Pensions - Am I over reacting?
Discussion
First off, and to set the scene, I know that the pension I have (had) was brilliant. Superb. Absolutely fantastic. The list goes on. That is why I have so much concern about all this.
Please, therefore, avoid bashing me on that point, and help me have a polite reality check.
I'm a civil servant. Have been for a decade, and I really enjoy it. I work in a role that I could step into the 'real world' tomorrow on 15-20k a year more, and until now, have turned down the offers. This isn't ' I've seen a job advert and I recon I could do that ' It's after speaking to the company them offering me a deal to come to them.
What has always until now stopped me is my pension. Its final salary, and I pay very little for the privilege really. However. Its always been my view that I'd accept the lower 'in working life' earnings, as they were offset by a great pension, and importantly, a retire at 60 on full pension situation.
Recent changes mean I've overnight gone to:
- Increases in line with CPI opposed to RPI
- Retirement age no longer 60, and now 'state pension age' which looks like it is 68, but after Mr Osbournes chat earlier last week might be 70
- Change from final salary to average salary
Those 3 changes mean quite a significant difference to what I am likely to end up with, if I even make it to retirement (males on my dad's side of the family don't seem to make it 70).
Now, accepting the emotive tone of the above, I'm trying to work out just how bad a situation I am now in. I know it is not the worst. I know it is not appalling, I know it is still good. But what I don't now know is, is it worth staying when I've still got these job options that I'm turning down.
I'd appreciate the views of others on this. Are these changes really as bad as they feel, or do I need to man up, and accept it is actually still significantly better than I could get anywhere else, and even with 15-20k a year more in my pocket, I'm better off where I am.
Please, therefore, avoid bashing me on that point, and help me have a polite reality check.
I'm a civil servant. Have been for a decade, and I really enjoy it. I work in a role that I could step into the 'real world' tomorrow on 15-20k a year more, and until now, have turned down the offers. This isn't ' I've seen a job advert and I recon I could do that ' It's after speaking to the company them offering me a deal to come to them.
What has always until now stopped me is my pension. Its final salary, and I pay very little for the privilege really. However. Its always been my view that I'd accept the lower 'in working life' earnings, as they were offset by a great pension, and importantly, a retire at 60 on full pension situation.
Recent changes mean I've overnight gone to:
- Increases in line with CPI opposed to RPI
- Retirement age no longer 60, and now 'state pension age' which looks like it is 68, but after Mr Osbournes chat earlier last week might be 70
- Change from final salary to average salary
Those 3 changes mean quite a significant difference to what I am likely to end up with, if I even make it to retirement (males on my dad's side of the family don't seem to make it 70).
Now, accepting the emotive tone of the above, I'm trying to work out just how bad a situation I am now in. I know it is not the worst. I know it is not appalling, I know it is still good. But what I don't now know is, is it worth staying when I've still got these job options that I'm turning down.
I'd appreciate the views of others on this. Are these changes really as bad as they feel, or do I need to man up, and accept it is actually still significantly better than I could get anywhere else, and even with 15-20k a year more in my pocket, I'm better off where I am.
I'm inferring that you're in your mid thirties. Assuming that you can stay in private sector employment at a +20k differential till you are 60, that gives you gross lifetime earnings uplift of 400k or so, call it 250k after tax and ignore inflation for the moment.
If you put all of that into long term savings it could generate retirement income of 10k a year or so, and be in a form of assets that your family could inherit unlike an employer pension. You could also put it gross into a SIPP and potentially have a 400k pot, which with a bit of careful planning could also be inheritable.
Run that same calc on your existing plan and see how it comes out. I'll bet it's not wildly different.
Also, surely there are better things for a 30-something to make a #1 priority about a career than the pension plan ?
If you put all of that into long term savings it could generate retirement income of 10k a year or so, and be in a form of assets that your family could inherit unlike an employer pension. You could also put it gross into a SIPP and potentially have a 400k pot, which with a bit of careful planning could also be inheritable.
Run that same calc on your existing plan and see how it comes out. I'll bet it's not wildly different.
Also, surely there are better things for a 30-something to make a #1 priority about a career than the pension plan ?
