A nation divided: Public sector pensions worth five times private sector pensions

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Published: 24 Feb 2016 Updated: 03 May 2016

A nation divided: Public sector pensions worth five times private sector pensions

There has been much ado with public sector pensions in recent years as Government looks to reduce future liabilities. But what is a public sector pension actually worth? Sidestepping the issues surrounding existing scheme members and broken promises, David Smith, Director, Financial Planning at Tilney Bestinvest looks into what someone joining the National Health Service now could expect at retirement and how it still stands apart from other retirement savings vehicles out there.

“Using the NHS pension scheme from 2015 as an example, if we consider a fully qualified nurse aged 25, earning £21,692 joining the pension scheme today, they will typically contribute 7.1% of their salary each year to fund their retirement. If they work for 40 years, stay in the same band of earnings throughout and attain 4% annual increases in pay they could retire on a salary of approximately £100,000 per annum. Taking into account the effects of inflation, that’s the equivalent of £45,500 in today’s terms.

“When they stop working, they’ll have amassed a pension worth approximately £67,600 per annum (£30,700 in today’s terms) – this equates to over two thirds of the nurse’s final salary. Not only is this income guaranteed by the State but additionally, it will also increase each year in line with inflation, as well as protecting buying power over time. Moreover, significant increases in pay throughout their working life, such as promotions etc. will provide additional benefit, however, if they decided to take a lump sum at retirement this will naturally reduce the level of pension income – but the basic picture is there.

“Taking into account the fact that retirees typically have lower outgoings (due to factors such as the repayment of their mortgages and any children having flown the nest) and they pay no national insurance contributions, this is a significant pension income, more than capable of providing a comfortable retirement.

“But how does that compare to pension provision outside of the public services? Well, taking into account current annuity rates, for an individual to purchase an increasing income for life at the age of 65 amounting to £67,600 per annum initially, the retiree would need a fund of approximately £2.2 million in their Defined Contribution scheme. To put this into perspective, if the nurse wanted to match their NHS pension through an alternative Defined Contribution pension, such as a stakeholder pension plan and assuming 5% per annum (net of all charges) growth within the pension fund, they would have to contribute over 43% of their gross salary each year. Obviously, this could be made up from both employee and employer savings, but you’d be extremely lucky to find an employer willing to make up the shortfall here…

“Disregarding the fact that the equivalent Defined Contribution scheme could likely surpass the Lifetime Allowance (that is, the amount of pension savings an individual can build up during their life before a tax charge becomes due) the fact remains that there is little out there that even comes close in terms of the benefit public sector pensions provide.

“To put it another way, the Government’s recent initiative to get the masses saving more for retirement, Auto Enrolment, aims to provide for approximately 9% of basic salary to be contributed to a pension by 2019 through a combination of employee and employer savings as well as tax relief (there are other contribution bases, but I’ve used this as an example). Assuming someone in an Auto Enrolment scheme earned the equivalent of the Nurse throughout life and achieved 5% net investment growth per annum within their pension fund, they would end up with just over £458,000 in their pension at retirement. This could provide an increasing income of barely £14,000 income per annum at age 65, which in today’s terms would be £6,366 per annum; some way off the £30,700 from the NHS pension scheme.

“Ultimately, our advice to public sector workers is always the same – get yourself in the scheme and stay in it – you may be one of the lucky few able to retire comfortably. To those of you not in such a scheme, you better start saving more…”

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Important Information

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested.

This article is not advice to invest or to use our services. If you are in doubt as to the suitability of an investment please contact one of our advisers.

If you are unsure of your options you should seek professional financial advice or visit Pensionwise.gov.uk.

Press contacts:

Jason Hollands
0207 189 9919 / 07768 661 382

Gillian Kyle
0203 818 6846 / 07989 650 604

About Tilney Bestinvest

Tilney Bestinvest is a leading investment and financial planning firm that builds on a heritage of more than 150 years. We look after more than £9 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.

We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.

We have won numerous awards including Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.

Headquartered in Mayfair, London, Tilney Bestinvest employs over 400 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.

The Tilney Bestinvest Group of Companies comprises the firms Bestinvest (Brokers) Ltd (Reg. No. 2830297), Tilney Investment Management (Reg. No. 02010520), Bestinvest (Consultants) Ltd (Reg. No. 1550116) and HW Financial Services Ltd (Reg. No. 02030706) all of which are authorised and regulated by the Financial Conduct Authority. Registered office: 6 Chesterfield Gardens, Mayfair, W1J 5BQ.

For further information, please visit: www.tilneybestinvest.co.uk


This release was previously published on Tilney Smith & Williamson prior to the launch of Evelyn Partners.