Help, stay or switch

zaffi · 12 June 2018 at 3:09PM

Alibert wrote: »

Is it normal for a company offering a DB scheme to also make a matching contribution to employees AVC ?
I wonder if the OP really understand the current set up

Maybe ask me then?

I clearly don't know a huge amount, but I'm sure I'm correct on this point.

This is text directly from the literature on our intranet (I'm removing the company name, replaced with xxx)

"Regardless of your decision to stay or switch, your voluntary contributions to xxx Extra and xxx Matching contributions will be unaffected. However, if you would like to reduce the level of your xxx Extra contributions then you can do this at the same time you make your decision to stay in the Career Average Section or switch"

Alibert · 12 June 2018 at 4:26PM

So your choice is
- Pay 9% into a DB career average scheme
- pay 6% into a DC scheme , which company matches with additional 6%

(In either case you can optionally pay an extra 3% , matched, into the extra scheme )

hyubh · 12 June 2018 at 7:33PM

zaffi wrote: »

This is text directly from the literature on our intranet (I'm removing the company name, replaced with xxx)

"Regardless of your decision to stay or switch, your voluntary contributions to xxx Extra and xxx Matching contributions will be unaffected. However, if you would like to reduce the level of your xxx Extra contributions then you can do this at the same time you make your decision to stay in the Career Average Section or switch"

What are the 'accrual' and 'revaluation' rates of the Career Average Section? And is pensionable pay in it capped or otherwise limited at all? (If it isn't, then a fraction or percentage of your full salary each year would get added to your annual pension amount.)

bluenose1 · 12 June 2018 at 7:46PM

University staff have recently been on strike over proposals to end the DB scheme as the advice is if a DC scheme is introduced the risk falls to the employee not the employer.
If in good health I would be very reluctant to leave a DB scheme and the guaranteed annual pension it offers.
DB pensions are offered less and less by employers. Not sure of the maths but after tax and potential NI savings the increase to 12% may not cost you as much as you think.

kidmugsy · 12 June 2018 at 8:25PM

Alibert wrote: »

So your choice is
- Pay 9% into a DB career average scheme
- pay 6% into a DC scheme , which company matches with additional 6%

(In either case you can optionally pay an extra 3% , matched, into the extra scheme )

The old final salary USS pension had the employee contributing 6.35% and the employer paying 16% for ages, then 14% when times were easy, then 18% when times got tougher, and then ......

So assume that a DB scheme might need about 20% - 25% of salary, averaged over the years. If you pay 9% then your employer may be on the hook for 11% - 16% roughly. And you save 40% tax. And if you get salary sacrifice you save NICs too. Then the extra gives you a free 3% as long as you contribute 3% too.

It looks to me as if you probably get a better deal with the DB scheme: the risk is all shouldered by your employer. If you don't need a widow's pension, or if you have objective reason to expect a short life, or if you think the DB scheme is in a perilous financial plight, then you might eschew the DB scheme. But to hand-waving accuracy it's probably the better bet for most people.

No doubt career-average reduces the burden on the employer compared to final salary, but the reason that employers are giving up on DB is not only that they expect it to be costly, but that the costs are erratic. With DC they know where they stand. Contrariwise, with DB you know where you stand. With DC you don't: the money flows in but what size of pension it will eventually fund no one can tell.

zaffi · 15 June 2018 at 11:06AM

Thanks to all for the opinions,

I've decided to jump ship and move to the new scheme, including upping my contribution to the existing DC scheme from 3% to 4%, my reasoning and I hope it makes sense is twofold.

1, under the new scheme, I’m going to pay 10%, 6% to the new DC scheme and 4% to the existing DC scheme. However, if I switch now the company will credit 3% back to me via payroll each month. I have no idea why, ideas? If I switch after the deadline I don’t get the credit, which is approx. £100 a month pre-tax.

2, I can withdraw 25% of my total pot tax free so looking straight at the projected numbers the 25% value is higher for the new scheme than the existing one.