Yeah - don't forget the non-financial perks of civil service:
- Job for life.
- No need to be any good at your job.
- Significantly shorter hours.
- More holiday.
- Inflation linked pay rises.
No offence - I am frankly jealous rather than critical.
Also 25years x 20k is 500k which you would be able to shield from tax in a pension if you so choose.
Furthermore newc has ignored any compounding which on 5% would yield c.£950k.
On a more normal 5% return on savings that's worth nearly £50k a year not £10k.
- Job for life.
- No need to be any good at your job.
- Significantly shorter hours.
- More holiday.
- Inflation linked pay rises.
No offence - I am frankly jealous rather than critical.
Also 25years x 20k is 500k which you would be able to shield from tax in a pension if you so choose.
Furthermore newc has ignored any compounding which on 5% would yield c.£950k.
On a more normal 5% return on savings that's worth nearly £50k a year not £10k.
Esseesse said:
walm said:
...you would be able to shield from tax in a pension if you so choose.
Do you not pay tax when you draw your pension?Yes - you do have to pay when you draw it but IIRC that's the same on a private pension generating £50k taxable income as it is on a civil service pension.
I am not a tax expert though so may well be wrong.
So definitely worth checking.
You pay tax on 75% of it (roughly), at least under current legislation. You also get tax free growth and, in many cases, benefit from moving from higher rate to basic rate tax when you retire.
So, under current tax rates and legislation:
put in £100 out of gross income (and save 40% tax)
get tax free investment returns
take out 25% which has entirely avoided tax and pay 20% basic rate on the income from the remainder.
But, to the OP, don't underestimate the value of your civil service pension even given the changes in recent years. If you work how how much you will receive (and take into account the cast iron guarantee behind it) it would be expensive to replicate in the private sector.
And that's before any of the arguments about job security and working practices. (I'm private sector and there are empty desks increasing every day as people "pursue other opportunities" ...)
So, under current tax rates and legislation:
put in £100 out of gross income (and save 40% tax)
get tax free investment returns
take out 25% which has entirely avoided tax and pay 20% basic rate on the income from the remainder.
But, to the OP, don't underestimate the value of your civil service pension even given the changes in recent years. If you work how how much you will receive (and take into account the cast iron guarantee behind it) it would be expensive to replicate in the private sector.
And that's before any of the arguments about job security and working practices. (I'm private sector and there are empty desks increasing every day as people "pursue other opportunities" ...)
Zigster said:
So, under current tax rates and legislation:
put in £100 out of gross income (and save 40% tax)
get tax free investment returns
take out 25% which has entirely avoided tax and pay 20% basic rate on the income from the remainder.
Again those figures aren't always accurate.put in £100 out of gross income (and save 40% tax)
get tax free investment returns
take out 25% which has entirely avoided tax and pay 20% basic rate on the income from the remainder.
40% tax saving is only if you earn in that tax bracket.
And likewise the 20% basic rate depends on the income - you could pay more or less depending on your overall taxable income.
The real question is how the civil service pension would be different to the private one at a net level or rather - what level of annual saving is necessary to generate the same net income in retirement as the civil service pension?
And without knowing the income levels we are talking about it is impossible to say whether a 15-20k bump bridges the gap or not.
walm said:
Yeah - don't forget the non-financial perks of civil service:
- Job for life.
- No need to be any good at your job.
- Significantly shorter hours.
- More holiday.
- Inflation linked pay rises.
No offence - I am frankly jealous rather than critical.
Also 25years x 20k is 500k which you would be able to shield from tax in a pension if you so choose.
Furthermore newc has ignored any compounding which on 5% would yield c.£950k.
On a more normal 5% return on savings that's worth nearly £50k a year not £10k.
Just to give balance your thoughts:- Job for life.
- No need to be any good at your job.
- Significantly shorter hours.
- More holiday.
- Inflation linked pay rises.
No offence - I am frankly jealous rather than critical.
Also 25years x 20k is 500k which you would be able to shield from tax in a pension if you so choose.
Furthermore newc has ignored any compounding which on 5% would yield c.£950k.
