Defined Benefit pension
Discussion
Wondering if anyone could sense check my figures;
Pension is a inflation linked career average earnings DB scheme with 2 options;
1/60ths for 5% contribution
1/50ths for 13% contribution
Say the career average earnings are likely to be £50k and salary now is £50k (for easy maths).
At 1/60th level, you are investing £2500/yr of employment to return £833 for each year of work. So, after 10 years of employment, your pension is £8330/year.
At 1/50th level you are investing £6500/yr to return £1000 for each year of work. After 10 years of employment your pension is worth £10k/yr.
Unless I'm missing something obvious, why would anyone pay the additional amount for the 1/50th level? Wouldn't you be better taking the £4k difference and investing it in a SIPP, where after 10 years it should be worth £40k, plus any growth, so say £45k in total.
Roughly £45k would buy you a £1300 pension, netting off the difference between the 2 options, so what you're hoping is that any growth in the SIPP is above inflation. Given that stocks and shares have historically returned above inflation, that would be the better option?
Pension is a inflation linked career average earnings DB scheme with 2 options;
1/60ths for 5% contribution
1/50ths for 13% contribution
Say the career average earnings are likely to be £50k and salary now is £50k (for easy maths).
At 1/60th level, you are investing £2500/yr of employment to return £833 for each year of work. So, after 10 years of employment, your pension is £8330/year.
At 1/50th level you are investing £6500/yr to return £1000 for each year of work. After 10 years of employment your pension is worth £10k/yr.
Unless I'm missing something obvious, why would anyone pay the additional amount for the 1/50th level? Wouldn't you be better taking the £4k difference and investing it in a SIPP, where after 10 years it should be worth £40k, plus any growth, so say £45k in total.
Roughly £45k would buy you a £1300 pension, netting off the difference between the 2 options, so what you're hoping is that any growth in the SIPP is above inflation. Given that stocks and shares have historically returned above inflation, that would be the better option?
You'll be earning 20% more pension yet paying a 160% higher contribution.
On the face of it not a good deal, however, the questions should be:
- Could I pay an additional 8% of my gross salary and earn the additional 20% pension elsewhere with the same level of risk i.e. very little?
- Do I need the extra 20% pension anyway?
- Have I got something else I really need to spend the extra 8% (remember, of gross salary so actual cost lower) now, that outweighs the benefit of the pension I'll receive later?
Comparing the proportionate increase in your contribution (5% to 13% is a 160% uplift) to the 20% increase in pension is not appropriate.
You are only paying a small proportion of the overall cost of providing your pension so any change in your contribution vs total pension is highly geared i.e. 5% for a 1/60th pension is good value (overall cost might be 30% - 40% say).
Edited to add: I can't have read your whole post initially. The risk is different - in the SIPP (outwith the charges eroding the contribution) you are taking the investment risk. In the DB pension scheme the company is taking the risk. The outturn maybe similar based on a consistent set of assumptions but the variability in outcome for you is far wider.
On the face of it not a good deal, however, the questions should be:
- Could I pay an additional 8% of my gross salary and earn the additional 20% pension elsewhere with the same level of risk i.e. very little?
- Do I need the extra 20% pension anyway?
- Have I got something else I really need to spend the extra 8% (remember, of gross salary so actual cost lower) now, that outweighs the benefit of the pension I'll receive later?
Comparing the proportionate increase in your contribution (5% to 13% is a 160% uplift) to the 20% increase in pension is not appropriate.
You are only paying a small proportion of the overall cost of providing your pension so any change in your contribution vs total pension is highly geared i.e. 5% for a 1/60th pension is good value (overall cost might be 30% - 40% say).
Edited to add: I can't have read your whole post initially. The risk is different - in the SIPP (outwith the charges eroding the contribution) you are taking the investment risk. In the DB pension scheme the company is taking the risk. The outturn maybe similar based on a consistent set of assumptions but the variability in outcome for you is far wider.
Edited by number2 on Tuesday 12th November 15:02
£40k of pension will not buy you a pension worth £1670 a year though? Indeed assuming that the pension has some of the usual DB benefits - index linked, spousal benefit etc then it wouldn't get close.
The additional 8% buys you an extra 2.4 months per year, or if you work 25 years you will have accrued a pension of 25k per year instead of £20,800. That extra £4.2k of pension costs you £100k. That's cheap.
I'm sure to do a proper analysis it requires much more sophisticated analysis but given the LTA benefits of a DB scheme etc I'd do that deal in a heartbeat.
The additional 8% buys you an extra 2.4 months per year, or if you work 25 years you will have accrued a pension of 25k per year instead of £20,800. That extra £4.2k of pension costs you £100k. That's cheap.
I'm sure to do a proper analysis it requires much more sophisticated analysis but given the LTA benefits of a DB scheme etc I'd do that deal in a heartbeat.
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