Pension calculation

[masona]

I know we have got some clever mathematician here

I'm in a company pension scheme which is non-contribution and it's base on final 2/3 salary (40/60)

I understand the calculation,

Example: £10,000 per year salary

£10,000 x 40 ÷ 60 = £6666.66 per year pension (I'm guessing it's 40 yrs service and 60 yrs retirement age(?)

I have contribute to topped up my pension on 1/45ths accrual rate but I'm not sure how to work it out, is it:

£10,000 x 45 ÷ 60 = £7500.00 per year pension

or

£10,000 x 40 ÷ 45 = £8888.88 per year pension

The online pension calculator doesn't help either.

 

[JohnD]

You say "have contribute to topped up my pension on 1/45ths accrual rate but I'm not sure how to work it out"

if you're on 1/45th rate, then you would have to work for 45 qualifying years to retire on full salary. Are you sure that's right? It's quite generous. 1/60th is more common these days. That means that if you work for 40 qualifying years you retire on 40/60ths = 2/3rds final salary. Perhaps you are a Policeman or Fireman? Mean companies have an accrual rate of 1/80th which assures you of poverty in old age.

If you retire at normal retirement date (will be the age specified in your scheme. e.g. 65) you will get the final salary amount. If you retire earlier the amount will be reduced by x% per early year (will be in the rules of your scheme)
The calculation would be
(base salary divided by accrual rate) multiplied by qualifying years
so if the rate was 1/45th, each qualifying year would be worth at Normal Retirement date:

(£10,000/45) = £222.22 p.a. additional pension

To clarify, are the contributions you mention "additional years purchased" (you can often do this on Public Sector schemes to make up for years away or late entry) or do you mean earned by qualifying years of employment?

 

[masona]

if you're on 1/45th rate, then you would have to work for 45 qualifying years to retire on full salary. Are you sure that's right? It's quite generous.

Thanks John,

This is what I don't understand, the 40/60 is for 40 yrs service and yet I put in 5% of my salary which is 45th, so I can't see why I have to work 45 yrs unless it's calulated differently and reduce the service years

 

[Thermo]

surely your wages dept should be able to work it out for you. I think they have to provide an illustration if you ask. i know i was pleasently surprised when they worked my one out before i left the old bill and it was way different to what i had worked out.

 

[masona]

Yeah okay, I'm getting impatient

I've got to wait & see if they will let me go first and I'm trying to get some sort of figures in my head but as you says they may calculated differently

 

[drspock]

Masona, I think that you will find that you cannot get anymore than 2/3 rds of your final salary as a pension.
Therefore as you say if you have been there for 40 years and your pension is based on 1/60th for each year of service you will receive the maximum of £6666 pa.
This will be reduced if you take a lump sum in lieu of pension,
Your employer shoud by law inform you each year what your projected pension will be.

 

[masona]

Masona, I think that you will find that you cannot get anymore than 2/3 rds of your final salary as a pension.

That's correct

Therefore as you say if you have been there for 40 years and your pension is based on 1/60th for each year of service you will receive the maximum of £6666 pa.

Been there 24 yrs using 1/45th and this is what I can't work out, I just have to wait & see.

 

[drspock]

That is some pension scheme 1/45th
If as you say you have been there for 24 years you pension would be £5333 for every £10000 of your final salary.

 

[JohnD]

...yet I put in 5% of my salary which is 45th...

Don't understand that.

5% of your salary is 1/20th.

The amount of money deducted from your salary is not enough to pay your pension. Typically, on a 1/60th accrual rate, the pension contributions (your plus your employers) would be in the region of 15% to 20%, and then it would have many years to grow.

The contributions have to build up to rather a large sum to pay the eventual pension.

For example, a 65 year old male, drawing a pension of £4,500 with no widows benefit, with RPI inflation indexing, needs a pension fund of £100,000. This sum would pay, for a man of 65 with a wife of 62, with provision for a 50% widows pension, only about £3,800.

Lot of money, hmmmm?

there is a lot of variation on fund growth rates, so they are only guessing how much will be required in 40 years time. You may remember that back in the 1980's and 1990s, company pension funds had grown so much that many companies were able to take a "contributions holiday" and make no payments for several years, because they thought their funds were doing so well. Here in the hard noughties, when pension funds have grown less well, many companies are saying they can't afford to make extra contributions, and are stopping or reducing their final salary schemes. Some might say that in good times the company wins, and in bad times the employee loses.

 

[empip]

Mas' I guess you are 'topping up' to make up for missing years ... As in starting with the company at age 25 --- can only get to 35/60 at age 60, but can possibly buy the 5 years extra required for a full pension.

I think you work for a large national company with all the attendant admin', get in touch with your local company pensions office - they should help you fully understand, within the rules of your scheme... Just what your options are and give bona fide examples, push for a 'face to face' situation - Beware the reductions for 'early leavers' >=age 50 I believe.

 

[masona]

Thanks for the feedback, I didn't think it would get this complicated!

I've found my company contributory option plan although I don't have to pay anything as it's free. I'm paying 5% which is 5:45 option which I have not seen before which I don't know how to calculate it, the idea is to reduce the years.

2% = 2:54 option

3% = 3:51 option

5% = 5:45 option

10% = 10:40 option

15% = 15:35 option

 

[JohnD]

I agree with empip about getting the company pension people to explain it to you