Final Salary Pension scheme - leave or not?

Final Salary Pension scheme - leave or not?

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Discussion

Revisitph

983 posts

188 months

Monday 3rd October 2016
quotequote all
Ginge R said:
Ozzie Osmond said:
OK - I think there may be a misunderstanding here.

  • I think you are talking about the accrual rate, which means how much pension you "earn" each year for each year that you work. In that part of the universe 1/40th is pretty good and 1/20th would be astoundingly brilliant - more than HMRC will actually permit in a tax-approved scheme. In much of the public sector the "pension promises" offered by many employers have been far too generous. This is why accrual rates are being reduced and/or employee contributions increased.
  • The second type of pension is Defined Contribution. Once at retirement people in a Defined Contribution (money purchase) scheme need to decide how to "buy" pension and look at what it will cost. This is where the multipliers being discussed in this thread come in and they are completely different concept from accrual rate. They have no relevance to anyone retiring normally from a Defined Benefit scheme, whether it's a funded private sector scheme or an unfunded public sector scheme.g
1/20?? Jesus. That's not a pension, that's a bank heist. The promises weren't too generous, they were simply in keeping with prevailing conditions. An early 90s GMP rate was somewhere in the region of c.8% annual increase.

(Edit:That's not to say that successive governments didn't know the system was unsustainable).


Edited by Ginge R on Monday 3rd October 20:46
No, no misunderstanding; my accrual is 1/80th, my promise/virtual (it doesn't exist) pot is 20 x annual pension + lump sum (3x pension I think). The problem is that whilst at current inflation rates I'm not going to hit the current LTA, it will be close but more importantly the annual allowance, especially with the new tapering system is likely to mean it isn't worth continuing to contribute, with the mega marginal tax rates that that implies, especially if there is a blip in inflation (likely with Brexit/dropping £) or, not that we've had one for at least 5 years, a pay increase, or to take steps to reduce income so that that income isn't effectively taxed at >65% I'm certainly not planning to leave the scheme, just stop contributing and freeze it. The problem then is that one can't continue with the life assurance element - which, as you get older, is more and more valuable.

The bottom line is that for a while the government has decided (perhaps reasonably) that the tax advantages to pension saving should really encourage people to save just enough to take them out of benefits in old age but not to subsidise pensions of more than that for the better off (though that has been a convenient way to keep their pay lower now with a promise of deferred pay in the form of pensions tomorrow, paid by a subsequent government). The problem they will face it that 1) the higher earners will stop contributing to the unfunded schemes (seeing their contributions rise from ~7 to 15% for a lower return (RPI -> CPI) and will also reduce their earnings so as to avoid the super tax rates that the tapering implies, rather like those who, a few years ago, ensured that they didn't hit the effective 60% rate between 100 - 120k when that came in.

sidicks

25,218 posts

222 months

Monday 3rd October 2016
quotequote all
Revisitph said:
No, no misunderstanding; my accrual is 1/80th, my promise/virtual (it doesn't exist) pot is 20 x annual pension + lump sum (3x pension I think). The problem is that whilst at current inflation rates I'm not going to hit the current LTA, it will be close but more importantly the annual allowance, especially with the new tapering system is likely to mean it isn't worth continuing to contribute, with the mega marginal tax rates that that implies, especially if there is a blip in inflation (likely with Brexit/dropping £) or, not that we've had one for at least 5 years, a pay increase, or to take steps to reduce income so that that income isn't effectively taxed at >65% I'm certainly not planning to leave the scheme, just stop contributing and freeze it. The problem then is that one can't continue with the life assurance element - which, as you get older, is more and more valuable.

The bottom line is that for a while the government has decided (perhaps reasonably) that the tax advantages to pension saving should really encourage people to save just enough to take them out of benefits in old age but not to subsidise pensions of more than that for the better off (though that has been a convenient way to keep their pay lower now with a promise of deferred pay in the form of pensions tomorrow, paid by a subsequent government). The problem they will face it that 1) the higher earners will stop contributing to the unfunded schemes (seeing their contributions rise from ~7 to 15% for a lower return (RPI -> CPI) and will also reduce their earnings so as to avoid the super tax rates that the tapering implies, rather like those who, a few years ago, ensured that they didn't hit the effective 60% rate between 100 - 120k when that came in.
They will still be receiving much more in benefits than paying in contributions!

Ozzie Osmond

21,189 posts

247 months

Monday 3rd October 2016
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Yes, something can be "less generous" and still "darned good value"!

(That is, of course, good value for the member as opposed to the unfortunate taxpayer.)

Ginge R

4,761 posts

220 months

Monday 3rd October 2016
quotequote all
Ozzie Osmond said:
Yes, something can be "less generous" and still "darned good value"!

(That is, of course, good value for the member as opposed to the unfortunate taxpayer.)
Scheme members are tax payers too..?

The money from a DB pension gets spent, it goes back into the system. It dies with the member or partner (50%). A DC pension, on the other hand, can be passed to as many people as you like - no chance for recapture and outside IHT. That's what I call good value.

