My local government employer will allow me to purchase additional years in the final salary scheme. I'm trying to work out if the deal is worth it. I've tried a number of pension calculators on the Internet, but get contradictory answers. As I'd be purchasing additional years, my employer would not be making a contribution.
I have 15 years left to retirement. Every year that I purchase would cost me 1.32% of my salary (for the 15 years) and result in me getting
1/80 of my final salary as additional annual pension plus 3/80 of my final salary as a lump sum.
My salary is 22500 (UK pounds). The additional annual pension would be
281, the lump sum would be 843.
Would I be better off putting the money into a stakeholder pension (or similar) or should I take up the offer from my employer?
I realise that my employer's offer is a guaranteed payment.
Impossible to calculate the correct answer without knowing how your future salary is likely to change, what inflation is likely to do, and what the rules on 'minimum pension guarantee' and suchlike means tested cr&p is likely to be .. however if it were me I'd probably rip their arm off to sign up for as many years as possible.
I assume the pension is fully index linked, so the only risk is that the country can't afford to pay out what the government has foolishly promised (such schemes are normally not fully funded .. or even not funded at all).
Correct me if I am wrong, but if you leave purchase of AVC's until after 6th April 2008 does your scheme not change to an enhanced 60ths scheme?.... for all service accrued or purchased after 6th?....it would therefore be worth
2/3rds of final salary for every year of service. You dont say how many years of service you already have and your age. There is no Inland Revenue limit anymore since A day of 40/60's of gross salary (pre 2006), so if your service will add up to more than 40 years under the old scheme rules you would have been overfunded (and penalised accordingly) but not anymore....it has been replaced by a lifetime benefits system which would effect anyone over £100k per year salary.
In my scheme (British Steel) when I am 60 I will have 49 years pensionable service, which according to their latest pension benefit forecast is all allowable.
But to answer your question....its all dependent on when they will let you retire (65 is the scheme age but early retirement at 60 without loss of benefits still takes place), and whether you have payback or not depends on the age you live to. In my scheme I worked out that if I lived 10 years after my retirement I was in payback in terms of payments put into the scheme compared with benefits drawn out. Look at your fathers age...and his fathers. Look at your health now and any genetic health problems and make a educated guestimate of how long youare likely to live (failing getting run over by a bus).
How can you say that "the additional pension would be 281"? That doesn't make sense, unless you mean it would be worth 281 for each additional year you purchase, but that isn't really the case, because you seem to be calculating it on the basis of your present salary, whereas 15 years down the line you would expect your salary to have increased both due to inflation and due to promotion.
OK, I suppose if you were to say that it would be worth 281 in today's money that would compensate for the effect of inflation, but surely you would expect, over the course of 15 years, to gain some seniority and promotion. Also, you need to look carefully at what "today's money" means. Salary inflation tends to run ahead of general inflation (even though in the long term it makes no sense for it to do so).
Suppose your final salary will be 30k in today's money. In that case, each additional year you purchase now would involve you sacrificing
1.32% of 22500 (297) (or promoted equivalent) for each of the next 15 years, and will give you an additional 30000/80 (375) annually when you retire. That seems like a pretty good deal to me. Steakholder pensions stand virtually no chance of beating that.
So if you like the idea, it's no longer a question of yes or no, but of how many years you should buy. As many as you can afford! As many as they'll let you! They will presumably not allow you to buy more than would bring your total pensionable service to 40 years at retirement age.
One thing to look out for is whether the salary sacrifice also reduces what is taken as your final salary for pension calculation purposes. What I'm saying is that if your final salary (after promotions etc) would have been 30000 15 years down the line without your buying any extra years, then if you were to buy 5 years, you'd be sacrificing
6.6%, and your actual final year's salary would be 93.4% of 30000, which is 28020. So will your pension be N/80 of 30000 or will it be N/80 of 28020?
Depends - in a lot of jobs most promotions occur early in the career, and someone who is say 50 and intends to retire at 65 may not necessarily get any promotions.
today's
seniority
In that scenario, yes. But the OP needs to consider other scenarios. For instance what if he gets another job in a few years' time? The deferred pension is likely to only increase by inflation, and possibly capped at 5% or so.
reduces
And the other thing is to check is if other salary related payments are based on the pre sacrifice or post sacrifice salary. For instance overtime pay, shift pay, redundancy etc.
As this is a local government final salary scheme, surely the purchase of additional years is unlikely to involve any "salary sacrifice"? It is more likely to be a straightforward payment with no effect whatsoever on the salary (or NICs); and with tax relief given at source by reducing the pay for PAYE purposes.
The scheme does offer AVCs but (see eg
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but I don't think those are what the OP has in mind. The scheme administrator should have booklets about this and other options.
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