On a more normal 5% return on savings that's worth nearly £50k a year not £10k.
- My department has seen redundancies since 2008, and plenty of them
- Ineffective staff are actively managed out. I've done it myself and seen it happen.
- I work well in excess of my contracted hours. I'd love to just pop in at 8, read the paper over a cup of coffee, take a 10 minute smokes break, take a lazy stroll round the park at lunchtime, and then clock off at 3 to miss the train rush. That just doesn't happen in any of the teams I've worked in over the last 10 years. Nothing close to it.
- I'd get exactly the same amount of holiday at other jobs I've been approached for
- I've not seen a pay rise since 2010. In fact, my take home pay has decreased in real numbers, let alone real terms.
So without this turning into a **** slinging contest, it isn't as rosy as people make out.
I'm 29, and I think the pension is definitely important. For me it was a huge part of the renumeration package. You'd be silly not to see it as such, and that is why I'm now considering my options.
Newc said:
...and be in a form of assets that your family could inherit unlike an employer pension. You could also put it gross into a SIPP and potentially have a 400k pot, which with a bit of careful planning could also be inheritable....
I didn't realise employer pensions and SIPPs were not able to be inherited? What happens to the money in a SIPP if you die?Also, could you outline any steps needed to ensure that either/both options above would be inheritable? thks
With regards to employer pension it depends on the individual scheme but normally the spouse will receive something. A SIPP is inheritable unless an annuity has been bought and that depends on the specific annuity.
With regards to the OP I would rather have the money in my hand/my SIPP rather than working for another 40 years and seeing the terms of your pension get worse and worse. There's less than 1% that the terms of your scheme will improve and I would say at least a 30% chance and probably much higher it will get worse again. Pensions are a ticking time bomb for employers and employees.
Assuming you can get paid another £20k that is a very healthy amount for someone of your age to be able to put into a pension. The key thing with planning for retirement is not to put all your eggs in one basket.....it's got horrendous consequences if things go wrong. My retirement planning consists of a SIPP, ISA's and BTL properties. All have positives and negatives but I think they are my best options. SIPP's and ISA's are relatively similar except ISA's are capped and you get the tax relief at maturity rather than inception. Presumably another job would have a pension of some kind with it too?
With regards to the OP I would rather have the money in my hand/my SIPP rather than working for another 40 years and seeing the terms of your pension get worse and worse. There's less than 1% that the terms of your scheme will improve and I would say at least a 30% chance and probably much higher it will get worse again. Pensions are a ticking time bomb for employers and employees.
Assuming you can get paid another £20k that is a very healthy amount for someone of your age to be able to put into a pension. The key thing with planning for retirement is not to put all your eggs in one basket.....it's got horrendous consequences if things go wrong. My retirement planning consists of a SIPP, ISA's and BTL properties. All have positives and negatives but I think they are my best options. SIPP's and ISA's are relatively similar except ISA's are capped and you get the tax relief at maturity rather than inception. Presumably another job would have a pension of some kind with it too?
To follow on from my earlier post:
I was ignoring returns in the fund, and inflation. I think that's valid for this kind of exercise where you're comparing the structure of two plans. Clearly the actual fund will be larger after investment returns.
As Walm said I was being conservative with the future earnings calcs, so as not to overstate the case. That's further emphasised by you being younger than I thought.
And like Cheib says, and to partially answer Fergus, as there is no actual pot of money in public sector pensions - pensioners are all paid from current taxation - there is no chance that they aren't going to get further downgraded over the rest of your working life. In fact, I would expect to see the end of DB plans completely for new entrants if the Tories are back in for 2015-20, and potentially a halt to existing plans in the medium term, but the medium term will be in your working life.
And you're only 29! Get a job on a yacht and sail the world!
I was ignoring returns in the fund, and inflation. I think that's valid for this kind of exercise where you're comparing the structure of two plans. Clearly the actual fund will be larger after investment returns.
As Walm said I was being conservative with the future earnings calcs, so as not to overstate the case. That's further emphasised by you being younger than I thought.
