Should I join the company pension or not?
August 6, 2007 1:34 AM Subscribe
Company pensions. Good idea? Bad idea?
I've been working with my current company for 5 years now, and despite wanting to leave, pretty much constantly, I've never done anything about it, nor will I for the forseeable future.
Today, I received a letter from my Employer, asking me to join the company pension scheme. I live in the UK. I have no other pension scheme operating currently.
Is this *generally* a good idea? What do I need to look out for? Any potential pitfalls, or problems that might occur? Where can I find more advice? I realise that you are not my financial adviser.
I've been working with my current company for 5 years now, and despite wanting to leave, pretty much constantly, I've never done anything about it, nor will I for the forseeable future.
Today, I received a letter from my Employer, asking me to join the company pension scheme. I live in the UK. I have no other pension scheme operating currently.
Is this *generally* a good idea? What do I need to look out for? Any potential pitfalls, or problems that might occur? Where can I find more advice? I realise that you are not my financial adviser.
What level of contributions will they make?
posted by gene_machine at 3:17 AM on August 6, 2007
posted by gene_machine at 3:17 AM on August 6, 2007
Is it a Self Invested Pension Plan (SIPP) or another pension that you manage yourself?
If it's not a SIPP, who manages the fund? You can typically find "fund scorecards" in newspapers like the Financial Times who will rate funds based on their performance. I would try to find out about the fund before signing up, just in case it's one of the snoozers that's been underperforming for years and nobody's done anything about it.
If it is a SIPP, you manage the fund, meaning you'll need to do a little work to pick out decent funds (reading a financial newspaper will give you most of the info you need), but ultimately will have more control over your pension. The general rule of thumb is to buy higher-risk funds (overseas equities, uk equiities, etc.) while you're younger, then gradually move towards lower risk (property, bonds, gilts) as you approach your retirement age to allow for less volatility.
You may find that if you do have a managed fund, they will do the same thing for your pension, it's typically called "lifestyling"
Either way, joining an employer's pension scheme will give you tax benefits, as Abiezer's link helpfully explains. Also, the sooner you start saving, the more your money will work for you in the future - try this basic pension calculator to get an idea of how much your contributions might be worth (disclosure: my employer built this tool, but it's the only pubicly-available one of its kind)
If you decide not to join the employer's scheme, however, I would line up an alternative retirement saving strategy post-haste - maxing out Stocks and Shares ISAs (£7k/year) is another option to consider.
(Disclaimer: i'm not an IFA, i just work for a company that deals with pensions)
posted by ukdanae at 3:41 AM on August 6, 2007
If it's not a SIPP, who manages the fund? You can typically find "fund scorecards" in newspapers like the Financial Times who will rate funds based on their performance. I would try to find out about the fund before signing up, just in case it's one of the snoozers that's been underperforming for years and nobody's done anything about it.
If it is a SIPP, you manage the fund, meaning you'll need to do a little work to pick out decent funds (reading a financial newspaper will give you most of the info you need), but ultimately will have more control over your pension. The general rule of thumb is to buy higher-risk funds (overseas equities, uk equiities, etc.) while you're younger, then gradually move towards lower risk (property, bonds, gilts) as you approach your retirement age to allow for less volatility.
You may find that if you do have a managed fund, they will do the same thing for your pension, it's typically called "lifestyling"
Either way, joining an employer's pension scheme will give you tax benefits, as Abiezer's link helpfully explains. Also, the sooner you start saving, the more your money will work for you in the future - try this basic pension calculator to get an idea of how much your contributions might be worth (disclosure: my employer built this tool, but it's the only pubicly-available one of its kind)
If you decide not to join the employer's scheme, however, I would line up an alternative retirement saving strategy post-haste - maxing out Stocks and Shares ISAs (£7k/year) is another option to consider.
(Disclaimer: i'm not an IFA, i just work for a company that deals with pensions)
posted by ukdanae at 3:41 AM on August 6, 2007
oops, i really didn't mean to say pubicly-available!
posted by ukdanae at 3:52 AM on August 6, 2007 [1 favorite]
posted by ukdanae at 3:52 AM on August 6, 2007 [1 favorite]
Hey ukdane, as a web developer I just wanted to say that's some nice work there. The code is cleanly semantic, the site is easy to navigate, and the design doesn't overwhelm.
posted by Civil_Disobedient at 5:03 AM on August 6, 2007
posted by Civil_Disobedient at 5:03 AM on August 6, 2007
Well, there are pensions, and there are pensions.
If it's a final salary scheme it's almost certainly worth joining, although there are fewer and fewer of those around now. These pensions have a fixed payout, with the company required to fund the difference between the value of your contributions and the cost of the annuity. This is a very good deal for you and typically very expensive for them, and these types of pension funds are being closed to new members almost every day.
