Moving jobs and comparing pensions....dB Vs company.
Discussion
Right I'm currently employed in public sector, thinking about a move but don't like the idea of being worse off even if the headline salary is higher ...
I have a defined benefit pension, employer contributes about 20% of salary and I contribute about 10%
25 days holiday Vs 30 days I can understand
40hrs a week Vs 36.5 I can understand
How the heck can I compare the pension offering?
Do I get a projection of what the current pension will pay in retirement..... Then add up contributions to new pension and divide by life expectancy ? Is it that simple?
I'm aware of the extra risk in an invested pension. I'm also not convinced my current DB pension won't be decimated in the next few years.
I have a defined benefit pension, employer contributes about 20% of salary and I contribute about 10%
25 days holiday Vs 30 days I can understand
40hrs a week Vs 36.5 I can understand
How the heck can I compare the pension offering?
Do I get a projection of what the current pension will pay in retirement..... Then add up contributions to new pension and divide by life expectancy ? Is it that simple?
I'm aware of the extra risk in an invested pension. I'm also not convinced my current DB pension won't be decimated in the next few years.
was8v said:
Right I'm currently employed in public sector, thinking about a move but don't like the idea of being worse off even if the headline salary is higher ...
I have a defined benefit pension, employer contributes about 20% of salary and I contribute about 10%
25 days holiday Vs 30 days I can understand
40hrs a week Vs 36.5 I can understand
How the heck can I compare the pension offering?
Do I get a projection of what the current pension will pay in retirement..... Then add up contributions to new pension and divide by life expectancy ? Is it that simple?
I'm aware of the extra risk in an invested pension. I'm also not convinced my current DB pension won't be decimated in the next few years.
Some key questions I have a defined benefit pension, employer contributes about 20% of salary and I contribute about 10%
25 days holiday Vs 30 days I can understand
40hrs a week Vs 36.5 I can understand
How the heck can I compare the pension offering?
Do I get a projection of what the current pension will pay in retirement..... Then add up contributions to new pension and divide by life expectancy ? Is it that simple?
I'm aware of the extra risk in an invested pension. I'm also not convinced my current DB pension won't be decimated in the next few years.
How many years are you likely to be paying into your pension?
How many years have you accumulated in your current scheme and what will that give you on retirement? Presume it is final salary based on number of years of service?
How much would the new employer pay into the new pension scheme? Can you put extra contributions in?
When I moved from a company that had a final salary scheme, half way through my working life, I did a rough calculation to estimate how much extra salary I would need to cover the pension position. My old employer put in, i estimated 20% so I reckoned on having a pay increase of at least that amount to cover what extra I would need to put into my pension.
DB pensions are great things to have. Unnafordable for providers, but great if you can still get one. But this doesn't mean DC pensions are bad - they're very flexible and you can pay in as much as you like tax free. And don't forget you can park your DB earned to date and still collect it when you retire.
I made this move myself, a long time ago. The bigger question is how old are you now, and what are your career aspirations. I think if I'd stayed public sector, I'd never have got near the salary I hit in the private world.
I made this move myself, a long time ago. The bigger question is how old are you now, and what are your career aspirations. I think if I'd stayed public sector, I'd never have got near the salary I hit in the private world.
was8v said:
Do I get a projection of what the current pension will pay in retirement..... Then add up contributions to new pension and divide by life expectancy ? Is it that simple?
You should be getting a projection every year from the Pension Scheme.As another poster has suggested I would add your current Employer Contribution to your salary and then use that for comparison purposes.
If it helps I was until recently a trustee of my former employer's pension scheme. The scheme was a 60th's career average salary scheme, although the maximum average salary was £100k (it was a bank so lots of people earning more than that). The pension increases by cpi max 3%. 50% widows pension.
The contribution cost (ie the amount charged to the different bits of the bank for their employees) for employees in the scheme, of whom there weren't many left, was 46% of salary in the year I left. There were no contributions from employees although there was a cash alternative that no one took which was 10% of salary.
Hard to know how to compare but I think a rule of thumb that says a 60ths final salary scheme could be worth half your salary probably isn't a bad one. You could tweak / adjust from there for an 80ths scheme, the contributions you make etc. So in short I suspect your current employer may be contributing a lot more than 20%? In the private sector I'd be surprised if employer contributions would be more than 10-12% so your salary probably needs to be at least 20% more? Does that sound about right?
