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Inoperational Bumblebee

Considering Final Salary pension value when changing job?

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Not sure which forum this fitted best; I thought in here might be most appropriate. Some fine minds hang out in here, and I thought someone like @wish I could afford one or @Frugal Git might have considered something like this before. Anyone's thoughts are obviously very welcome though!

I have a Final Salary pension with my current employer, with each year worth 1/80th of my final pensionable salary. If I change employer I'm highly unlikely to find somewhere that still offers FS pensions so I really feel I should consider that as part of any move.

Is there a rule of thumb I can use to value my current pension as equivalent income i.e to move somewhere else how much more would I want to earn to make up for not having the FS pension? Is that dependent on how many years I've worked here, or how many years I expect to work in total? Both?

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5 hours ago, Inoperational Bumblebee said:

Not sure which forum this fitted best; I thought in here might be most appropriate. Some fine minds hang out in here, and I thought someone like @wish I could afford one or @Frugal Git might have considered something like this before. Anyone's thoughts are obviously very welcome though!

I have a Final Salary pension with my current employer, with each year worth 1/80th of my final pensionable salary. If I change employer I'm highly unlikely to find somewhere that still offers FS pensions so I really feel I should consider that as part of any move.

Is there a rule of thumb I can use to value my current pension as equivalent income i.e to move somewhere else how much more would I want to earn to make up for not having the FS pension? Is that dependent on how many years I've worked here, or how many years I expect to work in total? Both?

Firstly - thanks for the compliment but I'm no fine mind - haha! Anyway, this is an equation with a *lot* of variables, so I wouldn't say there's a rule of thumb as it were.

Not ever having had an FS pension, my only exposure to them comes from my dad's - which I don't know the inns and outs of - just the final figure and the ongoing annual changes. 

I think valuing the current pension is fairly straighforward. But its a bit more complicated when it comes to factoring its future value against leaving now. Ok so we have to consider

* how long you've been there so far

* how long you could potentially have there till retirement 

* what your final expected salary would be at retirement

* what the terms are of this particular pension at retirement (index linked,and to what index, spousal benefits etc)

* whether this pension *requires* you to take an annuity. I *think* some schemes still can?

* what happens when you leave. Is the final salary figure 'frozen' at your leaving sal, or does that get amended with annual increases regardless even if you leave? 

* the opportunity cost of not leaving

So, let's have a think, with some assumptions - I'm going to assume if you leave, the final salary figure is frozen at the point of leaving.

Let's say for arguments sake you started there at 20, are now 40 and earning £40k. Let's also say, you plan to retire at 60, and expect to be earning £60k too. Obvs this is a hypothetical low inflationary environment.

Right now, your pension is worth, annually

20/80 * 40k = 10k p/a. 

If you stay, it'll be worth

40/80 *60k = 30k p/a.

Basically, the fund triples in size, and at current rates (I'm going to assume this is a generous pension with great linking and spousal cover) it's circa worth 300k now, or 900k if you stay.

If you leave the job, that value is frozen. If you stay and progress, you could be looking at a much larger figure than that, and providing your firm isn't tight, you'll be maintaining the value at retirement in future money all the way because you'll be getting at least inflationary rises. 

However, lets assume you move jobs.

You move and score yourself a 60k p/a job now. Great. That moves to 100k by retirement. Lovely stuff.

But how much will you have to chuck into your pension to get back that extra £20k p/a? Well, lets assume that the first time you do it, its a 4% withdrawal. You're going to now need to save 500k into the new pot in 20 years. Note this is less than the 600k in the other one because its a different 'type' of pot. Its not a guaranteed income one - its a sensible drawdown figure. But, this time, nothing is guaranteed.

To save 500k in 20 years, will take by my finger in the air growth rate, chucking at least 15k of gross income into the pension pot. I'm guessing that's a lot less than you currently have to contribute. Which reduces the difference between the two jobs quite a bit, at least initially. 

The major factor in this decision to me is how close to retirement you are, and how much you think moving will make yo your long term salary. The closer to it, the more I'd be inclined to jump if there no further penalties (or the possibility that you suddenly get a major hike just before retirement). If you're a long way from retirement I'd be inclined to value that scheme very highly indeed, and thus make sure you really make a big jump in salary by moving.

WICAO is much better at all this than me. So it'd be interesting to see his thoughts.

 

 

 

 

 

 

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Also, don't forget that final salary retirement dates are generally tied to the State Pension retirement age, whereas defined contribution pots can be dipped into from ten years beforehand. I have several public sector friends pissed off that their retirement age is moving away from them every year, 65..66..67.... whereas I can start using my (admittedly smaller) defined contribution pot from 57.

It depends if you can see yourself working all the way up to 67 before taking any pension. And then will you be in a fit state to make best use of it? 

And a final thing to take into account - how confident are you that the final salary will actually pay out? Most are badly underfunded, and will be even worse once the next bulge of boomers start retiring over the next ten years. Will there be anything left in the pot for you?

It's a tricky choice. Personally I think it's better to get to 60 with a mix of final salary and defined contribution schemes from previous employers - you might be left with a smaller pot on paper but it gives you maximum flexibility and hedges your exposure when the government inevitably move the goalposts on one approach or the other.

Edited by RentingForever

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6 hours ago, Inoperational Bumblebee said:

I have a Final Salary pension with my current employer, with each year worth 1/80th of my final pensionable salary.

A chap at work asked me what I would do with in his position as he is in an old 80ths final salary scheme. He has 39.5 years in and can take 1 of 2 options which are max or min cash with nothing inbetween. Roughly this is either £125K cash and 20K pa pension or £50K cash and 25K pa pension on a final salary of £51K. For personal reasons and the fact that it would take 12+ years to touch the difference he has gone max cash.

If you had to fund this yourself you would need a pot of approximately £750K which would require £800/month for 40 years with an average return of 3%.

I think you should find these numbers of some use.

Edited by ChewingGrass
fat fingers

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Thanks folks. Some very helpful thoughts there.

Given that I have absolutely no intention of working until 67 or whatever it will be, it doesn't seem quite so valuable.
I actually think moving to a better paid job and stuffing the extra into my S&S ISA would suit me better. Now, to find one... :blink:

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14 minutes ago, Inoperational Bumblebee said:

Thanks folks. Some very helpful thoughts there.

Given that I have absolutely no intention of working until 67 or whatever it will be, it doesn't seem quite so valuable.
I actually think moving to a better paid job and stuffing the extra into my S&S ISA would suit me better. Now, to find one... :blink:

Don't rule out moving to a better paid job and signing-up up to the new company's pension scheme if they will also make contributions for you. You should be able to choose how the money is invested (so you could choose a S&S ISA0-style strategy) and you have the benefit of a return on the gross amount paid in. As long as you are able to access it when you need to (which should be possible) then it will probably pay more than taking the salary and using it yourself.

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