How do pensions work?
Discussion
I know that you pay in and you (should) get back, but how does it all work really?
From my understanding:
For the private sector - We pay in to a "pot of money" that is segregated for pensions only - when "Bob" retires, that's where his retirement fund comes from.
For the public sector - We, the taxpayer, don't pay in to a "pot", but an amount of our taxable monies are allocated for pension payouts. Or is it the same as in the Private sector and there exists a "pot" of money?
For the "pot" of money - How is all this money held - is it "real"/"actual" money or is it only in stocks and shares? Is this money kept legally safe?
I only ask as I was listening to something on Radio 4 this morning that said that the public sector pension costs are going to rise massively and that these need to be curbed - but the Unions won't let pensions be cut...
From my understanding:
For the private sector - We pay in to a "pot of money" that is segregated for pensions only - when "Bob" retires, that's where his retirement fund comes from.
For the public sector - We, the taxpayer, don't pay in to a "pot", but an amount of our taxable monies are allocated for pension payouts. Or is it the same as in the Private sector and there exists a "pot" of money?
For the "pot" of money - How is all this money held - is it "real"/"actual" money or is it only in stocks and shares? Is this money kept legally safe?
I only ask as I was listening to something on Radio 4 this morning that said that the public sector pension costs are going to rise massively and that these need to be curbed - but the Unions won't let pensions be cut...
You pay in all your life and think you have a decent pension planned for when you retire, meanwhile a Labour Govt gets into power and raids your pension (again), thereby reducing your pension to about what you paid into, minus fees.
In the event that your pension isn't penalised, then in 40 years you will discover that the State Pension has become unaffordable, and is now means tested, and that despite saving that money over the years, you are no better off than someone who spanked their hard earned cash down the pub every night for the last 40 years.
Don't worry about who pays what into your pension, or the mechanism of it, just remember that you get screwed in 40 years.
Have a good day!
In the event that your pension isn't penalised, then in 40 years you will discover that the State Pension has become unaffordable, and is now means tested, and that despite saving that money over the years, you are no better off than someone who spanked their hard earned cash down the pub every night for the last 40 years.
Don't worry about who pays what into your pension, or the mechanism of it, just remember that you get screwed in 40 years.
Have a good day!
I would reply, but by the time I've written it all down someone else will, try this link
http://www.direct.gov.uk/en/Pensionsandretirementp...
http://www.direct.gov.uk/en/Pensionsandretirementp...
JRM said:
I would reply, but by the time I've written it all down someone else will, try this link
http://www.direct.gov.uk/en/Pensionsandretirementp...
Thanks - but that doesn't say how Public Sector pensions really work - I accept that I'll have a "State" pension which will, let's be honest, be worthless and my private pension will "hopefully" add to it - but Joe over there who worked as a Civil servant all his life will retire at 55 on a lump sum and a big pension*http://www.direct.gov.uk/en/Pensionsandretirementp...
* Shortly after which, he'll go back as a contractor on 4x his exit salary
Not to mention that it doesn't show how public sector pensions are funded - clearly taxation is the way to go - at the expense of the Private sector
Edited by james_tigerwoods on Tuesday 15th June 11:38
Ok, well in the public sector I think it's still the case they there are a mix of contribution and final salary pensions. My father has the latter, the luck sod.
Typical contribution scheme in the private sector works that you give, say, 5% of your salary pre-tax into the pension fund and the employer matches it, or even just gives you some regardless. The total contribution is then invested into the stock market and you keep your fingers crossed that it grows at a decent rate over 40 years.
Many companies and I should think the public sector as well are looking at how much the company contributes and are thinking of cutting it back e.g. say you get the following:
5% core contribution
5% personal addition
5% matched by the company because you put in 5%
On top of this you can pay Addition Voluntary Contributions (AVCs) if you really want everything in a pension fund.
So overall the company paying is 10% and many are looking at cutting backing on the matching or the core part.
Final salaries are a huge timebomb. Basically many work to say that the firm, or government in the public sector will pay into a fund on your behalf and when you retire you can have 2/3s of your final salary until you die.