The contribution cost (ie the amount charged to the different bits of the bank for their employees) for employees in the scheme, of whom there weren't many left, was 46% of salary in the year I left. There were no contributions from employees although there was a cash alternative that no one took which was 10% of salary.
Hard to know how to compare but I think a rule of thumb that says a 60ths final salary scheme could be worth half your salary probably isn't a bad one. You could tweak / adjust from there for an 80ths scheme, the contributions you make etc. So in short I suspect your current employer may be contributing a lot more than 20%? In the private sector I'd be surprised if employer contributions would be more than 10-12% so your salary probably needs to be at least 20% more? Does that sound about right?
Ok thanks all! It is some kind of career average pension.
So on those assumptions (I don't know the new employer contribution) I need to ask for a 20% uplift to account for pension, and a 10% uplift for increase in working hours, and ask them to match the holiday or uplift again .....
Turns a 30k job into a 40k job or a 50k job into 65k job and associated extra tax...
Wow. Not looking forward to that conversation.
So on those assumptions (I don't know the new employer contribution) I need to ask for a 20% uplift to account for pension, and a 10% uplift for increase in working hours, and ask them to match the holiday or uplift again .....
Turns a 30k job into a 40k job or a 50k job into 65k job and associated extra tax...
Wow. Not looking forward to that conversation.
To do it properly you'd need to be an actuary and working out how long you are going to live and the risk return on your DC investments.
I've moved back and forth a couple of times, so I think realistically you probably need to do it anecdotally or at best back of a fag packet.
1) The DB pension is guaranteed, underwritten by the taxpayer. It will be inflation proof and requires no effort on your part, nor worry. The DC pension is going to depend on the provider not going under (Equitable Life, Woodford). It will only be as inflation proof as the underlying investments. You will have to watch it and worry whether you have enough in the pot. And if you were fortunate enough to be incredibly well paid you'd also find yourself losing the tax benefits and having to push even more into it. The comment about just adding the percentage pension is fairly valid, but you would also really want to add a risk premium too. Go look at a pension calculator to see expected income in retirement, then consider that they usually project 5% returns on your pension pot. I have one pension that has only gone sideways for the last six years. Some of the providers are utterly rubbish - and take chunky fees too.
2) The public sector salary is also guaranteed, underwritten by the taxpayer. It will be as inflation proof as you can get. Your payrise will likely be collectively negotiated, with no effort on your part or worry (albeit also no way to get a bigger one!). The private sector salary may be arbitrarily cut (e.g. lots of firms slashed pay at the start of the pandemic) and equally could stagnate for years. I worked at one place where everyone got penny payrises. We found out years later than one person in the department always used to go to the boss with either a story of how much money they had made the firm or a hard-luck story. They used to get mega thousand payrises each year. There's not much you can do about that in the private sector, other than being the one doing the negotiating. If we get mega inflation, I would be fairly confident private sector wages will lag significantly compared with public sector.
3) Hours worked in the public sector job will be monitored and you *will* get your leave, time off and (probably) flexi-leave. In the private sector there is a much greater probability that you will work until the job is done. Pull an all-nighter? Thanks - now here's today's work. You *may* get time off in lieu, but equally you *may* find you are doing 50 hours a week for 40 hours pay as a matter of routine.
4) Flexileave. It's amazing how you forget about this benefit. Need to go see the kids' Christmas Play? No issue in the public sector. Private Sector that will likely be using holiday for it.
This is not knocking the public sector. It's pointing out that you need to consider the overall package, not just the pension. Depending on your personality and the jobs that you are looking at, you could find you really regret the move. I personally would probably want a minimum of 30% more to make the move and that's assuming everything else was equal.
I've moved back and forth a couple of times, so I think realistically you probably need to do it anecdotally or at best back of a fag packet.
1) The DB pension is guaranteed, underwritten by the taxpayer. It will be inflation proof and requires no effort on your part, nor worry. The DC pension is going to depend on the provider not going under (Equitable Life, Woodford). It will only be as inflation proof as the underlying investments. You will have to watch it and worry whether you have enough in the pot. And if you were fortunate enough to be incredibly well paid you'd also find yourself losing the tax benefits and having to push even more into it. The comment about just adding the percentage pension is fairly valid, but you would also really want to add a risk premium too. Go look at a pension calculator to see expected income in retirement, then consider that they usually project 5% returns on your pension pot. I have one pension that has only gone sideways for the last six years. Some of the providers are utterly rubbish - and take chunky fees too.
