How valuable is my DB pension actually?

Albermarle

It is not just because it is a DB pension as such, it is because with these schemes the employer has to fund them for a large % of your salary, to meet the commitments.

If you had a DC scheme, but the employer say added 25% of your salary, instead of the usual 3 to 10%, then the final outcome would not be that dissimilar ( assuming the employee added a similar amount to both).

artyboy

My first employer ran a non-contributory DB pension scheme when I started, but it was closed just 9 months later and replaced with a DC scheme.

That DB pension is now worth about £3000 a year to me when I hit 60 (in today's money based on statutory revaluation).

Obviously I wish they'd kept it open, but it's an illustration of just how crazily generous these schemes were, and how fortunate you are if you still have one - even if you have to contribute a fair whack of your pay into it.

Because the vast majority of such schemes are now in the public sector, there's a lot of political noise from certain more 'agitator' parties about their cost. Personally I have no real issue, in most cases public sector workers could earn more in comparable private sector jobs, so it's a trade off.

Back to my old scheme… I recall that my employer tried to buy people out of the ongoing DB obligation. In my case I think they offered about £800. The crazy thing is that I know a lot of people that took it, because it was 'real money' that they could understand, rather than a vague promise of something in the future.

These people were bankers, by the way 🤣

Albermarle

These were bankers, by the way 🤣

Not normally known for their long term thinking, not in the City anyway ……

Bostonerimus1

If you were retiring at say age 65 and your DB pension was index linked then assuming a 4% drawdown over 30 years and historical market returns then your pension of 15k/year might be the equivalent of a 375k pot.

Nebulous2

You have done well to reach that point already, and while money isn't everything, it should be a consideration if you are changing job. You would usually need a decent payrise to compensate for moving from a DB pension to a DC one.

I spent most of my career in the public sector, with staff who weren't paid huge amounts of money, but a lot of them had accrued a lot of service. They often didn't value their pension as much as they should have, often believing they were being cheated, or were paying too much for it.

I used to try to counter some of that. A statement that always got people agitated was: "For most of the people in this room, their pension will be worth more than their house."

Most of them saw their home as their only significant asset, so they couldn't get their heads round that.

poseidon1

A bit of a curious disconnect between the OP's current 'respect' for pensions prompting consideration of extra funding, and their previous post castigating private pensions due to government constantly changing the goal posts.

A 180 degree change of viewpoint occasioned by continued exposure to the weight of good advice from this forum?

hugheskevi

I am 37 and I have a DB pension currently worth £15k per year.

This is key. If your pension increases at a low rate, eg, CPI capped at 2.5%, then this is far less valuable than if it is linked to final salary.

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.

£375K is just taking a crude 4% withdrawal rate. That might be reasonable if you were aged in your 60s and comparing a DB scheme to drawdown, but you are aged 37 and so need to consider those intervening 23 years until you are 60. If the £15K DB pension is just increasing by CPI that makes it much cheaper to fund, as you would expect real returns to be something more like CPI+3% over a long period, or whatever your expectation is. That 3% compounded over 23 years makes a huge funding difference.

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

The value of your pension is extremely sensitive to the discount rate used, which can be thought of as the assumed rate of return.

A thorough analysis of valuing DB schemes can be found at this link. Based on that analysis, and based on a 47 year old, the Annual Allowance flat factor was set at 16. As you are younger than 47 your factor would be much lower than 16, probably closer to 10, and so the value of that £15,000 p/a pension closer to a capital value of £150,000.

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?

A DC pension is a perfect complement to a DB pension, each type's strengths counters the other's weakness. A DB is inflexible, guaranteed (to a point), and provides a steady income each year. A DC pension has no guarantee, is complelelt flexible, and can give more resources whenever you wish., eg, front loaded for early retirement or whatever.

A very efficient arrangement is a DB core pension and then a DC pension build from the most tax efficient income, eg, higher rate tax, getting Child Benefit back, keeping income under £100,000 or whatever threshold is relevant to you.

Universidad

One thing that I'd add to the current conversation is that how well you're doing depends on how you want to live in retirement, which depends quite a bit on how you live now.

To have amassed 15K of DB pension in, let's say, about 15 years of work, suggests a fairly high salary. So while you may, in financial terms, be "ahead" of most people, the person you most need to be ahead of is yourself. 🤑

For my own purposes 15K of DB pension was literally the point at which I said to myself, well, combined with the state pension, that would be enough, assuming my mortgage is gone.

But if you're used to earning, and spending, £60,000+ per year then… maybe not?

GrubbyGirl_2

DB pensions are like gold especially if you've had one for a long time. I was in the NHS 1995 scheme which was final salary and paid into it for 41 years. When I retired in 2020 age 60 they give you a hypothetical annuity figure. Mine was £1.8 million. On my pension page it gives you details of all of your earnings and pension contributions. My total career earnings were £1.96 million and pension contributions were £170k. fortunately at age 18 I had no idea I could have chosen not to pay into my pension………for once ignorance really was bliss

leosayer

https://forums.moneysavingexpert.com/discussion/comment/81909475#Comment_81909475

It depends how the statement is worded.

Most statements show the annual pension accrued until the statement date in today's money as you said.

Some statements also include projections if you keep contributing until your planned retirement age which may default to state pension age.