What percentage to pay in ?

nicko33

Retired_I.F.A. wrote: »

final salary 30000*1.04^21 = £68,363
average salary (30000+68363)/2 = £49,181

Average salary looks wrong (to me)
That formula works if the increase each year is the same amount
If you sum all 21 salaries and divide by 21 you get a different amount

and if 30000 is the salary for all of year 1
then it is only *1.04^20 in all of year 21 = £65734
i.e.
year 1 = 30000 * 1.04^0 (1.04^0 = 1)
year 2 = 30000 * 1.04^1
year 3 = 30000 * 1.04^2
...
year 21 = 30000 * 1.04^20

average of those 21 years would be £45670

Dick_here

And I'd be getting tax relief on the extra £50pm I've just realised. Does that affect the calculation much ?

Retired_I.F.A.

Hang about, my brain has slipped out of gear a bit here.


I need a coffee. Let me look at it again in a mo.


Tax wise the comparison is right, the 2% increase cost is 2% of you gross ie £50p/m. In PAYE it's took out without tax deducted whereas in a PP you'd pay it from taxed pay and get tax relief added. either way it's the same.

Dick_here

Retired_I.F.A. wrote: »

Tax wise the comparison is right, the 2% increase cost is 2% of you gross ie £50p/m. In PAYE it's took out without tax deducted whereas in a PP you'd pay it from taxed pay and get tax relief added. either way it's the same.

I didn't think I'd be getting tax relief added to my AVC. Or do I ?

Retired_I.F.A.

With an AVC it's took from your gross ie: £50 comes off your top line but you nett pay is only £40 less. The tax relief is thei automatically.

With a PPP or a FREE STANDING AVC you pay those from your net pay ie you pay £40 to the provider and they get the £10 tax relief credited to it by the govenment so you have the £50 invested.


I have boobed with the career average calculations I'll re do it in a bit.

Retired_I.F.A.

Okay sorted it now


Here's why I said tell them to stuff it...

male assumed age 44 next bithday. Thus 21 pay rises to come
Assumed to be a non smoker
21 years term till retirement at 65
Spouse assumed to be 3 years younger
pension g-teed 5 years with 50% spouses escalating at 3% p/a
annuity rate for such taken from http://www.fsa.gov.uk/tables
= 4.87% best rate shown as of today (actually it's the same rate for smokers) and is typical of the annuity type offered by defined benefit schemes such as yours.

Salary today £30,000
cost of proposed increase 2% gross (£50 p/m)
Assumed rate of pay rises 4%
Assumed rate of inflation 3%

final salary 30000*1.04^21 = £68,363
average salary = £46,701 (calculated on a spreadsheet)
Assuming average salary is revalued by inflation then pension will be based on £61,884 whereas the old final salary scheme pension would be based on £68,363

The extra proposed gives you((1/60)-(1/65)) x 21 x £61884 =£ 1666.11 p/a
Equivalent cost of buying £1666.11 pension today at 4.87% annuity rate= £34,212

Compared to a personal pension plan whereby contributions of £50 p/m gross escalating at 4% for 21 years (like for like) produces:
(Note the yield is the return after charges in such a plan)

at 6% yield =
(source:compound interest spreadsheet wrote by myself).
reg p/m = £50
esc p/a = 4%
Term yrs= 21
yield p/a= 6%
total fund= £34,706.91
inflation= 3%
todays value £18,656

at 7% yield = £ 38,633 in todays value= £20,767

at 8% yield = £ 43,095 in todays value= £23,166

yield required to match the employers offer= 5.8645%

You can still better that in a cash ISA !

Like I said, tell them to stuff it.

note.
DON'T TAKE THAT AS ADVICE. IT'S MY OPINION, MY ASSUMPTIONS, MY MATHS AND YOURS MAY BE TOTALLY DIFFERENT. IF IN DOUBT SEEK OUT AN IFA NOT THIS EX ONE WHO IS NO LONGER AUTHORISED TO GIVE ADVICE.

As you can see cockups are easily made

Dick_here

Many thanks for all that. Going back to my other point though, I'm still not clear how I'm getting tax relief on my AVC. I pay £30pm and looking at last year's statement £30pm went in each month. How am I gaining tax-wise ?

p.s. My bint is 13 years younger than me

bigbloke45

!!!!!!_here wrote: »

Thanks, Retired. This is where us normal people struggle, we'd never be able to do calculations like that.

Please hang on with this. If you see my thread "How Much Should I pay For My Pension", I've broken down the calculations using no more than a £2.00 "Texet" calculator form Tesco's. It's not difficult, it's just NEW!( I only have an "O" level in maths (and not a very good grade either!)).

Formulae look difficult because they are alien to most of us because they are a mathematician's shorthand that is not open to interpretation. They are universal.

If I told you that you can become an expert in the calculations within a few short weeks, would you believe me? Probably "no" but you can!

What is needed is to start with the simple steps and work up. Everyone is overwhelmed when they are presented with everything at once; but that's not the way to do it.

If you have a calculator with a "power" function on it, you can do all of these calculations, I promise.

Send me a message if you want to take this further. Kind regards.

Retired_I.F.A.

!!!!!!_here wrote: »

Many thanks for all that. Going back to my other point though, I'm still not clear how I'm getting tax relief on my AVC. I pay £30pm and looking at last year's statement £30pm went in each month. How am I gaining tax-wise ?

£30 comes out of your wages without being taxed. it's paid from your top line and then deductions are taken from the rest. You cant get tax relief on something you have not paid tax on can you?

If it were a FSAVC or a PPP or a Stakholder pension plan set up with anyone other than your employer you'd pay £24 p/m from your bank account which you put your after tax wages in. The providor would then claim back the £6 tax you've paid on that money and you'd have £30 invested.

Penny dropped?

p.s. My bint is 13 years younger than me

bint ? Am yow from owa neck of the woods ah kid? Sure sounds like it I've never erd of "Bint" being used outside of the black country"


Not going to make a great difference in the figures really besides buying an annuity is a mugs game compared to drawdown.

edit: and dow forget 50% of bints naff off wi some other sod if yow dow fust.

2nd edit: that annuity site only allows illustations fo a spouse 10 yeas younger and the annuity rate for such =4.44% so the fund required would be 37525 and the yield to match it 6.73% Still makes sense to go the PPP route.

Dick_here

So are you saying that I should stop my AVC and pay into a PPP aswell as my company scheme ?

If I paid the extra into the company scheme instead of the AVC as previously mentioned I'd also save on NI contributions rather than just tax as currently wouldn't I ?