How to make the new DC pension work for you

[RobertT]

Who says you live 20-30 years? If you live to 95 how much income will you actually want?

If you retire at a reasonable age, say 60, average life expectancy of someone that age is around 82 for men and 85 for women I think. Both my parents are in their 80’s and retired in their late 50’s and they are still relatively active and don’t spend their whole day in their rocking chairs! In practice what they spend their money on has changed over the years, but they still spend it.

What's happens if you retire at 65 and die at 75? You'll have 10 years then perhaps a 50% pension for your spouse (maybe less, depending on the scheme) Then the pension finishes on second death and guess what - the annuity provider/fund keeps all the money you paid in

Yes that’s what might happen if you buy annuity with a DC pot, which in my original post, I’m suggesting is not necessarily a good option.

Personally if I take my DB NRA60 pension at 60, I would only have to draw it for about 3 years to get back the money I’ve paid in over 30 years of service. Everything after that is ‘profit’. That's a benefit for workers, but a problem for companies. Which is one of the reasons DB pension schemes have been closing left, right & centre for years!

A DC scheme offers continued flexible drawdown for your spouse of ALL of your fund, perhaps cash left at the end after death for inheritance, access to capital (e.g. house repairs, help kids) and the freedom to make those decisions.

Very true, and again I intimated that in my original post. But what happens if you run out of money – you’ll only have the state pension then. £155 per week isn’t very much really! After all nobody really knows how long their going to live do they?

A fixed income is certainly not my idea of a useful financial planning tool when circumstances change in retirement. All this against a background of historically low annuity rates too?

Who said anything about a fixed income. The Royal Mail Pension Plan is a defined benefits scheme that provides an index linked income for the rest of your life and your spouses too! You do not buy an annuity with it – the benefits are paid for by the government/taxpayer and RM.

The old way is costly, outdated and inflexible.

That can be said for buying an annuity with your DC pot. But you don’t buy an annuity with a DB pension.


In practice i believe that a mixture of DB and DC pension provision is the way to go.
DB for your guaranteed income for life, i include the state entitlement in that - aimed at providing a decent level of income to live on fairly comfortably. And then DC to give flexibility to retire(or perhaps semi-retire) early without touching your DB pension too early. Plus there's still the option to pay for house repairs, inheritance, etc.

[trythat]

A very nice article Robert. But if possible can you confirm the following?

I'm coming up to 54 and intend to finish sometime this year after 27 years in (going to live on saved ISA's). Am I correct in the assumption that my pensions will be halted at this years value and increased by a maximum of 5% which going forward may well be enough as I don't see inflation going above 5% for some time?

If you leave this year you won't build up any more pension and it will be deferred until you take it. Based on the info in the library section of the pensions website, your pension will then increase with CPI until you draw it and then by RPI when in payment. It’s not 100% clear if the proposed changes in 2018(after you’ve left RM) will affect that.

Thanks for that Robert, I read it as though if you left 2018 then no changes would be made, but with the quality of information being sent to us, I tend to agree with you.

[jetblack]

In practice i believe that a mixture of DB and DC pension provision is the way to go.
DB for your guaranteed income for life, i include the state entitlement in that - aimed at providing a decent level of income to live on fairly comfortably. And then DC to give flexibility to retire(or perhaps semi-retire) early without touching your DB pension too early. Plus there's still the option to pay for house repairs, inheritance, etc.

Thats what we have already. A safe and guaranteed income via the DB scheme - and the flexibilty (of the DC scheme options) granted by our AVC's.

TBH, rather than the DC scheme proposal on the table by RM I personally would prefer them to put their 10% RM contribution into my wages. It wouldn't cost them anymore - but at least this way I could invest the money as I saw fit. And so long as it was into some kind of pension provision I would still get tax relief. As it is, my options are/will be severely demarcated by RM - and this lack of choice must be to the detriment of the growth of my funds.
They can invest the funds wherever they choose when they are responsible for providing a defined benefit - but surely when all the risk is on me then I should be able to have the choice of investing the money where I see fit. I may wish not to have a good chunk on the stock market at all for eg. I may wish to be proactive in the management of my own money/value/wealth according to current market conditions. I may not wish to give a cut to RM's chosen middleman.

ps. should the state really have to be bearing the burden for providing a secure income in retirement for ex workers - thereby taking the onus of responsibilty away from FTSE 100 companies ?
For the sick/infirm/those who haven't otherwise been able to work or indeed find gainful employment - yes, of course. That is the safety net that is the welfare state. But for the rest of us that have been working for these companies, have given the best years of our lives to these companies ? I dunno. Why let them off so light ?
Its Royal Mail that are buggering up my knees - if its really the case that this company bears no responsibilty for my pension provision (which, in effect, the DC scheme implies) - and a good chunk of the burden is therefore being shifted onto the state - shouldn't this mean that levels of corporation tax need adjusting by Govt. in order that they are able to raise the revenue to pay for it all ? Instead rates of corporation tax (tax on the co.s profits) seem to be falling over time.
And people wonder at how we have reached the obscene situation whereby a global 1% elite control a half of all the worlds wealth.

I'll say it again - the problem is not so much that companies like Royal Mail can't afford DB schemes. Its more that their competitors are allowed not to offer decent pension provision for their employees.

Anyhow, that was just a few random thoughts. Your OP was a good one Robert. Thankyou.