in life expectancy, which went down in 2020 https://analytics.phe.gov.uk/apps/chime/#Life expectancy - no sign of a commensurate reduction in state pension age! For those of us whose work pension is tied to the state pension age, it's a double-whammy.

For OP - your defined benefit *is* a good deal (despite pessimism about state pension age), but if/when you can afford it, it would be worth investing in other retirement options too - e.g. SIPP, potentially Lifetime ISA.

It is important to remember that as well as changes in life expectancy, there is also consideration of how long the govt. considers adults should spend over State Pension age, as a proportion of their adult life.

Since assessments began, life expectancy has not been increasing as rapidly as previously expected.

At the same time, the proportion of life that the govt. thinks should be spent in retirement has been falling, from an original about a third, 33%, to the latest review where it fell to 'up to 31%'

So the outcome of the reviews is really a political decision, hiding behind the science of changing life expectations.

The changes also affect public service pensions, so changes will face union opposition (perhaps more significant under a Labour administration).

breadandbutter5

amanda1024 said:

Possibly a third one is being unduly pessimistic about state pension provision in future. ( Older people vote in greater numbers than younger ones, so no Govt wants to reduce it, in fact the opposite has been happening)

For OP - your defined benefit *is* a good deal (despite pessimism about state pension age), but if/when you can afford it, it would be worth investing in other retirement options too - e.g. SIPP, potentially Lifetime ISA.

Definitely my plan! Will look into SIPP soon.

Bostonerimus1 said:

Your DB pension looks good and it will be an excellent benefit if you stay working where you are now for a long time. You should also be contributing to an ISA and given your 6% DB salary contribution I think you should put 10% into the ISA, I assume you won't get to the max contribution. 

Absolutely, I have a cash ISA and save a substantial amount each month. I intend to look into S&A ISA as well

Pendle_Gazza

That was the one thing I was going to mention, as a couple of others have... make sure you build up other things in your portfolio, including ones you would be able to call on earlier if need be - so it's good you're doing it and considering other options, and thinking about it relatively early. Also, consider adding more into these other areas if/when your salary increases. 

Universidad

FIREDreamer said:

I am more worried about Labour means testing the state pension. Their own demographic won’t be affected by that to the same degree.

The state pension is already effectively means tested, as it is all taxable income. 

What you can expect in terms of the screws being tightened around the state pension is for small changes to chip away at that, rather than for a wholesale means testing of the state pension, as you might imagine that to be.

So, for example, they might do it in a similar way to the HICBC, where you lose a certain proportion of the benefit once you get over a relatively high retirement income level.

But there are two main problems with reducing peoples retirement incomes like this.

Firstly, it wouldn't necessarily achieve the aims (or needs) of the government: it could incentivise a lot of the workforce to retire earlier, which exacerbates the main pensions issue, which is that we have an aging population. (For example, see the issues around the LTA forcing doctors into retirement).

Secondly, unlike other state benefits, the state pension is something that you accrue an entitlement to, over time, and the government will quite happily tell you what you have banked so far. It would be a hard sell to shrug and take that away. 

And don't forget that the entire pension landscape with all its tax efficiencies is set out to incentivise retirement savings. So any government that says "thanks for following the incentives we have laid out for you to prepare for retirement, but you would have been much better off if you had not done that, because we're taking much of it away from you now" is likely to find themselves in serious trouble.

Dazed_and_C0nfused

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?

I know you have seen the light now but one way to think of it is that your £2k was almost certainly only £1.6k after allowing the tax you avoided paying.  And that £1.6k is a one off for that year.

The £362 you have accrued in that one year will almost certainly increase each year with an element of inflation proofing and you could be paid it for 30+ years in retirement.

Maybe not gold plated but not far off it!

af1963

FIREDreamer said

I am more worried about Labour means testing the state pension. Their own demographic won’t be affected by that to the same degree.

You might be surprised at the demographics which supported each party at the last election.  Forty years ago, social class was a fairly reliable predictor of votes.  Nowadays there is support for both main parties across the range of classes. Age is now a stronger factor in voting intention. 

Universidad

af1963 said:

Forty years ago, social class was a fairly reliable predictor of votes.  Nowadays there is support for both main parties across the range of classes.

Erosion of the middle class biting back, perhaps.

hyubh

Universidad said:

FIREDreamer said:

I am more worried about Labour means testing the state pension. Their own demographic won’t be affected by that to the same degree.

The state pension is already effectively means tested, as it is all taxable income. 

That's a strange thing to say. Insofar as your total income in retirement is such that the tax due is above your state pension amount, you can't say the state pension is being taxed away, unless you also claim you're not being taxed on other taxable income. Which doesn't make much sense.

Were the state pension become actually means tested, people won't be saying 'no big deal, it was effectively means tested already', as they become ineligible for it in the first place.

shortseller09

One word of warning, the employer could, at any point, close the DB scheme and replace it with some form of DC scheme.

JoeCrystal

shortseller09 said:

One word of warning, the employer could, at any point, close the DB scheme and replace it with some form of DC scheme.

However, I vaguely recall that the employer generally replaces the DB pension scheme with the DC contributions at levels much more generous than the bare auto-enrollment minimum. Still, I would love to know which company or organisation breadandbutter5 works for!