And like Cheib says, and to partially answer Fergus, as there is no actual pot of money in public sector pensions - pensioners are all paid from current taxation - there is no chance that they aren't going to get further downgraded over the rest of your working life. In fact, I would expect to see the end of DB plans completely for new entrants if the Tories are back in for 2015-20, and potentially a halt to existing plans in the medium term, but the medium term will be in your working life.
And you're only 29! Get a job on a yacht and sail the world!
Married and have a newborn, so the boating idea might not be compatible !!
I think the shame really is that the pension was what made the 'compensation' package compatible. Now I'm just underpaid !!
I'd be interested to know just how good/bad other company schemes are. Anyone brave enough ?
One role I got called for was final salary .... And non contributory ! I didn't go for it though as it was relocation to an area I wasn't keen on.
I think the shame really is that the pension was what made the 'compensation' package compatible. Now I'm just underpaid !!
I'd be interested to know just how good/bad other company schemes are. Anyone brave enough ?
One role I got called for was final salary .... And non contributory ! I didn't go for it though as it was relocation to an area I wasn't keen on.
conanius said:
Married and have a newborn, so the boating idea might not be compatible !!
I'd be interested to know just how good/bad other company schemes are. Anyone brave enough ?
Bigger boat....I'd be interested to know just how good/bad other company schemes are. Anyone brave enough ?
AFAIAA there are no FTSE100 companies offering DB pensions to new joiners. I feel fairly certain that no unlisted or startup firm will be offering them either. So there may be a couple of odd firms in the FTSE250 or below that still do it, but even if there are those plans won't be as good as the civil service.
Newc said:
AFAIAA there are no FTSE100 companies offering DB pensions to new joiners. I feel fairly certain that no unlisted or startup firm will be offering them either. So there may be a couple of odd firms in the FTSE250 or below that still do it, but even if there are those plans won't be as good as the civil service.
I think Unilever still have a DB scheme open to new entrants.You're right to consider your pension as a major component of your remuneration - when I was 29 my pension pot was empty. The shift towards DC schemes, deferred state pensions etc. means people need to prioritise and take control of their pensions.
You're clearly intelligent and need to think about your career goals, and whether you can achieve them and be well remunerated within the civil service. There's a world of opportunities out there, and if you're successful you can pay bonuses into your SIPP and quickly accumulate a fund that you control.
You're clearly intelligent and need to think about your career goals, and whether you can achieve them and be well remunerated within the civil service. There's a world of opportunities out there, and if you're successful you can pay bonuses into your SIPP and quickly accumulate a fund that you control.
fandango_c said:
I think Unilever still have a DB scheme open to new entrants.
I was intrigued enough to check. But sadly, according to http://www.uukpf.co.uk/, not only is the DB plan closed to new joiners, the final salary plan for existing staff has been frozen and turned into a career average plan.walm said:
Zigster said:
So, under current tax rates and legislation:
put in £100 out of gross income (and save 40% tax)
get tax free investment returns
take out 25% which has entirely avoided tax and pay 20% basic rate on the income from the remainder.
Again those figures aren't always accurate.put in £100 out of gross income (and save 40% tax)
get tax free investment returns
take out 25% which has entirely avoided tax and pay 20% basic rate on the income from the remainder.
40% tax saving is only if you earn in that tax bracket.
And likewise the 20% basic rate depends on the income - you could pay more or less depending on your overall taxable income.
The real question is how the civil service pension would be different to the private one at a net level or rather - what level of annual saving is necessary to generate the same net income in retirement as the civil service pension?
And without knowing the income levels we are talking about it is impossible to say whether a 15-20k bump bridges the gap or not.
if moving to the private sector would give a £15K-£20K payrise there's got to be a fair chance that puts the OP in the 40% tax bracket (i.e. approx £45K+). If not then current salary much be no more than about £20K so doubling it would be definitely worthwhile.
And being a higher rate tax payer in retirement is pretty tricky - pension funds are capped at £1.25M now and you would be struggling to get a £45K+ pa pension, particularly after taking a quarter of the fund as TFCS. A fund of £1.25M would give TFCS of £312K plus residual pension of less than £35K pa.
So it isn't a dead cert that the OP would be 40% payer now and 20% in retirement, but there's a pretty good chance.
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