It's an amazing deal, and the issue is that the fund that is being contributed to must grow like a private fund in order to supply the people who retire (and at a certain amount each year). Unfortunately government departments (and the Royal Mail!) can't afford to contribute enough/or the fund doesn't perform as expected and there is a big gap between what is in the fund and what they can afford to pay out.
What has happened in private and public sectors is that the immediate need for cash has often meant that management has cut back on the contributions, becuase it's not going to be an issue for 20 or 30 years, when the deficit will really hit and they need more money now, so one step is to reduce the amount they are liable to pay out at the end of your working life and change the T's & C's
To give you a guide (seeing as the private fund above is paying a 15% contribution) I think to retire on 2/3s final salary needs an equivalent of 30-40% contribution throughout your working life!
Typical contribution scheme in the private sector works that you give, say, 5% of your salary pre-tax into the pension fund and the employer matches it, or even just gives you some regardless. The total contribution is then invested into the stock market and you keep your fingers crossed that it grows at a decent rate over 40 years.
Many companies and I should think the public sector as well are looking at how much the company contributes and are thinking of cutting it back e.g. say you get the following:
5% core contribution
5% personal addition
5% matched by the company because you put in 5%
On top of this you can pay Addition Voluntary Contributions (AVCs) if you really want everything in a pension fund.
So overall the company paying is 10% and many are looking at cutting backing on the matching or the core part.
Final salaries are a huge timebomb. Basically many work to say that the firm, or government in the public sector will pay into a fund on your behalf and when you retire you can have 2/3s of your final salary until you die.
It's an amazing deal, and the issue is that the fund that is being contributed to must grow like a private fund in order to supply the people who retire (and at a certain amount each year). Unfortunately government departments (and the Royal Mail!) can't afford to contribute enough/or the fund doesn't perform as expected and there is a big gap between what is in the fund and what they can afford to pay out.
What has happened in private and public sectors is that the immediate need for cash has often meant that management has cut back on the contributions, becuase it's not going to be an issue for 20 or 30 years, when the deficit will really hit and they need more money now, so one step is to reduce the amount they are liable to pay out at the end of your working life and change the T's & C's
To give you a guide (seeing as the private fund above is paying a 15% contribution) I think to retire on 2/3s final salary needs an equivalent of 30-40% contribution throughout your working life!
anonymous said:
[redacted]
Agree on endowments, not sensible however I genuinely believe many have then to avoid spending the wedge as they go, too tempting.Also, if you run your own company with a few quid sloshing around then putting a big whack in every year is, or at least has been a tax efficient way of saving notwithstanding the control aspects with regard to actual retirement date.
Defined benefit (DB) schemes are a promise to pay you a pension based on your length of service and your final or average salary. You and your employer pay into a grouped pension investment fund run by trustees. Whether or not that fund has accrued enough investment returns to pay your pension you get it regardless. The pension you take when you retire is also index linked, so it will increase year on year after you retire.
For example a 60/40 Final Salary DB scheme will pay you 60% of your Final Salary for 40 years service, for less service you get less pension, so for 20 years service you get a 30% pension.
Defined contribution (DC) schemes are when you gradually build up a pot of money in your own in a tax free investment vehicle made up of yours and if your lucky your employers contributions to create a fund to buy an annuity after you retire. The annuity is an assurance plan that calculates; based on your pot of money, your life expectancy and the assurance companies expected investment returns on your lump sum, how much it can pay you on a monthly basis until your supposed to pop your clogs.
There are inherent issues with both DB schemes & DC schemes and the current increases in life expectancy. The problem for DB schemes is that they have legally promised pensions 40 years in the future with no real understanding if their investment returns on the pension fund can support that promise.
With DC schemes the annuity rates are tumbling as people live longer, so people who believe they are making a decent provision for there old age may find themselves doing the meet and greet jobs at Asda well into their 80's.
The size of the funding issues in DB schemes are ridiculous and the private sector has a bigger issue than the public sector who still have a significant problem in meeting these issues in the future.
