Final salary pension - buying extra years

vicstar_2

My OH is a civil servant and has a final salary pension. I believe the maximum pay out he can get under the scheme will be a pension of 40/60 of his final salary. As he won't have worked 40 years before he is due to retire he has the option of buying extra pension years - he has applied for this and to buy approx 7 years will cost him just over £200 a month (although this figure will go up every time his salary goes up as it equals something like 7% of his salary) until he retires. Even if his salary doesn't go up over the next 33 years this works out at over £70k so eack 1/60 ends up costing him over £10,000.

The question is, it it worth doing this or should he put the £200 a month somewhere else - another pension/saving etc...?

any comments welcome

thanks

mcc28_x

Hi,

Funnily enough I myself have the same dilemna at the moment, added years does seem expensive, but I suppose it has a guarantee in terms of final value?

Could I get a better return investing the monthly sum elsewhere....

Mark

Ian_W

I don't know too much about the CS pension scheme so more general than specific comments.

Buying added years is often an expensive option for 2 main reasons:
1. As you're gaining a personal benefit and the employer isn't, you have to pay the full cost whereas with the normal contributions you pay a set amount and the employer [in this case the taxpayer] makes up the difference to provide for the defined benefits the scheme provides.
2. If you can afford it, it provides better and more guaranteed benefits than investing the money elsewhere. You don't take any investment risks because your benefits are defined and aren't limited to normal retirement but also increase the benefits for ill-health, survivor benefits and so on. In other words you're paying more because in all likelihood you'll benefit more.
A couple of other things to consider is that the £200 is pre-tax so as a BR taxpayer [I guess your OH is on about £34K pa?] the actual cost is £160 whereas other investments would be from taxed pay and if they become a HR taxpayer in the future they get more tax relief. The annual increases in the added years would be the same % as salary - on which the benefits are based. So what you pay increases but the benefits increase by the same amount, besides if you save or invest as an alternative unless you increase that year on year you're going to be very disappointed IMO.

Could I get a better return investing the monthly sum elsewhere....

Maybe, maybe not. You take the risk - or you buy into the certainty of defined benefits underwritten by the taxpayer.

polo2000w

In almost all cases it is worthwhile if given the option to buy as many added years as you can afford to buy. Although it will cost him 7% of his salary, as the pension is defined benefit, the employer will be implicitly paying a cost far in excess of this. This is because the employer will take the full risk of investment returns and annuity rates in the future - whereas your OH will be guaranteed a pension of 2/3rd of his salary at retirement for as long as he lives (and also quite likely, that should he die, his spouse would get a percentage of that as long as she lives). This is not to mention the tax relief he will get on the contributions.

Andy_L

The 7% will have been calculated as a "fair" rate based on assumptions about longevity, career progression, stockmarket performance etc. Your husband will either "win" or "lose" that calculation depending on how his circumstances compare to those assumptions.
Just to muddy the waters futher if you have the extra cash to save it might be best putting it in a pension in your name to use your tax allowance or using ISA's to avoid income tax totally.

polo2000w

not quite - the 7% is calculated globally across all scheme members. The cost is much higher than 7% for older members, particularly those about to retire. Typical cost of accrual for most pension schemes is in the order of 20% of salary - many schemes even higher than this.

meester

vicstar wrote: »

My OH is a civil servant and has a final salary pension. I believe the maximum pay out he can get under the scheme will be a pension of 40/60 of his final salary. As he won't have worked 40 years before he is due to retire he has the option of buying extra pension years - he has applied for this and to buy approx 7 years will cost him just over £200 a month (although this figure will go up every time his salary goes up as it equals something like 7% of his salary) until he retires. Even if his salary doesn't go up over the next 33 years this works out at over £70k so eack 1/60 ends up costing him over £10,000.

The question is, it it worth doing this or should he put the £200 a month somewhere else - another pension/saving etc...?

any comments welcome

thanks

You have missed quite a lot of information needed to make a decision:

His Age
His Salary
His current number of years of service
His planned retirement age
His normal pension payment (without extra years)

mcc28_x

A good choice?

My quotation is:
cost of buying 1 added year: £23.32 1.43%

I will probably buy 5 years which I believe would cost monthly 5*23.32/100*78 = £90.95.

The quotation says to give an indication of the difference to your added pension multiply the amount you want to buy by your FT salary/60 = extra annual pension.

This would be: £1631 p.a.

If I work another 18 years (age 60) I would pay at least £90.95*12*18 = £19645

If I retired at 60 and lived to 78 I would receive in extra pension 18yrs * £1631 = £29538

Probably a bit basic in terms of my expertise, but it seems like a good deal?

[Edit]

or is it?

If I invested £90 per month @7% over 18 years I would have an additional pot of approx £43k. This would by an annuity paying approx £2500p.a.

I'm now a little confused, the added years option doesn't look so good?

Comments welcome

Mark

Retired_I.F.A.

Guarantees cost far more than the same non guaranteed benefits simply because the g-teed routes cost calculation assumes hefty investment in g-teed funds namely gilts. If you have money to to throw at them then fine your buying a more secure pension othewise go the money purchase personal route which to better requires a greater portion in equity investment. By accepting the bigger risk based on historical data and all reasonable future assumptions money purchase is the better option for the majority.

Andy_L

mcc28_x wrote: »

I will probably buy 5 years which I believe would cost monthly 5*23.32/100*78 = £90.95.

The quotation says to give an indication of the difference to your added pension multiply the amount you want to buy by your FT salary/60 = extra annual pension.

This would be: £1631 p.a.


If I invested £90 per month @7% over 18 years I would have an additional pot of approx £43k. This would by an annuity paying approx £2500p.a.

The final salary pension will increase with RPI, the rate for the annuity quotation suggest's its a level annuity -ie it never increases.

You've used your current salary to calculate the pension rather than your final salary.

mcc28_x

This is more difficult to compare than I thought at first. I haven't allowed for inflation either.

Is there a better way to compare?