How valuable is my DB pension actually?

j813ys

I am 37 and I have a DB pension currently worth £15k per year. A quick google search tells me that to draw down that much on a DC pension pot it would typically be a pot of £375-400k. This seems staggering to me since google also says the average pension pot size at retirement age is currently circa £150k.

How can I be so far in front at age 37, surely I am missing something here?

I have always been concerned that leaving the job with the DB pension before it reaches the full value, essentially doing 40 years at the job, would make it much less valuable and that I should already be running a DC alongside it to counter that negative effect, because if I start the DC pot later there is much less time to compound it up.

Should I be running 2 pensions or am I overthinking it?

Aylesbury_Duck

If you have spare income and headroom in your annual allowance, there's certainly an advantage to running a DC scheme as well. What DB pension is it? If it's LGPS there will probably be a linked AVC scheme available which offers very generous TFLS terms if the AVC is drawn at the same time as your LGPS.

The usual considerations come into play. Mortgage? Other debts? Significant expenditure on the horizon? Can you afford to lock spare money away for 20 years or more?

P.S. to answer your original question: very. Having something guaranteed to pay an inflation-linked income from your late 60s until death is great. I'm in a similar position, with a decent DB pension and full state pension comfortably funding 67 onwards, so I've got DCs and savings to see me through early retirement until 67.

daveyjp

Most DB pensions now only give max annual pay out if you retire at the scheme retirement age - now generally 67.

If you retire early there can be a significant reduction for early payment, to reflect the pension will probably be paid for longer.

If you have any desire to retire early you need a plan in place to accumulate funds to enable this and defer your DB pension so the reduction isn't as dramatic. This could be a pension which can be drawn at 58 (be mindful this age could increase again), ISAs, property ladder etc etc.

LHW99

Would you want to retire early? Pensions will soon only be accessible from 58, and maybe later by the time you get there. Maybe building up some ISA investments would provide an option to go mid-50s, or at least to drop to part-time.

JoeCrystal

valuable? Depending on what your DB pension actually is. That would be understatement of the century, DC pension for example don't typically come with Ill health retirement, pension for children under age, and all other possible bells and whistles. I would say... Priceless even.

horsewithnoname

https://forums.moneysavingexpert.com/discussion/comment/81908692#Comment_81908692

the civil service pension has a reserved age for early retirement, classic is generally 50, the other schemes are 55, if in the scheme before 4 November 2021. In some departments you can partially retire by dropping 20% of your pay you can access your pension and any lump sum while working part time (if your management allows you to)

Though the normal pension age for the current scheme, alpha, is your state pension age, you can still access your pension at 55. Subject to the whims of crapita of course 🙄

Obviously if you can afford to make additional provision, all to the good 👍

dunstonh

How valuable is my DB pension actually?

In most cases, replacing it with market-available options (e.g., a SIPP, PHI, and term assurance) would typically cost you around 30% of your salary. Maybe towards 25% if its career average but more if it has a better accrual rate.

This seems staggering to me since google also says the average pension pot size at retirement age is currently circa £150k.

The figures on what people have at retirement are difficult to quantify because people tend to have multiple pensions and multiple tax wrappers. I am working on a review at the moment where the person has just over £1m but only £180k in the pension wrapper. The rest is in ISAs, GIAs and onshore bond. That doesn't include the several hundreds of thousands they have in cash.

The average DC pension pot size is just £19k. However, that is weighted low because of auto-enrolment being relatively new and lots of small pots as people change jobs.

How can I be so far in front at age 37, surely I am missing something here?

Mainly as you are in a DB pension.

Should I be running 2 pensions or am I overthinking it?

You should be doing what you need to do to achieve your objectives.

How much are you putting into a stocks and shares LISA for example?

thats not a pension but its more tax efficient than a pension and under 40s should be lapping that up if they have excess funds available.

HedgehogRulez

is that £15k per year what you've accrued to date, or what's forecast if you stay employed accruing benefits until retirement age?

MyRealNameToo

https://forums.moneysavingexpert.com/discussion/6657921/how-valuable-is-my-db-pension-actually

Yes, thats why DB schemes are so valuable and why so many firms have stopped offering them. Its also why its so hard to get anyone to give you the advice to convert your DB into a DC despite all the on here complaining that IFAs advise them not to and then almost no one will accept the transfer against advice.

DC you have no guarantees you dont know what the pot value will be at retirement and even less certainty on what pension that will buy especially if you want the certainty of annuity

katejo

https://forums.moneysavingexpert.com/discussion/comment/81908738#Comment_81908738

Probably what he has accrued so far. I am about to retire on a DB but have old annual pension statements showing what I had built up so far.

Exodi

j813ys
I am 37 and I have a DB pension currently worth £15k per year. A quick google search tells me that to draw down that much on a DC pension pot it would typically be a pot of £375-400k. This seems staggering to me since google also says the average pension pot size at retirement age is currently circa £150k.

It's a bit of an unfair comparison, and remember you only have a DB pension worth £15k per year when you retire at NRA, so in your example it wouldn't be fair to consider it to a pot of £375-400k now.

If we consider that to the DC pot values you cited, we see a drawdown rate of 3.75%-4%. This is around what some people cite as the 'Safe Withdrawal Rate' (though controversial, as 4% is based on research on US investors) and is viewed as the rate at which US investors can theoretically withdraw without running out of money over a 30 year retirement - with many scenarios leading to a significant sum of money left over in the DC pot (and commonly, with more than you started). To look at the whole picture, you should consider that you could pass any leftover capital in a DC pot to your beneficiaries, whereas in most cases a DB pension dies with you. You should also consider that while you can access them both earlier than NRA (typically up to 10 years before), your annual benefit is significant reduced for a DB scheme (though in practice this is to be expected as you are drawing on it for longer, aka actuarial neutrality).

A much fairer comparison might be comparing an annuity, which is a lot more similar to a DB pension - can increase in line with inflation, guaranteed income but no pot of money, etc. Obviously I don't know the exact terms of your DB pension, but assuming it increases in line with RPI, you could see that it might cost ~£275k to purchase an annuity.

https://www.hl.co.uk/retirement/annuities/best-buy-rates

Nonetheless, you're not wrong in your thinking - DB schemes have generally been extremely lucrative for retirees, hence why they have generally been phased out entirely from the private sector over the last few decades and hyperbole like "gold-plated" pensions gets thrown about in reference to DB schemes.