Pension question

A one off 5.962% of £1,200 gets 1.7%pa or £343 for life a 29%pa return.

Compare that with annuities which get 3.1 - 9.7%

Daytona

Hi all, I`m currently a civil servant and have been enquiring about buying extra years for my final salary pension. I`ve had the reply, and I`d like to know other peoples thoughts on it.

To earn the maximum 40 years service by the time I retire, I need to buy just over 7 years added service. This will cost me 5.962% of my salary (on top of the 3.5% I currently pay) before tax relief. This would cost me approximately 100 a month extra (again before the relief). Each year is worth 1/60th of my final salary, so the difference in my pension will be the difference between just over half my final earnings, and 2/3`s of my final salary, a fair difference.

Incidentally, it seems that the ability to buy extra years will be removed in October, after which something called an additional pension will be available. I could be wrong, but it strikes me that the chances of this being a better deal are slim, and that if I want to buy extra years then I should get started now :-)

I`d love to hear other peoples opinion on this!

Bitstring , from the wonderful person Simon Finnigan said

I'd buy them .. assuming of course that Joe Public doesn't get so p1$$ed off by the index linked government employee pensions that they force a rule change (or just line all the recipients up against the wall and save a bunch of tax money).

btw, you didn't tell us how long you have to pay the extra ~6% of your salary FOR, which is sort of important since that determines the actual outlay.

It's not clear whether this 5.962% is a one-off payment - or an annual payment for the rest of your working life. Please clarify.

Buying extra years usually involves a one-off payment in my experience - in which case I'm confused by your reference to 100 per month extra.

Incidentally, the basic pension of 1/60 of your final salary per year of service for a contribution of only 3/5% of your salary sounds fairly generous to me - particularly in the current pensions climate.

Sorry, this is 5.962% per month of my salary from now until I reach 60, in

32 years time.

The pension is good, it makes up for the lower than average pay for the nature of the job.

Whoops :-) The extra outlay would be for 32 years, at a fixed %age of my wage each month.

It`s 5.962% a month for the rest of my working life, rather than a one off payment.

Hmmm...

Why Hmmmm? You have no idea what the job I do is, nor what the pay for other similar jobs is.

So, you've only been there a year?! (You have 32 years to go, want to buy 7 years worth extra). What makes you think you'll last the 32 years to make it worth paying the extra 7?

It is not necessary to know what you do. It is merely necessary to presume that what you mean is that if you did similar work "in industry", (whatever that means), you might expect a salary which is (say) 20% higher. So for every £1000 you nominally earn now, and from which £35 are deducted in pension contributions, we could say that you're really earning £1200 and paying £235 pension contribution.

Then (if you did not have to buy the extra 7 years, i.e. if you had been young enough when you joined) you get a pension based on 40/60 of your nominal final salary. But your "industry equivalent" salary would be 20% higher, and so your pension would only be 33.3/60 of *that* salary. OK, that's still 44.4/80, which is better than the 40/80 you might have expected to get from an "industry" final salary scheme, but you'd also have to work 20 years longer for it.

By the way, do you really believe that in 32 years' time you will still be allowed to retire at 60 on 40/60 of salary?

So for a 6.135% [*] reduction in your pre-tax income relative to what it is now, you will get a pension which is 21.2% [**] more than it would be.

That sounds pretty attractive to me.

Bear in mind that the status quo is really 17.5% [***] below par, so buying those extra years is getting you up to par. Would you rather live out your retirement in the comparative squalour of having a pension 18% less than that of your peers, or would you rather sacrifice 6% of your salary during your working life?

At first sight, it doesn't look like a very good deal. If you continue to pay your 3.5%, you'll end up with a pension of 33/60 (55%) of your final salary. If you increase your contributions to 9.462%, you'll end up with a pension of 40/60 (66.66%) of your final salary. So your contributions will have gone up by a factor of 2.7 - but your pension will go up by a factor of only 1.21

So the increase is very poor value for money compared with the basic pension. But, as I said earlier, the basic pension is pretty generous!

So you're faced with trying to decide (second guess?) what your pension requirements will be in 32 years time (if, indeed, you're allowed to retire then, as others have said). If you think that a pension of 55% will be adequate, stick with your basic pension. If you think you will need more, you need to consider how best to achieve it. You really need to use a spreadsheet to produce some projections. I've just knocked up a simple one, based on your figures. I have assumed that your salary will rise at a rate of 5% p.a. for the next 32 years, and that any money put into a private pension fund will grow at 5% p.a. You can, of course, do your own, using different assumptions. Based on my assumptions, your salary will be about

90.7k in 32 years time (assuming 20k now). If you put 5.962% of your salary in a private pension scheme for the next 32 years, the pot will have grown to about 94.3k by the time you retire.

You know - all other things being equal! - that if you pay at the higher rate into your pension fund, you will get an extra pension of 11.66% of your final salary. In order to achieve the same thing from your private pension pot, you would have to buy an annuity which gave an annual income (index linked!) of 11.2% of the capital sum - which seems unlikely, based on current rates.

Do your own sums, and it may come out differently - but it still seems that you're likely to get a bigger pension by paying your money into your existing scheme rather than into a private scheme.

If I grow to hate the job, I can transfer within the civil service and keep my pension running. Apart from the fact that I love my job (pretty much dream job material) I`ve also got that backout clause. :-)

So you don't work for HMRC then. :-)

I`ve gt friends who do who are enjoying it, but they aren`t in a call centre getting grief :-)