2) The public sector salary is also guaranteed, underwritten by the taxpayer. It will be as inflation proof as you can get. Your payrise will likely be collectively negotiated, with no effort on your part or worry (albeit also no way to get a bigger one!). The private sector salary may be arbitrarily cut (e.g. lots of firms slashed pay at the start of the pandemic) and equally could stagnate for years. I worked at one place where everyone got penny payrises. We found out years later than one person in the department always used to go to the boss with either a story of how much money they had made the firm or a hard-luck story. They used to get mega thousand payrises each year. There's not much you can do about that in the private sector, other than being the one doing the negotiating. If we get mega inflation, I would be fairly confident private sector wages will lag significantly compared with public sector.
3) Hours worked in the public sector job will be monitored and you *will* get your leave, time off and (probably) flexi-leave. In the private sector there is a much greater probability that you will work until the job is done. Pull an all-nighter? Thanks - now here's today's work. You *may* get time off in lieu, but equally you *may* find you are doing 50 hours a week for 40 hours pay as a matter of routine.
4) Flexileave. It's amazing how you forget about this benefit. Need to go see the kids' Christmas Play? No issue in the public sector. Private Sector that will likely be using holiday for it.
This is not knocking the public sector. It's pointing out that you need to consider the overall package, not just the pension. Depending on your personality and the jobs that you are looking at, you could find you really regret the move. I personally would probably want a minimum of 30% more to make the move and that's assuming everything else was equal.
brickwall said:
This approach can be way off - because the combined employee and employer contributions on the public sector side often fall well short of the true cost of the pension. There’s an additional implicit subsidy from the Treasury to make up the difference later on.
The right way to do it is
- Work out the true value of the pension benefit (as a % of salary). Career average schemes make this easier than it used to be, but it’s still a bit of a fraught exercise.
- Deduct employee contributions
- The remainder is the effective ‘employer contribution’ (whether or not this is what the employer theoretically puts in is a different matter)
So:
- Let’s say the Civil Service pension scheme has a true value of 33% of salary (which probably isn’t too far off), and employee contributions are 9%
- Employer contributions for external comparison purposes are therefore 24%
You then calculate the “total package”
- Salary (say) £40,000
- Plus Employer pension contributions 24% x £40k = £9,600
(Any other benefits, bonuses, overtime, etc.)
Total = c.£50,000
Then compare on the same basis to the equivalent outside.
If you’re being super-geeky you can adjust for holiday or working hours by calculating the total on a per-day or per-hour basis.
I usually added around 24% as some schemes publish the contribution number - so not really far off in terms of what you just described.The right way to do it is
- Work out the true value of the pension benefit (as a % of salary). Career average schemes make this easier than it used to be, but it’s still a bit of a fraught exercise.
- Deduct employee contributions
- The remainder is the effective ‘employer contribution’ (whether or not this is what the employer theoretically puts in is a different matter)
So:
- Let’s say the Civil Service pension scheme has a true value of 33% of salary (which probably isn’t too far off), and employee contributions are 9%
- Employer contributions for external comparison purposes are therefore 24%
You then calculate the “total package”
- Salary (say) £40,000
- Plus Employer pension contributions 24% x £40k = £9,600
(Any other benefits, bonuses, overtime, etc.)
Total = c.£50,000
Then compare on the same basis to the equivalent outside.
If you’re being super-geeky you can adjust for holiday or working hours by calculating the total on a per-day or per-hour basis.
I guess the other way is to work back from annuity rates but no precise way of calculating.
Some further points to the good ones above.
For higher earners, DB pensions are valued on a much more favourable basis for Lifetime Allowance purposes than DC. All other things being equal, with DB you can receive a larger pension before you get hit with the Lifetime Allowance tax.
Having the security of a DB pension locked in gives you the freedom to take more risk on your other retirement savings, hopefully leading to higher returns.
For higher earners, DB pensions are valued on a much more favourable basis for Lifetime Allowance purposes than DC. All other things being equal, with DB you can receive a larger pension before you get hit with the Lifetime Allowance tax.
Having the security of a DB pension locked in gives you the freedom to take more risk on your other retirement savings, hopefully leading to higher returns.
I’m in a DB scheme, 1 years service equals 1% of final salary.
I asked our HR / Pension team and the above is set to an equivalent contribution of 19.95%, it costs me 4%, plus I get 2% into a cash pot where any AVC also go.