The one glimmer of light for the Private Sector is that they have mainly closed DB scheme to new entrants, they'll still have to fund those currently in and on them. This means the only way they can hope to afford them until all of the current members have passed away is to significantly increase their investment in the pensions funds and hope to get decent returns to cover the cost in the future.
I'm not sure on this but I believe in the Civil Service (not necessarily all of the wider public sector) the contributions made by employees (3.5%) and employers (19%) are not invested, so the exposure to this cost is a real time cost issue and tax burden as the current contributions from current civil servants doesn't cover the amount the pension schemes are paying out. Therefore there is no way to offset some of these cost issues as returns from an investment fund. Add to this the fact that despite some changes to the scheme in the Civil Service, it still has an Open DB scheme, so you can see why it is a hot issue.
Elsewhere in the public sector, local govt etc they are in the same situation as the rest of the private sector employees, eg closed DB schemes they need to fund and open DC schemes that are not going to realise enough return to provide a meaningful annuity.
For example a 60/40 Final Salary DB scheme will pay you 60% of your Final Salary for 40 years service, for less service you get less pension, so for 20 years service you get a 30% pension.
Defined contribution (DC) schemes are when you gradually build up a pot of money in your own in a tax free investment vehicle made up of yours and if your lucky your employers contributions to create a fund to buy an annuity after you retire. The annuity is an assurance plan that calculates; based on your pot of money, your life expectancy and the assurance companies expected investment returns on your lump sum, how much it can pay you on a monthly basis until your supposed to pop your clogs.
There are inherent issues with both DB schemes & DC schemes and the current increases in life expectancy. The problem for DB schemes is that they have legally promised pensions 40 years in the future with no real understanding if their investment returns on the pension fund can support that promise.
With DC schemes the annuity rates are tumbling as people live longer, so people who believe they are making a decent provision for there old age may find themselves doing the meet and greet jobs at Asda well into their 80's.
The size of the funding issues in DB schemes are ridiculous and the private sector has a bigger issue than the public sector who still have a significant problem in meeting these issues in the future.
The one glimmer of light for the Private Sector is that they have mainly closed DB scheme to new entrants, they'll still have to fund those currently in and on them. This means the only way they can hope to afford them until all of the current members have passed away is to significantly increase their investment in the pensions funds and hope to get decent returns to cover the cost in the future.
I'm not sure on this but I believe in the Civil Service (not necessarily all of the wider public sector) the contributions made by employees (3.5%) and employers (19%) are not invested, so the exposure to this cost is a real time cost issue and tax burden as the current contributions from current civil servants doesn't cover the amount the pension schemes are paying out. Therefore there is no way to offset some of these cost issues as returns from an investment fund. Add to this the fact that despite some changes to the scheme in the Civil Service, it still has an Open DB scheme, so you can see why it is a hot issue.
Elsewhere in the public sector, local govt etc they are in the same situation as the rest of the private sector employees, eg closed DB schemes they need to fund and open DC schemes that are not going to realise enough return to provide a meaningful annuity.
Edited by anonymous-user on Tuesday 15th June 16:53
The state of private (both DB and DC) pensions is truly awful, but I reserve special scorn for the State Pension. Not only is it a poor model (current contributors pay the pensions of the retired), but now it seems these contributions are not for pensions at all, they're just a tax. Cue Brown thinking he was sounding generous by illustrating how he would "spend" an increase in NICs on schools, health, policing etc. Heaven forbid it be used to pay for, oh I don't know, the PENSION SHORTFALL. The consequence of an ageing population means if it isn't reformed, the whole thing will collapse before very long. What a joke.
bogwoppit said:
The state of private (both DB and DC) pensions is truly awful, but I reserve special scorn for the State Pension. Not only is it a poor model (current contributors pay the pensions of the retired), but now it seems these contributions are not for pensions at all, they're just a tax. Cue Brown thinking he was sounding generous by illustrating how he would "spend" an increase in NICs on schools, health, policing etc. Heaven forbid it be used to pay for, oh I don't know, the PENSION SHORTFALL. The consequence of an ageing population means if it isn't reformed, the whole thing will collapse before very long. What a joke.
