final salary pension at 32

May

Hi everyone

I'm a little confused. I have started a new job of which it offers a final salary pension and a death in service pay out.

At the age of 32 i've been advised that i should only consider paying in to a pension at 40 and no matter how much i pay into it, i'll only come out with a final salary amount.

I'm confused as the the job i have is quite risky and my family will only benefit from the Death in service scheme if i'm with the pension fund.

Any advice?

jem16

Yes, sack whoever gave you the advice in the first place.

A final salary pension is normally worth its weight in gold. There is no investment risk unlike most other pensions. At retirement the pension you get will be based on your final salary at retirement, i.e. you could get half your final salary depending on the number of years you have contributed.

Who is your job with?

May

thanks for the advice.
I work for BAA and pay 5% of my salary which is a different amount each month as i work shifts.
I have tried to read the info passed on from the pension company but it makes no sense to me.

However, pensions do make me nervous as i am always reading about pensions company folding - would these be the companies that are based against stocks and shares?

jem16

That would be the BAA pension that caused all the strike furore recently as they are trying to close it to new members.

It may well change to a money purchase scheme at some point.

vivatifosi

Hi May,

I'm going to answer your question as a trustee of a final salary pension scheme, rather than as an IFA. As I'm not an IFA I won't be giving investment advice, but I can advise how your pension works. I've also tried to use the type of pensions language that I understand, so apologies to the IFAs on this board if I've inadvertently used the wrong wording somewhere.

There are essentially two types of pension, defined benefits and defined contributions. The "final salary" scheme is a defined benefit scheme. This way what you get out of it at the other end (ie when you retire) is worked out as a fraction of your salary at the end of your service. In the past, companies running final salary schemes were able to take "pension holidays" which meant that they didn't have to contribute to the scheme, while you as the future pensioner still did. However, a shift in government tax policy coupled with poor investment returns in the early 2000s has meant that companies often have to pay a larger share into these funds than they had to in the past, often companies have shortfalls to make up as a result of these changes. The companies are also the ones who carry the risk.

A defined contribution scheme on the other hand means you know how much you and the company are putting in, but not what you are going to get out in the end. Now, if the stock market and other investment vehicles (bonds, property etc) function well, you could do really well out of a defined pension scheme, arguably better than out of a defined benefit scheme. But the key word here is IF. When the markets and/or bond yields go down, the investment of people in those schemes may likely also dip in value (depending on what they are invested in and where). So in this scenario you are less likely to be able to tell what your pension will be worth in the future.

Both types of schemes are now significantly safer than pensions were in the past due to changes in legislation. Thankfully even the Dexion pensioners (one of the worst hit groups by closures) are now going to benefit from these changes.

Turning to the next point of not investing until you are 40. I've never heard that advice before, in fact I was told to get my pension in my 20s.... However a good IFA will tell you that £10 invested at 32 years of age will be worth more than £10 invested at 40 years of age. And of course you'll get to add more £10s to your retirement fund along the way.

Finally death in service is a useful benefit. My scheme has had to pay out on death benefits to people who died well before their time as a result of accidents etc and it is a real tragedy (please know I'm not wishing you dead!!!!) but those funds have been an absolute godsend to people who otherwise would not have had money anyway.

Anyhow, the BAA scheme is clearly a contentious one and I would imagine you have to decide pretty quickly if they are planning to shut the scheme to new members. PLEASE, PLEASE, PLEASE get good advice from an IFA who can look at the scheme and explain the gobbledegook and, most importantly, help you decide what's right for you.

Brum_Man

May wrote: »

However, pensions do make me nervous as i am always reading about pensions company folding - would these be the companies that are based against stocks and shares?

ALL pension funds invest in stocks and shares, just some to different degrees.

As said, final salary is based on the number of years in service and the amount of final renumeration. If they are offering you one you should *almost* definitely take advantage of it.

With the ageing population these types of schemes are becoming increasingly unaffordable for most companies to fund and therefore they are closing to new entrants and switching to money purchase schemes (where the final amount depends on how much you put in and the investment return). These tend to be less favourable when you when you compare them on a like for like bases ie. how much you put in each year.

May

thanks so much everyone.

This has helped me out alot. I think i'll stay in the scheme as I was going to opt out.

thanks again

Lorian

Do you know if the scheme is 60ths/80ths/100ths Thats the best clue to what it'll be worth when you retired.

dunstonh

At the age of 32 i've been advised that i should only consider paying in to a pension at 40 and no matter how much i pay into it, i'll only come out with a final salary amount.

Slap the idiot that told you that. How many others have they told that too who have listened to them. Being out of the final salary scheme for 8 years can cost 10% of your final retirement income.

Some workplace myths are very dangerous.

harryhound

Demand a copy of the real rules (probably called something like the trust deed). This is not the silly little public relations booklet that new joiners get.
It may well be the size of a small novel and covers such topics as what happens when "Young Mr Grace", aged 80 marries his nurse.
Wrap a cold towel round your head and read it. Pay special attention to "early retirement" and any other topics that will effect you personally.

Far too many pension scheme members do not bother to take an interest and when their company gets taken over or hived off, they get ripped off.

I well remember reading the prospectus when British Airways was sold off on the stock exchange!

May

Thanks for all the advice everyone. I'm gonna stick with it and try and get my head round the figures and such like.

Mnay thanks again - this is better advice than what i have previously been given!