So essentially today I get 21.95% for 4%.
So Ive used a 17.95% uplift on salary just to be on par with where I am today (currently job hunting), I’ve been offered a few jobs in the past but it is a case of golden handcuffs.
I asked our HR / Pension team and the above is set to an equivalent contribution of 19.95%, it costs me 4%, plus I get 2% into a cash pot where any AVC also go.
So essentially today I get 21.95% for 4%.
So Ive used a 17.95% uplift on salary just to be on par with where I am today (currently job hunting), I’ve been offered a few jobs in the past but it is a case of golden handcuffs.
LeoSayer said:
For higher earners, DB pensions are valued on a much more favourable basis for Lifetime Allowance purposes than DC. All other things being equal, with DB you can receive a larger pension before you get hit with the Lifetime Allowance tax.
This is true more generally - if you were to take the employee and employer DB contributions and try and replicate the DB benefits in the annuity market you'd have a shortfall. To move from a DB to a DC scheme I'd want substantially >1x the DB contributions.was8v said:
Ok thanks all! It is some kind of career average pension.
So on those assumptions (I don't know the new employer contribution) I need to ask for a 20% uplift to account for pension, and a 10% uplift for increase in working hours, and ask them to match the holiday or uplift again .....
Turns a 30k job into a 40k job or a 50k job into 65k job and associated extra tax...
Wow. Not looking forward to that conversation.
Are you planning to apply for a job advertised for £30KPA and neg it up to £65K?So on those assumptions (I don't know the new employer contribution) I need to ask for a 20% uplift to account for pension, and a 10% uplift for increase in working hours, and ask them to match the holiday or uplift again .....
Turns a 30k job into a 40k job or a 50k job into 65k job and associated extra tax...
Wow. Not looking forward to that conversation.
Honestly if someone suggested that to me I would instantly put them into the "do not employ pile." Fair enough apply for £30k PA job and try to neg it up to £35K.
I think your valuation of 20% for a DB pension is WAY off, its more like 50%, to get 3% CPI and 50% widow benefit to retire at 55 you should be working on sub 2% annuity returns, retire at 65 and you might get 3% that in effect means you need £250000 MINIMUM for £10k pa.
To my way of thinking the only right comparison would be :
Expected benefit from DB if I was at retirement age now
Minus expected income if it is ended now
Gives a balance to fund.
So If someone was on £35k now and would get £18K at retirement today.
Your current DB scheme would pay £8K PA if contributions stop now.
You need to "save" for £10k PA income, so over the time you have left working you need to pay £250,000 into your pension pot to retain the value of current DB.
Average private sector employer contribution is about 5% so potentially you would need to earn £235,000 more over your remaining working life to accurately compare the remuneration.
otherman said:
But this doesn't mean DC pensions are bad - they're very flexible and you can pay in as much as you like tax free.
That's not right.Annual pension allowance (most you can pay in to a pension in one year without paying tax) is £40k. You can carry forward unused allowance from previous 3 tax years. Above that you pay tax.
Also if you are a high earner that annual pension allowance is reduced.
Hmmm well nobody puts salaries on job adverts anymore.
The job I'm applying for pays anywhere between 40 and 70k
My current salary puts me in the lower of that range, but add the pension in and I'll be more in the middle.
I'm not going to jump if there isn't more in it for me, the working conditions eg flexibility are likely worse. Prospects are unknown really.
They know my current salary...and know I have a good pension.
I can only ask for 60k (salary plus pension contributions) if I am offered and get turned down I suppose.
Weird how I was under the impression the private sector pays better. That's not true, although the jobs are not exactly equivalent.
I don't expect to be dangering any lifetime or annual Allowances.
The job I'm applying for pays anywhere between 40 and 70k
My current salary puts me in the lower of that range, but add the pension in and I'll be more in the middle.
I'm not going to jump if there isn't more in it for me, the working conditions eg flexibility are likely worse. Prospects are unknown really.
They know my current salary...and know I have a good pension.
I can only ask for 60k (salary plus pension contributions) if I am offered and get turned down I suppose.
Weird how I was under the impression the private sector pays better. That's not true, although the jobs are not exactly equivalent.
I don't expect to be dangering any lifetime or annual Allowances.
Edited by was8v on Thursday 19th August 19:48
Edited by was8v on Thursday 19th August 19:49
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