I might be, probably am, looking at this for too simplistically but from these numbers

Old scheme pension 13959
New Scheme pension 4436 – previously accrued in old scheme

Difference: 9523

Old Scheme lump sum: 126475 – from existing DC scheme
New Scheme lump sum: 339055

Difference: 212580

Does that mean I’d have to live 212580/9523 = 22.3 years after retirement for old DB scheme to return more than new DC scheme?

My election becomes final at midnight tonight so if you think I’ve make a mistake speak now!

Thanks,
zaf

Alibert · 15 June 2018 at 11:21AM

Mynl impression is you are placing too much weight on the accuracy of the projections

In reality you cannot know now what your pension will be in a DC scheme. The value of your investments can go down as well as up. You could end up with less than projected, you could end up with more. Not sure you have internalised that uncertainty?

GunJack · 15 June 2018 at 11:40AM

You won't get a lump sum AND a pension from a pure DC scheme, without buying an annuity or going into drawdown, so think you're not really comparing them properly. The lump sums you're using seem way too high...you seem to be using the full DC pot as the lump sum, not 25% of it tax-free and then annuity/drawdown on the remainder for the income part..

If you live for 30 years post-retirement, the DB will keep paying out (and be index-linked, so will pay out £400k-plus). What happens if you go into drawdown on the DC and run out of money in 25 years?

Oh, and your company will have NO liability to you on the DC part of the pension, managing it is all down to you.

kidmugsy · 15 June 2018 at 11:51AM

I'd say you are probably making a poor decision. DB schemes are becoming rarer and rarer except for government employees. You have the chance to stay in one. With some future non-government employer you probably won't get the option of DB. I suggest there is a case for grabbing the DB scheme while it's on offer and accepting that in some future job you may well be in a DC scheme. That would potentially be a useful diversification especially since the future DC scheme would perhaps make it easy to retire aged 55-60, with the DC money bridging the gap until the DB pension starts at 65.

Anyway, remember that for someone aged 36 pensions are a long game.

zaffi · 15 June 2018 at 1:10PM

Alibert wrote: »

Mynl impression is you are placing too much weight on the accuracy of the projections

In reality you cannot know now what your pension will be in a DC scheme. The value of your investments can go down as well as up. You could end up with less than projected, you could end up with more. Not sure you have internalised that uncertainty?

Clearly no one can know what's going to happen, but surely using the projections is the only like for like comparison? my money is still going to be invested the same funds I've chosen regardless whether I stay or switch, so if my funds go down, both go down, same if opposite. So in that respect, aren't the projections, whilst probably not accurate, at least comparable to each other?

GunJack wrote: »

You won't get a lump sum AND a pension from a pure DC scheme, without buying an annuity or going into drawdown, so think you're not really comparing them properly. The lump sums you're using seem way too high...you seem to be using the full DC pot as the lump sum, not 25% of it tax-free and then annuity/drawdown on the remainder for the income part..

If you live for 30 years post-retirement, the DB will keep paying out (and be index-linked, so will pay out £400k-plus). What happens if you go into drawdown on the DC and run out of money in 25 years?

Oh, and your company will have NO liability to you on the DC part of the pension, managing it is all down to you.

What I've invested so far in the DB scheme is protected so I will get a pension, albeit relatively small, if I switch to a pure DC scheme, I posted the numbers in post #17

The lump sums I've posted are directly from our online projection tool, based on contributions and retirement age. When I spoke to the group pensions guy, he said the projections were deliberately conservative.

kidmugsy wrote: »

I'd say you are probably making a poor decision. DB schemes are becoming rarer and rarer except for government employees. You have the chance to stay in one. With some future non-government employer you probably won't get the option of DB. I suggest there is a case for grabbing the DB scheme while it's on offer and accepting that in some future job you may well be in a DC scheme. That would potentially be a useful diversification especially since the future DC scheme would perhaps make it easy to retire aged 55-60, with the DC money bridging the gap until the DB pension starts at 65.

Anyway, remember that for someone aged 36 pensions are a long game.

I guess the only consideration is that this is the 3rd pension change in the 11 years I've worked here, I doubt DB is going to last much longer. The 3% credit back to me via payroll may not be on offer next time!

Incidentally, do you know why they would offer the credit?

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