Public sector pensions worth five times private pensions
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. 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.
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.
How does this compare to pension provision outside of the public services?
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.
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 there is little out there that even comes close in terms of the benefit public sector pensions provide.
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, example only). 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.
David Smith is a director of financial planning at Tilney Bestinvest.