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easy2012

How Good Is Final Salary (Defined Benefit) Pension

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I have always thought that a Final Salary pension is gold plated but given a 4%+ effective rate of inflation, a 2% uprating would reduce the value of the pension over time and the final salary pension will be greatly diminished when one live the 80s.

Say someone on £40k and work for the full 40 years and hence gets £26k to start with - which is a decent sum of money. After 10 years (uprating 2%, inflation 4%, that becomes around (1.02^10)/(1.04^10) * 26 = £22k, after 20 years, this becomes £17k, after 30 years, this will have current purchasing power of around £12k. If we have earning growth of RPI+1% (eventually), then the relative position of final salary pension would be even worse.

So, maybe final salary pension is silver plated rather than gold plated afterall.

All thoughts on this issue is much appreciated.

Edited by easy2012

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Most were index linked to RPI so they'd do a fair enough job of keeping up with inflation.

However, the rules were changed, and most are now linked to CPI which will do a worse job of keeping up with inflation

I expect more fiddling in the future to devalue these pensions as much as the government of the day feels they can get away with.

Edited by SpectrumFX

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Got various bits of pensions, I don't rely upon any of them for my 'retirement planning' and that includes the state pension.

If any 'come in', then it'll be a bonus.

As the RPI to CPI change shows, you can't rely on them.

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I have always thought that a Final Salary pension is gold plated but given a 4%+ effective rate of inflation, a 2% uprating would reduce the value of the pension over time and the final salary pension will be greatly diminished when one live the 80s.

Say someone on £40k and work for the full 40 years and hence gets £26k to start with - which is a decent sum of money. After 10 years (uprating 2%, inflation 4%, that becomes around (1.02^10)/(1.04^10) * 26 = £22k, after 20 years, this becomes £17k, after 30 years, this will have current purchasing power of around £12k. If we have earning growth of RPI+1% (eventually), then the relative position of final salary pension would be even worse.

So, maybe final salary pension is silver plated rather than gold plated afterall.

All thoughts on this issue is much appreciated.

How can you truly consider this without looking at your level of contributions?

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I have always thought that a Final Salary pension is gold plated but given a 4%+ effective rate of inflation, a 2% uprating would reduce the value of the pension over time and the final salary pension will be greatly diminished when one live the 80s.

Say someone on £40k and work for the full 40 years and hence gets £26k to start with - which is a decent sum of money. After 10 years (uprating 2%, inflation 4%, that becomes around (1.02^10)/(1.04^10) * 26 = £22k, after 20 years, this becomes £17k, after 30 years, this will have current purchasing power of around £12k. If we have earning growth of RPI+1% (eventually), then the relative position of final salary pension would be even worse.

So, maybe final salary pension is silver plated rather than gold plated afterall.

All thoughts on this issue is much appreciated.

I agree, I think that the term "gold plated" is only used by the media to wind up people who don't have final salary pensions. DBs are a useful way of ensuring a reasonably comfortable lifestyle in retirement.

Re the effects of inflation, you will have a "top up" from your state pension sometime around your mid/late 60s.

I have dozens of former colleagues on final salary pensions, all doing very nicely thank you.

Not DB, but re the amount, my old man does fine on his £12k/year (total of pensions).

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How can you truly consider this without looking at your level of contributions?

Aren't we talking defined benefit? In which case his contributiions aren't relevant (he may not even be making any!) as his employer is required to meet any shortfall in contributions.

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Aren't we talking defined benefit? In which case his contributiions aren't relevant (he may not even be making any!) as his employer is required to meet any shortfall in contributions.

I think he has a point - if one has to contribute 50% of salary to get the 'defined benefit' - then it is probably not worth it. This amount is now normally between 4 to 8%. However, to make the comparison against other alternative, SeeyouNextTuesday will have to make some assumption on future returns of those other options - which are of course unpredictable.