Of course when they go ahead and cut the civil service population hugely they'll be even less offset against the tax burden, and more people drawing a pension against it. It is the worst possible model for this point in time for the country. The only way they can fix it is to extend the retirement age to about 80.Edited by anonymous-user on Tuesday 15th June 16:52
Just to demonstrate how badly pensions have been handled in the past, the following is a summary of the Pension Fund Affair.
said:
When the Post Office was corporatised in 1969, it took over responsibility for the former system of civil service pensions. Prior to 1969, the Post Office made payments to the Exchequer, which in turn used the sums, as part of a notional fund to pay the pensions. Upon corporatisation, the government valued this notional fund and then credited the value in notional government stock to the new Post Office fund.
Although this Consolidated Stock (consuls) was valued in notional terms, it was then sold at market prices. As undated Consuls, the market price was very vulnerable to changes in inflation. Unfortunately, the same inflation, that reduced the value of the stock, also increased index-linked pensions, creating an overall deficit of £512 million, which grew to £1920 million by 1976. Due to the economic situation of the time, the government refused to take responsibility for the deficit, despite having 'taken good money from the Post Office before 1969 and paid it back with bad -- its own paper.' (Corby, p. 158) Instead, the Post Office had to resort to using its own general reserves of past profits -- largely accumulated by the Telecoms division -- to rectify the deficit.
Although this Consolidated Stock (consuls) was valued in notional terms, it was then sold at market prices. As undated Consuls, the market price was very vulnerable to changes in inflation. Unfortunately, the same inflation, that reduced the value of the stock, also increased index-linked pensions, creating an overall deficit of £512 million, which grew to £1920 million by 1976. Due to the economic situation of the time, the government refused to take responsibility for the deficit, despite having 'taken good money from the Post Office before 1969 and paid it back with bad -- its own paper.' (Corby, p. 158) Instead, the Post Office had to resort to using its own general reserves of past profits -- largely accumulated by the Telecoms division -- to rectify the deficit.
Pensions are too complicated for me. I had two. The experts to whom I sent the money made, over the years, about the same amount as I gave them. This wasn't hugely impressive. Then I became 50. I took the quarter of my money I was allowed to take and used it far far better than the experts had managed. The rest of it is kept by other experts who pay a monthly pittance as the proceeds. The quarter I took currently pays 12 times what the three quarters I didn't take pays.
Oh, and, by the way, the rotten cherry on this mouldy cake is that when you die they steal anything that's left because despite what's left being composed of your savings they've invented a way where it becomes theirs.
Pensions are a waste of time and a waste of money, although not for the people in the pensions industry for whom they're doubtless very profitable.
Oh, and, by the way, the rotten cherry on this mouldy cake is that when you die they steal anything that's left because despite what's left being composed of your savings they've invented a way where it becomes theirs.
Pensions are a waste of time and a waste of money, although not for the people in the pensions industry for whom they're doubtless very profitable.
Or you could always invest in something safe like BP,or maybe not at the moment.
My father has bought shares all is life instead of buying a pension,now has quite a lot of BP,and up until this fiasco going on at the moment as had a resonable income from them.
O.K. it could have all gone tits up but up until now he has earned more than sticking it in the bank/building society.
My father has bought shares all is life instead of buying a pension,now has quite a lot of BP,and up until this fiasco going on at the moment as had a resonable income from them.
O.K. it could have all gone tits up but up until now he has earned more than sticking it in the bank/building society.
SmoothRB said:
They go into the massive Ponzi scheme of the stock market where they make people like Warren Buffet even richer.
So cut out the middle man, buy Berkshire B and expect to see 6-10 points above market, no management charges, less volatility on value, and the best finacial education you can possibly get.anonymous said:
[redacted]
Property is the only long term gainer, maybe a nice bungalow in a decent middle class area, not too remote but still near civilasation. It will over time appreciate in value, with an ageing population they will never build any more bungalows, supply and demand and all that. Also they usually have a nice flat plot so if all else fails and its not been modernised inside and wont sell as is, sell the plot for a flats development. Gassing Station | News, Politics & Economics | Top of Page | What's New | My Stuff