DB Pension - Have I got this right ?

[Crafty_]

I have a DB or final salary pension, but I need to make a choice:

5% of salary buys me 1/80th
9% of salary buys me 1/60th

If I go 60ths I can drop down to 80ths in future years. If I go 80ths now I can't go back to 60ths, ever.

So I was doing some sums and not totally sure if I have this right..

To keep the figures simple lets say a pensionable salary of 30k and I've worked for 20 years.

20 x 1/60th = £10,000
20 x 1/80th = £7,500

The difference between the payments for the two is 4%, which is £1200 a year or £24,000 over the 20 years. The way I look at it, you'd need to live for 20 years post retirement to make it worth going for 60ths ?

Am I missing something ?

I'm wondering if it might be better to pay 5% on the pension and then take the £1200 (minus income tax of course..) and invest long term it elsewhere?

I have a private pension I started years ago that I could pay in to (which I'm still contributing to) or find some other investment.

Thanks!

[ringram]

ISA or SIPP?

Probably needs a bit more calculator action. But you should be able to work things out.
Dont forget a SIPP will get you a tax credit equal to your marginal rate. So £1200 in net will get grossed up to a higher number.
Or perhaps your organisation will let you do salary sacrifice for the same result.

Either way do some more sums.

[fandango_c]

ringram said:

ISA or SIPP?

Probably needs a bit more calculator action. But you should be able to work things out.
Dont forget a SIPP will get you a tax credit equal to your marginal rate. So £1200 in net will get grossed up to a higher number.
Or perhaps your organisation will let you do salary sacrifice for the same result.

Either way do some more sums.

£1200 is a gross figure, so won't be grossed up into a SIPP.

[fandango_c]

Crafty_ said:

I have a DB or final salary pension, but I need to make a choice:

5% of salary buys me 1/80th
9% of salary buys me 1/60th

If I go 60ths I can drop down to 80ths in future years. If I go 80ths now I can't go back to 60ths, ever.

So I was doing some sums and not totally sure if I have this right..

To keep the figures simple lets say a pensionable salary of 30k and I've worked for 20 years.

20 x 1/60th = £10,000
20 x 1/80th = £7,500

The difference between the payments for the two is 4%, which is £1200 a year or £24,000 over the 20 years. The way I look at it, you'd need to live for 20 years post retirement to make it worth going for 60ths ?

Am I missing something ?

I'm wondering if it might be better to pay 5% on the pension and then take the £1200 (minus income tax of course..) and invest long term it elsewhere?

I have a private pension I started years ago that I could pay in to (which I'm still contributing to) or find some other investment.

Thanks!

Difference between 60th and 80th is £2,500pa which is about a tenth of the £24,000 figure of the difference between gross contributions. Not sure why you get a figure of 20 years and not 10 years?

[Crafty_]

ringram said:

ISA or SIPP?

Probably needs a bit more calculator action. But you should be able to work things out.
Dont forget a SIPP will get you a tax credit equal to your marginal rate. So £1200 in net will get grossed up to a higher number.
Or perhaps your organisation will let you do salary sacrifice for the same result.

Either way do some more sums.

I don't know if its ISA or SIPP, will find out.
Can you explain the second sentence for a thicko? I don't quite follow...

I already do salary sacrifice.


ETA : fandango, you are quite correct its 10 years to see a benefit, not 20. I will run through the actual figures again. I did say I was missing something! Still not sure what I should do.

Edited by Crafty_ on Tuesday 6th November 23:59

[fandango_c]

Crafty_ said:

Am I missing something ?

I'm wondering if it might be better to pay 5% on the pension and then take the £1200 (minus income tax of course..) and invest long term it elsewhere?

Thanks!

You're missing investment risk, longevity risk, investment/management charges and choosing where to invest with regard to going down the saving elsewhere route. The DB option won't have these risks, but may have others such as would employer becoming insolvent. The DB option also ties up your money until your retirement age. Saving other than a pension means you can access your investment at any point.

Once you've done some more sums, it should be very clear that the 60th scheme is the best option.

[wattsm666]

Do you get a 25% tax free lump sum on both 60th and 80th's?

[CaptainSlow]

Crafty_ said:

I have a DB or final salary pension, but I need to make a choice:

5% of salary buys me 1/80th
9% of salary buys me 1/60th

If I go 60ths I can drop down to 80ths in future years. If I go 80ths now I can't go back to 60ths, ever.

So I was doing some sums and not totally sure if I have this right..

To keep the figures simple lets say a pensionable salary of 30k and I've worked for 20 years.

