Final salary - to buy extra years?

kittycat07

I'm employed as a civil servant and was one of the lucky ones to get in on the final salary pension scheme. I'm in my mid 20s and have worked for the civil service for 2 years. I have the option to buy "extra years" but only til the end of the month becuase they are changing the scheme. I can buy up to 5 years and 200 odd days which will cost me 4.34% of my salary - my question really is is this worth doing? By the time I pay this for the next 30 odd years wouldn't I have spent more money than the benefit I'll get? I'm keen to do this if it'll benefit but really don't want to pay it if it's not. Any help gratefully received. Whilst not on the bread line I'm still paying off student loans and a mortgage so don't want unnecessary expense - but if it's worth it will do it.

Retired_I.F.A.

Different person but the same question....
http://forums.moneysavingexpert.com/showthread.html?t=748187

7% should not be the critical yield figure for you though.
For her with 5 years till retirement 7% is a reasonable figure but you have far longer to go so todays low interest rates and the last few years with poorer investment returns should not be the basis for a longer future reasonable projection.

On the other hand you have more promotion prospects and paying a percentage of your pay now may well turn out to be a great benefit if your promoted as you will get a pension based on your final salary.

The actuaries who calculate the cost take that into account so your critical yield would be higher than hers for both of the above reasons.

Cozworth806

Not sure what your th's are. Mine in DWP are 1/80th per year of service so to buy 4 years will increase your pension by 4/80 or 5% of your future salary, plus 3/80ths as a lump sum (3.75% of salary)
Final salary schemes are obviously better in times of higher salary increases/ inflation as the final salary will be that much higher, as well as if there is any chance of promotion.

If you can afford it then I would say go for it, but if you want more flexibility then maybe looks to put the 5% into an ISA, on an ongoing basis.

Retired_I.F.A.

Cozworth806 wrote:

... Final salary schemes are obviously better in times of higher salary increases/ inflation as the final salary will be that much higher, ...

That's not true final salary / defined benefits are not better than personal pensions / money purchase.

Wiith higher inflation comes higher interest rates making the money purchase route cheaper. Both have to be costed so when it comes to added years the estimated final benefit and it's cost is calculated based on assumptions made by the schemes actuary whereas you replace those assumptions with your own in the personal pension money purchase route.

Having said that though an ISA is possibly the better option. There again he may well have a credit card or a car loan at 14% or more no PHI and not plan to stay in the job which is why he ought to seek out an independent financial adviser as no one else can say what's the best option unless they take everything into account and are licenced and qualified to give advice.

sleepless_saver

You could always hedge your bets and buy less than the full amount of added years. Remember you won't pay tax on the added year payments, especially useful if you move into the 40% bracket so the net cost to you will be less than the 4.x% quoted. If you do an ISA, then you are using taxed income for that and you won't get an index linked income at the end of it. You might find it handy to have one for other reasons though.

Personally I'd go for the added years if I planned to stay in the civil service for a reasonable amount of time, and if I expected to end up in a higher grade than the one I'd started in.

Of course if you did not want to retire at normal retirement age for cs pension, you could make up the shortfall by continuing to work rather than buying added years!

NAR

The purchase % increases as you get older so it pays to look at the returns very closely. A colleague of mine, 50 next birthday, wanted to purchase 4.25 added years. The profile arrived today and my calculations showed she would not be in profit until she is 76 and four months! :eek:
So I don't think she will be taking up the offer.