Pension question.. Defined benefit or maximising DC? Watch

Pipsico
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So I'm currently on an career average pension plan, but is this really the best option for me?

I have a preference for yield (not high risk) over security of pension cash flows when I retire.

At what point/scenario is the DB a no-brainer against defined contribution?

I appreciate rates & inflation are ridiculously low right now.


Any thoughts would be much appreciated.

Thanks





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Reue
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(Original post by Pipsico)
So I'm currently on an career average pension plan, but is this really the best option for me?

I have a preference for yield (not high risk) over security of pension cash flows when I retire.

At what point/scenario is the DB a no-brainer against defined contribution?

I appreciate rates & inflation are ridiculously low right now.


Any thoughts would be much appreciated.

Thanks
I don't think I've ever heard of a situation whereby DC was better than DB.

The payouts you'd get from a DB scheme are likely to be far higher than what you could achieve through a DC plan based on the same contributions.

Im not sure how you can prefer yield over risk.. the two are linked!
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Pipsico
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(Original post by Reue)
I don't think I've ever heard of a situation whereby DC was better than DB.

The payouts you'd get from a DB scheme are likely to be far higher than what you could achieve through a DC plan based on the same contributions.

Im not sure how you can prefer yield over risk.. the two are linked!
Thanks for your comment 😊. I could have been a bit more specific in my question!

I mean, if I was to compare maximised contributions against a DB, where the contribution is non flexible. I can afford to make extra payments, and my employer is able to match them.

I appreciate the yield comment was confusing - I mean normal 'pension grade' risk coupled with the risk of putting in a higher contribution overall, relative to no risk at all by going down the DB route.

I've probably made this even more confusing now.. But going to make it even more confusing by adding the next comment!

I also have a mortgage @ 2.29% fixed that I'm not overpaying on.

Would you choose to just continue with the DB and make overpayments, rather than switching to DC and making the maximum contribution there?




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Reue
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(Original post by Pipsico)
Thanks for your comment 😊. I could have been a bit more specific in my question!

I mean, if I was to compare maximised contributions against a DB, where the contribution is non flexible. I can afford to make extra payments, and my employer is able to match them.

I appreciate the yield comment was confusing - I mean normal 'pension grade' risk coupled with the risk of putting in a higher contribution overall, relative to no risk at all by going down the DB route.

I've probably made this even more confusing now.. But going to make it even more confusing by adding the next comment!

I also have a mortgage @ 2.29% fixed that I'm not overpaying on.

Would you choose to just continue with the DB and make overpayments, rather than switching to DC and making the maximum contribution there?




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By maximum contribution you are talking about putting in £30,000 a year?? Or are you referring to a different maximum?

Im still not sure what you're trying to compare. Does your DB scheme allow you to make AVCs? If so then that's almost certainly going to be better value than if you were making AVCs into a DC scheme.

At a 2.29% mortgage your money is very likely to earn a better return when invested (whether that be the pension or ISAs).

Personally I'd stick to the DB, chuck in some AVCs if allowed and put the rest of my savings into a 6month expenses cash and then invested in an index fund through a stocks and shares ISA.
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Pipsico
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(Original post by Reue)
By maximum contribution you are talking about putting in £30,000 a year?? Or are you referring to a different maximum?

Im still not sure what you're trying to compare. Does your DB scheme allow you to make AVCs? If so then that's almost certainly going to be better value than if you were making AVCs into a DC scheme.

At a 2.29% mortgage your money is very likely to earn a better return when invested (whether that be the pension or ISAs).

Personally I'd stick to the DB, chuck in some AVCs if allowed and put the rest of my savings into a 6month expenses cash and then invested in an index fund through a stocks and shares ISA.
Nope, I can only make AVCs with my DC.
So as I understand it, I'm better off retaining my DB and investing in the stocks and shares ISA over switching to DC and maximising my AVCs?

Thanks for highlighting the S&S ISA - I googled and didn't appreciate how much higher they were to cash ISAs!



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Reue
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(Original post by Pipsico)
Nope, I can only make AVCs with my DC.
So as I understand it, I'm better off retaining my DB and investing in the stocks and shares ISA over switching to DC and maximising my AVCs?
If you are so keen on making additional pension contributions you could keep your company DB and open a SIPP in which you put any extra contributions.