Most likely it's a money purchase scheme, where the contributions are fixed (normally as a %age of salary), and the fund is used to buy an annuity on retirement. The value of this really depends on the level of contributions that the company makes. In my experience companies in the UK typically match your own contributions up to around 5% of your salary. This is probably also worthwhile, as the company is paying you an extra 5%, and your pension fund will be twice the size it otherwise would have been.
UK company pension schemes also usually include injury and death benefits.
Having said all of that, my own personal opinion is that it is only worthwhile joining if the company is making a significant contribution. Otherwise, you are tying your money up in a scheme that takes forty years to come to fruition. In that time the government can (and will) change the rules, so that you may not end up with what you thought you had when you thought you were going to get it. Also, currently you are obliged to spend most of your pension fund on an annuity. You will get screwed when you do this. However, as ukdanae says, if you decide not to join the scheme stick your money in an ISA or some such.
posted by Jakey at 7:15 AM on August 6, 2007
If it's a final salary scheme it's almost certainly worth joining, although there are fewer and fewer of those around now. These pensions have a fixed payout, with the company required to fund the difference between the value of your contributions and the cost of the annuity. This is a very good deal for you and typically very expensive for them, and these types of pension funds are being closed to new members almost every day.
Most likely it's a money purchase scheme, where the contributions are fixed (normally as a %age of salary), and the fund is used to buy an annuity on retirement. The value of this really depends on the level of contributions that the company makes. In my experience companies in the UK typically match your own contributions up to around 5% of your salary. This is probably also worthwhile, as the company is paying you an extra 5%, and your pension fund will be twice the size it otherwise would have been.
UK company pension schemes also usually include injury and death benefits.
Having said all of that, my own personal opinion is that it is only worthwhile joining if the company is making a significant contribution. Otherwise, you are tying your money up in a scheme that takes forty years to come to fruition. In that time the government can (and will) change the rules, so that you may not end up with what you thought you had when you thought you were going to get it. Also, currently you are obliged to spend most of your pension fund on an annuity. You will get screwed when you do this. However, as ukdanae says, if you decide not to join the scheme stick your money in an ISA or some such.
posted by Jakey at 7:15 AM on August 6, 2007
If it is final salary, almost certainly yes.
If it is contribution based, it is typical for the employer to make a contribution on your behalf, with you sometimes also making a contribution. The employers contribution may be in addition to your salary. If so, again almost certainly yes.
Basically, find out what the company is paying for, it may include management expenses and fees, some sort of life or income insurance and possibly other items.
I would think it unlikely many employers would bother offering a plan unless they covered some of these benefits, otherwise it would be a hassle for them to run, and the employees might as well invest in an ISA. So it seems likely to me you are getting something here, and you might as well ask HR or read the docs carefully to find out what.
posted by bystander at 6:43 PM on August 6, 2007
If it is contribution based, it is typical for the employer to make a contribution on your behalf, with you sometimes also making a contribution. The employers contribution may be in addition to your salary. If so, again almost certainly yes.
Basically, find out what the company is paying for, it may include management expenses and fees, some sort of life or income insurance and possibly other items.
I would think it unlikely many employers would bother offering a plan unless they covered some of these benefits, otherwise it would be a hassle for them to run, and the employees might as well invest in an ISA. So it seems likely to me you are getting something here, and you might as well ask HR or read the docs carefully to find out what.
posted by bystander at 6:43 PM on August 6, 2007
I'm surprised that you've waited five years.
If you are considering leaving, look into portability of this pension scheme (if it's a money purchase scheme, I would think it could be ported on departure to a SIPP). I can't think that any scheme involving company matching to, say, 5-10% of your salary would ever be a bad idea.
I do like the comment about the government changing the rules. Today there's the tax-free lump sum withdrawal on retirement (I think up to 1/3 of the total asset value). This is a nice perk.
Another thing to consider (although it may not be that big an issue) is that there are rules that do not compel you to purchase an annuity under some circumstances. I think if the fund value reaches £300k, you can manage the fund yourself for income and not wind up pissing it all away in an annuity that expires on your death.
posted by sagwalla at 2:55 AM on August 8, 2007
If you are considering leaving, look into portability of this pension scheme (if it's a money purchase scheme, I would think it could be ported on departure to a SIPP). I can't think that any scheme involving company matching to, say, 5-10% of your salary would ever be a bad idea.
I do like the comment about the government changing the rules. Today there's the tax-free lump sum withdrawal on retirement (I think up to 1/3 of the total asset value). This is a nice perk.
Another thing to consider (although it may not be that big an issue) is that there are rules that do not compel you to purchase an annuity under some circumstances. I think if the fund value reaches £300k, you can manage the fund yourself for income and not wind up pissing it all away in an annuity that expires on your death.
posted by sagwalla at 2:55 AM on August 8, 2007
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posted by Abiezer at 2:22 AM on August 6, 2007