Public sector wellcome to the real world

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  • atush
    atush Posts: 18,719
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    Firstly I'd like to say that only something like a 3rd of private employees pay into a private pension,

    Which is one reason that the new rules that every employer will have to offer a pension scheme are coming into force.
  • So why waste your time paying into a pension if your so sure it's a waste of money?

    If I do have some time post retirement, I'd like it to be quality time. I also (whilst being quite rubbish with finances) do have a relatively strong ethic that I want to provide for myself and not rely on public hand-outs. Though of course, I wan't you all to pay for my bloated gold plated pension :T
  • atush wrote: »
    Which is one reason that the new rules that every employer will have to offer a pension scheme are coming into force.

    You can lead a horse to water and all that. How many of those 2/3's without a pension have decided not to join a current company pension? Offering a pension does not mean that people will choose to enter it.

    Odly enough, there is one person in my office who opted out of the public sector pension.....it beggars belief.

    Oh and my husbands company also recently started to offer a pension, people could either choose to have their pay rise or have that money put directly into a pension pot. My husband chose the pension. It's only a small company, but I'd say only 15% decided to opt for a pension. Yet I'm sure those same people are moaning about how much they have to pay for public sector pensions, being to dense to realise that we pay for their benefits in old age.
  • molerat
    molerat Posts: 31,701
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    edited 2 September 2011 at 2:36PM
    You can lead a horse to water and all that. How many of those 2/3's without a pension have decided not to join a current company pension? Offering a pension does not mean that people will choose to enter it.

    Odly enough, there is one person in my office who opted out of the public sector pension.....it beggars belief.

    Oh and my husbands company also recently started to offer a pension, people could either choose to have their pay rise or have that money put directly into a pension pot. My husband chose the pension. It's only a small company, but I'd say only 15% decided to opt for a pension. Yet I'm sure those same people are moaning about how much they have to pay for public sector pensions, being to dense to realise that we pay for their benefits in old age.
    At least with the new system you will have to actively opt out rather than just ignore it.

    Interesting comparison figures from the programme last night although some journalistic licence was probably used. 2 people start on 20K and work for 40 years with same wage progression and same monthly pension contributions. Public sector would come out with £28k pension and private with £8k. I assume the latter was with no employer contribution so then £16k could be assumed with matched contributions. Scary !!
  • molerat wrote: »
    2 people start on 20K and work for 40 years with same wage progression and same monthly pension contributions. Public sector would come out with £28k pension and private with £8k. I assume the latter was with no employer contribution so then £16k could be assumed with matched contributions. Scary !!

    I may be missing the point but i'm not sure about any programe last night. I cannot argue that the public pension is far superior to private pensions. But two wrongs don't make a right. I do wonder how anybody is supposed to plan financially for their futures. Let's face it, finance, saving and planning for the future hasn't exactly been in the forefront of public debate until very recently, so most of us are clueless and the state and companies offer no support.
  • hugheskevi
    hugheskevi Posts: 3,785
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    edited 2 September 2011 at 6:34PM
    2 people start on 20K and work for 40 years with same wage progression and same monthly pension contributions. Public sector would come out with £28k pension and private with £8k.
    I like the notion of two big pension schemes, one for public sector only and one for private sector only, with workers who only spend their entire career in one or the other :D Such approaches usually gloss over huge and important differences such as:
    • Salary sacrifice
    • Contracting-out
    • Pension commencement lump sums and commutation rates
    • Income tax on pension payments
    So I thought I might do my own modelling of the difference. Taking a public sector scheme as being characterised by the following (from this HM Treasury page):
    When it started, members of the Teachers’ Pension Scheme put in the same as the taxpayer – 5% each. Today, current members pay 6.4%, with employers contributing more than double - 14.1%.
    And comparing this to a private sector scheme offering
    4% employer contributions and matching up to a further 3% of member contributions and salary sacrifice for members, with employer NICs savings added to the member's pension.
    I'm aiming for a reasonable but not fantastic scheme for comparison purposes which can be compared on an annual basis, rather than the unrealistic lifetime basis.

    Now take someone earning £25,000 and contrast their overall remuneration package, assuming that the private sector employee puts in 6.4% to his pension just like the public sector worker, which means their employer puts in 7%.

    Employee and employer pension contributions

    The employee contributions are the same in both schemes. The public sector employer puts in £3,525 and the private sector employer £1,750.

    Income tax

    Both workers pay the same amount of income tax.

    National Insurance

    The public sector worker pays £1,818 National Insurance, and the private sector worker £1,941 (public sector worker benefits from lower rate due to contracting-out, whilst the private sector benefits from salary sacrifice).

    Salary sacrifice employer NICs saving rebate

    The private sector employer also adds £221 to the pension, reflecting the saving in employer NICs from salary sacrifice.

    Net salary

    That gives the public sector worker a net pay of £18.397 and the private sector worker £18,274.

    Net pension benefits

    The public sector worker accrues gross pension benefits worth £5,125 (employee plus employer contributions). As lump sum commutation rates are very poor in the public sector, he won't benefit from any tax advantages from a pension commencement lump sum and so the whole of the pension will be taxed at 20%, giving a net benefit of £4,100 after tax.

    The private sector workers accrues gross pension benefits worth £3,571. The pension commencement lump sum of 25% will be tax free, the other 75% taxed at 20%. So that is a net benefit of £3,035.

    State Second Pension accruals

    The private sector worker also accrues State Second Pension, which the public sector worker doesn't get due to being contracted-out. The value of this is the combined employee and employer National Insurance rebate for being contracted-out (as rebates are set to be actuarially neutral). In the case of this public sector worker, the combined employee and employer rebate is £973. As State Second Pension will be taxed at 20%, that is a net benefit of £778.

    Bottom line

    Adding together net salary, net private pension and net State Second Pension accruals, the overall net remuneration packages to the workers are £22,497 for the public sector worker and £22,087 for the private sector worker - a difference of less than 2%.

    Other issues

    There are a few things that could be added to this comparison which I've not included:
    • Risk - public sector pension doesn't have longevity or investment risk which has value to the employee, although either could be advantageous or disadvantageous
    • Annuity costs - whilst annuitisation is not mandatory, most defined contributions pots will be annuitised and reduce the expected value of the pot
    • Charges - the public sector will have their pension charges paid, whilst the private sector will have annual costs to pay
    • Political risk - the public sector pension is probably at greater risk of policy change (eg RPI/CPI) than the defined contribution pension
    On balance, these would disadvantage the private sector pension, but the charges and annuity costs are things which are in the employee's power to minimise.
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