Thanks for the above replies - it looks like relying on a defined benefit / final salary even from a good company / government for those retiring in the next 20 odd years without further provision is not a wise thing to do.

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I think he has a point - if one has to contribute 50% of salary to get the 'defined benefit' - then it is probably not worth it. This amount is now normally between 4 to 8%. However, to make the comparison against other alternative, SeeyouNextTuesday will have to make some assumption on future returns of those other options - which are of course unpredictable.

Thanks for the above replies - it looks like relying on a defined benefit / final salary even from a good company / government for those retiring in the next 20 odd years without further provision is not a wise thing to do.

Ok, i missed that. Most of these schemes the contributions are so low compared to the benefits I didn't even comprehend what he meant! Major brain fail on my part.

Edited by SpectrumFX

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I think he has a point - if one has to contribute 50% of salary to get the 'defined benefit' - then it is probably not worth it. This amount is now normally between 4 to 8%. However, to make the comparison against other alternative, SeeyouNextTuesday will have to make some assumption on future returns of those other options - which are of course unpredictable.

Thanks for the above replies - it looks like relying on a defined benefit / final salary even from a good company / government for those retiring in the next 20 odd years without further provision is not a wise thing to do.

If you are an optimist, the maths adds up for the scheme I am in. Only because the company contribution is far larger than my own. I cannot see anyway of getting the sort of returns I would need on my personal contribution. It would take a lot of fiddling to make it not worthwhile.

If I could make those returns myself I'd be better off jacking in my job and trading to make a living. As a point of note, mnay schemes are capped at 50% final salary not 2/3. Don't know if thats some sort of public private difference or just chance but I'm on a 50% 80ths scheme, far less generous than a 2/3s 60ths scheme but still extremely generous in current climate.

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I have always thought that a Final Salary pension is gold plated but given a 4%+ effective rate of inflation, a 2% uprating would reduce the value of the pension over time and the final salary pension will be greatly diminished when one live the 80s.

Say someone on £40k and work for the full 40 years and hence gets £26k to start with - which is a decent sum of money. After 10 years (uprating 2%, inflation 4%, that becomes around (1.02^10)/(1.04^10) * 26 = £22k, after 20 years, this becomes £17k, after 30 years, this will have current purchasing power of around £12k. If we have earning growth of RPI+1% (eventually), then the relative position of final salary pension would be even worse.

So, maybe final salary pension is silver plated rather than gold plated afterall.

All thoughts on this issue is much appreciated.

I have just been playing around on a pension annuity calculator to calculate today's value of a pension that pays out £26,000, rising at 3% p/a. The amount you would need would be £650,000. If you had paid 50% of your £40,000 salary into the pension it would still take you over 30 years to build up this pot, assuming a constant level of salary.

OK, a CPI pension is not as great as an RPI pension, but the reality is, the true value of this defined benefit pension pot is higher than the combined value of pension contribution and income tax over a life time.

Edited by Ah-so

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I have just been playing around on a pension annuity calculator to calculate today's value of a pension that pays out £26,000, rising at 3% p/a. The amount you would need would be £650,000. If you had paid 50% of your £40,000 salary into the pension it would still take you over 30 years to build up this pot, assuming a constant level of salary.

OK, a CPI pension is not as great as an RPI pension, but the reality is, the true value of this defined benefit pension pot is higher than the combined value of pension contribution and income tax over a life time.

I agree with you that is is relatively attractive vs annuity. However, there are more alternatives then just annuity and my main concern remain the sometimes mistaken view that DB/Final Salary pension is gold plated - it doesn't look like it is.

There are many permutations of course once the alternatives are taken into account. There is always a bull market somewhere - the tricky thing is to identify them, of course. An example would be the possibility of borrowing at 2.6% and leverage 10x on relatively safe equities that have an earning yield of 10%/PE10 (or less) and hence giving a look through return of 70% (or 35% on 5x leverage) or so on invested capital (equities and leverage carries significant risks, obviously)

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  • 243 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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