Re: pension - should I purchase additional years from my employer's final salary scheme?


"Ronald Raygun" <no.spam@xxxxxxxxxxxxxxxxxxxxx> wrote in message
news:IB3Gj.28216$XI.19642@xxxxxxxxxxxxxxxxxxxxxxxxxxxx
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.

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.

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.

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.

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.

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?

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.

--
Andy



.

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