Ozzie Osmond

21,189 posts

247 months

Monday 3rd October 2016
quotequote all
sidicks said:
The only relevance of multipliers is when comparing benefits with the lifetime allowance....
... and when looking at the "cost" of buying an annuity. Ouch!

sidicks

25,218 posts

222 months

Monday 3rd October 2016
quotequote all
Ozzie Osmond said:
... and when looking at the "cost" of buying an annuity. Ouch!
beer

Croutons

9,892 posts

167 months

Monday 3rd October 2016
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Where I appreciate Osbornism is [currently] dead, you do know that the lifetime allowance at a mill is due to rise with CPI from 2018/19 onwards? Ie, you should be chasing a moving target?

https://www.gov.uk/government/publications/reducti...

Ozzie Osmond

21,189 posts

247 months

Monday 3rd October 2016
quotequote all
Ginge R said:
The money from a DB pension gets spent, it goes back into the system.
That's pure Tony Blair / Gordon Brown! It doesn't matter how much money the state spends or gives to people because it all goes round the system again and nothing matters.

The only way that can work is with either rocketing inflation or an endless supply of cheap labour slaving away at the bottom of the system. Shut out the East European cheap labour? Hello inflation!

Wonder why Greece is bankrupt?

Ginge R

4,761 posts

220 months

Monday 3rd October 2016
quotequote all
Croutons]Where I appreciate Osbornism is [currently said:
dead, you do know that the lifetime allowance at a mill is due to rise with CPI from 2018/19 onwards? Ie, you should be chasing a moving target?

https://www.gov.uk/government/publications/reducti...
I wouldn't be surprised if it disappears anyway. A year or so before the election too, nice for Tory voters. Just renounce your Individual and Fixed Protection.. but from the g'ment perspective, all that tax relief saved for 4 years..

Ginge R

4,761 posts

220 months

Monday 3rd October 2016
quotequote all
Ozzie Osmond said:
That's pure Tony Blair / Gordon Brown! It doesn't matter how much money the state spends or gives to people because it all goes round the system again and nothing matters.

The only way that can work is with either rocketing inflation or an endless supply of cheap labour slaving away at the bottom of the system. Shut out the East European cheap labour? Hello inflation!

Wonder why Greece is bankrupt?
Yes, frequently. Greece is knackered because it cooked the books with tacit approval from the EU and borrowed insanely instead of addressing issues, with a view to spending the money on Audi and Bosch. You're comparing an insane application of a sound principle with a moderate application of a sound principle.

DB income gets spent here, it keeps people now behind the tills taking silver pounds off benefits, it makes them tax payers.

Revisitph

983 posts

188 months

Monday 3rd October 2016
quotequote all
Ozzie Osmond said:
Yes, something can be "less generous" and still "darned good value"!

(That is, of course, good value for the member as opposed to the unfortunate taxpayer.)
I've never understood why it is assumed that the DB pension savers are not thought to be taxpayers.

The whole issue for a case like the one I highlighted is that they are paying income tax on every penny they earn - no nil rate band, 45% marginal rate and with tapering loss of tax relief and 45% tax even more on that amount as well.

When I started working the private sector had DB schemes, often at better accrual rates, people in those jobs often earned significantly more than those who are now in still-open DB schemes, and often had far more ways to be creative with taxation. Part of the now apparently generous DB scheme was to compensate with the certainty of a pension for a lower salary, keeping costs down during employment - something successive governments were happy to promote, kicking the can / bill down the road.

It is only relatively recently that the position has reversed. Money printing by governments of all three political flavours has pushed gilt yields to crazily low levels and has had the unintended consequence of making annuities very expensive, so the DB schemes appear to be overly generous.

The changes to taxation / LTA / annual allowances may well lead to the death of the few remaining DB schemes, public sector included, especially for higher earners, but this will give our grandchildren the same problem in a different form; few people will save, or save enough, and then there will be a big population of poor elderly - the triple lock etc which has seen benefits to the retired outstrip earnings for the employed will stop soon as it is equally expensive, given the compounding effect.







Ozzie Osmond

21,189 posts

247 months

Monday 3rd October 2016
quotequote all
Ginge R said:
moderate application of a sound principle.
Printing money and passing it round a bit in the hope that it will acquire value is decidedly optimistic.

Ginge R

4,761 posts

220 months

Tuesday 4th October 2016
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Money has intrinsic value, the question isn't one of it acquiring value, but generating value. M4 (money in circulation) can be a sign of a healthy economy, one reason for the reliance on monetary policy to generate/pull back on inflation and ONS data last month, showed a big drop in M4. Getting the balance right is key, hence my point about the principle being applied badly or wisely because although money can acquire value, it still has to be used. China is as reliant on (addicted?) to lending as America is as addicted to borrowing and that new fiver in my back pocket is worthless if it stays there. It's only when I hand it over to buy fuel that it generates value to me, the person now paid to receive it, the company that owns the station and the Exchequer for taking in a tax receipt.

(Spelling)

Edited by Ginge R on Tuesday 4th October 08:43