20 x 1/60th = £10,000
20 x 1/80th = £7,500

The difference between the payments for the two is 4%, which is £1200 a year or £24,000 over the 20 years. The way I look at it, you'd need to live for 20 years post retirement to make it worth going for 60ths ?

Am I missing something ?

I'm wondering if it might be better to pay 5% on the pension and then take the £1200 (minus income tax of course..) and invest long term it elsewhere?

I have a private pension I started years ago that I could pay in to (which I'm still contributing to) or find some other investment.

Thanks!

I assume you work for a large US Corporation. Once you take the income tax off I guess it is nearer 7-8 years payback?

[Crafty_]

wattsm666 said:

Do you get a 25% tax free lump sum on both 60th and 80th's?

Yes, I get the option to take a tax free lump and a lower pension or just take a higher pension. Doesn't matter if I go 60ths or 80ths.

CaptainSlow said:

I assume you work for a large US Corporation. Once you take the income tax off I guess it is nearer 7-8 years payback?

Yeah big US corp, I'm PAYE in the UK and the pension is UK based, so whatever the income tax rules are will affect me.

Edited by Crafty_ on Thursday 8th November 20:28

[sidicks]

Crafty_ said:

I have a DB or final salary pension, but I need to make a choice:

5% of salary buys me 1/80th
9% of salary buys me 1/60th

Well if 1/80ths costs 5%, then 1/60ths should cost 1/3rd more, so that gives you a 'fair' cost of around 6.7%.

In this case the 1/80ths scheme is (significantly) better value.

However, it all depends on whether the money you save can be put to good use to make up the pension shortfall.

As fandango has outlined, for the pension you are buying, the contribution rates are excellent value - think of the true cost being 25-30% for the 60ths scheme (assuming that benefits are NOT index-linked) and come with zero risk to you in terms of investment risk, longevity risk and interest rate risk at retirement.

For that reason, I'd ignore the fact that the 60ths scheme is relatively more expensive than the 80ths scheme and focus more on the excellent terms available on the 60ths scheme.


Sidicks

[TFP]

ringram said:

ISA or SIPP?

Probably needs a bit more calculator action. But you should be able to work things out.
Dont forget a SIPP will get you a tax credit equal to your marginal rate. So £1200 in net will get grossed up to a higher number.
Or perhaps your organisation will let you do salary sacrifice for the same result.

Either way do some more sums.

I like the irony of you you being pretty much entirely wrong in the advice you give above, whilst on another thread you say that it isn't worth paying for financial advice.

Maybe you don't know as much about pension planning as you think you do.

[CaptainSlow]

Crafty_ said:

Yeah big US corp, I'm PAYE in the UK and the pension is UK based, some whatever the income tax rules are will affect me.

OK I have the same employer. I'm sticking with the 60ths.

[Crafty_]

Yeah I decided to go that way too. The net pay modeller thing on the website seems to think the impact isn't too bad, I've changed some of the other benefits around and my tax code changed (for the better!) as well.

Are you Aviation ?

[northandy]

ringram said:

ISA or SIPP?

Probably needs a bit more calculator action. But you should be able to work things out.
Dont forget a SIPP will get you a tax credit equal to your marginal rate. So £1200 in net will get grossed up to a higher number.
Or perhaps your organisation will let you do salary sacrifice for the same result.

Either way do some more sums.

DB pension isnt an ISA or a SIPP its a totally different animal altogether

[otherman]

northandy said:

ringram said:

ISA or SIPP?

Probably needs a bit more calculator action. But you should be able to work things out.
Dont forget a SIPP will get you a tax credit equal to your marginal rate. So £1200 in net will get grossed up to a higher number.
Or perhaps your organisation will let you do salary sacrifice for the same result.

Either way do some more sums.

DB pension isnt an ISA or a SIPP its a totally different animal altogether

OP proposed investing his money elsewhere to do better than the DB (nb, virtually impossible). Ringham is asking what route he assumed for this.

[otherman]

Crafty_ said:

Am I missing something ?

I think you're missing the fact that the pension is worth a lot more than the extra 4% (say 3% net) that you're putting into it, your employer will put in more than you.

My rule is to look at what you pay in vs what you get out. If you retire at 65 and live to average age you'll collect 20*2.5k = £50k in extra pension payments. If you pay in 3% net, and your average salary over the 20 years working is 25k, you'll have paid in £15k to get this benefit. So money coming out = better than 3x money going in. And if the pension in payment is index linked its even better.
Of course I've ignored inflation but the ratios will stay about the same.

[CaptainSlow]

Crafty_ said:

Yeah I decided to go that way too. The net pay modeller thing on the website seems to think the impact isn't too bad, I've changed some of the other benefits around and my tax code changed (for the better!) as well.

Are you Aviation ?

No Capital