(Original post by Pipsico)
Thanks for highlighting the S&S ISA - I googled and didn't appreciate how much higher they were to cash ISAs!
What do you mean by higher? The contribution limits are the exact same and the returns entirely depend on your investment performances.
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Quady
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(Original post by Pipsico)
Nope, I can only make AVCs with my DC.
So as I understand it, I'm better off retaining my DB and investing in the stocks and shares ISA over switching to DC and maximising my AVCs?

Thanks for highlighting the S&S ISA - I googled and didn't appreciate how much higher they were to cash ISAs!



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It depends on the terms of the DB vs DC, though as has been said, I'd be shocked if DC had better terms.

Unless you're a higher rate taxpater there isn't enough benefit in maximising your private pension. The money will be taxed when you come to retire and you need to lock it away until you're 55.

Personally I'd overpay the mortgage just because I'd want to own outright ASAP. The better return would probably be from a S&S ISA though.
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Pipsico
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(Original post by Reue)
If you are so keen on making additional pension contributions you could keep your company DB and open a SIPP in which you put any extra contributions.




What do you mean by higher? The contribution limits are the exact same and the returns entirely depend on your investment performances.
Well, seeing as I'm less risk averse, I mean I should see higher returns on my investment. I'd never really even thought of S&S ISA

Thanks for your input! ☺️


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Pipsico
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(Original post by Quady)
It depends on the terms of the DB vs DC, though as has been said, I'd be shocked if DC had better terms.

Unless you're a higher rate taxpater there isn't enough benefit in maximising your private pension. The money will be taxed when you come to retire and you need to lock it away until you're 55.

Personally I'd overpay the mortgage just because I'd want to own outright ASAP. The better return would probably be from a S&S ISA though.
Ah ok, fair point- thanks. I guess I was quite fixated on it giving me tax relief immediately, but of course it's taxed later on anyway 😣

The plan now is to build up savings in a S&S and use it to make a lump sump payment when my mortgage term's up.




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Hedgeman49
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(Original post by Pipsico)
Ah ok, fair point- thanks. I guess I was quite fixated on it giving me tax relief immediately, but of course it's taxed later on anyway 😣

The plan now is to build up savings in a S&S and use it to make a lump sump payment when my mortgage term's up.




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It's taxed later but bear in mind that unless income tax is completely overhauled between now and retirement you'll benefit from using up your PA when you draw your pension, so you won't be re-taxed on all of it.

As stated previously pension relief is much more attractive as a HR or AR taxpayer.
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Pipsico
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(Original post by Hedgeman49)
It's taxed later but bear in mind that unless income tax is completely overhauled between now and retirement you'll benefit from using up your PA when you draw your pension, so you won't be re-taxed on all of it.

As stated previously pension relief is much more attractive as a HR or AR taxpayer.
Ok, so when I start earning significantly more than 40k, it's more worthwhile to switch from DB to DC (maximising my contributions and getting them matched)?


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Quady
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(Original post by Pipsico)
Ok, so when I start earning significantly more than 40k, it's more worthwhile to switch from DB to DC (maximising my contributions and getting them matched)?


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What are the terms of each?
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Reue
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(Original post by Pipsico)
Ok, so when I start earning significantly more than 40k, it's more worthwhile to switch from DB to DC (maximising my contributions and getting them matched)?


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Almost certainly not. Again; Why not keep the DB and invest any additional amounts you want (over 40k etc) into a SIPP?

It sounds like you've got a good pension scheme and are likely to be making significant contributions. You should speak to a pension advisor before closing a DB scheme.
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Pipsico
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(Original post by Reue)
Almost certainly not. Again; Why not keep the DB and invest any additional amounts you want (over 40k etc) into a SIPP?

It sounds like you've got a good pension scheme and are likely to be making significant contributions. You should speak to a pension advisor before closing a DB scheme.
Ah, got it. I'll stick with it then. They've removed the scheme for new starters so it's not a decision I could ever go back on too. I guess DB schemes are now obsolete for a good reason 😁


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