To think public sector pensions should be slashed?

[Monwmum]

I'm probably going to be slated for even suggesting it....but in the private sector, high percentage final salary pensions were phased out in the early 2000s because they are a money pit and unsustainable. They were continued in the public sector as a sweetener because (apparently) public sector jobs were lower paid.

This simply isn't the case anymore. After years of frozen pay or meagre 1 or 2% pay increases in much of the private sector versus mainly regular inflation based pay increases in the public sector, this gap has been reduced if not closed completely. However, public sector pensions are still getting contributions of the high 20% figures while private sector pensions range from 4% -10%.

Quite a difference! Am I being unreasonable to say this would be a good place to start saving some of our tax money? And before people start saying there would be outrage just remember this was done to every private sector employee in the early 2000s so it can be done.

Public sector had years and years of zero inflation or only 1%. Public sector pay is far lower
than private.public sector have also paid into their pension and deserve the pension they have paid into.

That would be the case only if they had spent the entirety of those 35 years on £43k or the equivalent - remember it's career average. Much more likely that they had spent the majority of the time in lower grades, say 10-15 years in the equivalent at today's rate of £25k so accruing around £500 a year, and another 10-15 years at a today's rate of £30-35k so around £700-750 a year. Also bear in mind that the recipient is paying at least half of the contributions.

Then factor in that to get a pot of £750k you don't have to put £750k in due to typical growth and compound interest (as I noted above) - I've run the pension shortfall calculators and you're talking about an equivalent yearly contribution to your DC pot, employers and employees contributions combined, of nearer £7500pa.

So all in all, the actual salary differential is £4k a year or less.

I should note that I worked for some years as a pensions administrator often working with DB pension transfers into DC pensions.

Yes but civil servants do have to contribute towards that on top of the employer contributions. Between 4.6% and 8.05% depending on their salary (higher salaries pay more).

Considering that if it was cash it would grow as an investment I think the calculation is a bit off. Even so, it’s still one of the best pensions on offer (albeit offered alongside much lower salaries than you would get for similar roles in private sector).

Spouses get 50% if the civil servant dies but then kids don’t inherit anything (unless they took a cash lump sum to reduce their monthly amount).

Should have said - my figures are very rough so please no nit-picking, but they do show a differential of a whole order of magnitude.

My OH didnt get final salary pension when he retired with state and his USS pension he is on half what he was earning when he was working University lecturer in stem subjects

You are forgetting 35 years‘ of cost of living increases. Even at only 2% a year your numbers are well short.

@messybutfun what do you mean, exactly?

The way these pension entitlements work is that the fraction of salary for the year goes into the scheme and is uprated with RPI usually for every year to calculate its "real terms" value for the final pension entitlement so it far outstrips the official inflation rate used for payrises/ quoted in Government figures these days which is usually CPI (and few people get a payrise even equating to that). As a result, the pension entitlements in most of these schemes get uprated far above salaries and this compounds, hence somebody earlier stating that a couple of years of work in admin for a public sector organisation now means they have pension entitlement which if multiplied up by the fraction of their earnings that went into the scheme for those years of work would have equated to a member of junior admin staff earning a £60k salary...

The uprating mechanism more than compensates for recent cost of living issues. Again, something completely unavailable to those in DC schemes who instead bear all of the political, investment, interest rate and inflation risks themselves and - far from an uprating guarantee - could get back less than they invested nominally, let alone in real terms! And then will have their individual savings of money from their own earnings which they've had to risk like this for decades with no taxpayer topping up to meet a guaranteed income level taxed at up to 70% if there is some left when they die to give to their children, thanks to Rachel Reeves.

And yet there's no rush of people trying to work in the public sector....

And yet there's no rush of people trying to work in the public sector....

I actually DO work in the public sector.

Some people are capable of rational analysis of data and facts rather than their views being driven by entirely self-interested or ideological motivations.

Really not sure how you think this works. I do know someone who was 25 years in the central CS culminating on about £30k. They started when it WAS the "gold plated" scheme though of course that did get downgraded after a few years. She left about 10 years ago, and before a chunk of this goes to her ex-H the gross pa is around £15k which she gets half of. As she's still working, the entire amount is tax payable of course.

Also bear in mind that for people on DC schemes contributions are tax deductible up to a certain amount, so "tax payers money" IS contributing at least 20% towards those pensions as well e.g. it works out that for someone on the basic tax rate for every £80 you pay in, the governments tops that up by £20. You can pay up to £60k per year into a pension scheme before this benefit is removed (provided you don't earn less than that). Bearing in mind that to have that much money available to go into a pension you are likely on the higher tax rate. Things are different once you get a salary around the £200-260k mark, but below is a quote from Hargreaves Lansdown explaining how this works for earners below that rate.

"For example, if you wanted to use the full £60,000 pension annual allowance, and your employer paid in £15,000, you’d only need to pay in £36,000 and the rest (£9,000) would come from the (20%) basic-rate tax relief that you’d automatically get.
If you’re a higher-rate (40%) taxpayer, you could also claim up to £9,000 back through your tax return. This means the effective cost to you of a £45,000 pension contribution could be as little as £27,000."

So in the higher rate payer example above, the government is contributing £18k pa into your fund

Oh dear. You don't understand tax relief do you? The Government isn't contributing anything to DC schemes. It is deferred tax. All pension contributions are taxed at the point of withdrawal and all contributions made gross in DC AND DB schemes.

As pension contributions are paid gross, you don't get taxed on that amount so the equivalent saving to net income is 20%. I thought that was made clear by the Hargreaves Lansdown quote above, it shows the overall effect of tax relief on pension contributions.

If there were no tax relief, then in the first example there would be another £9k pa paid to the government in income tax. Whichever way you look at it, the individual in that example is £9k a year better off (as long as it's put into a pension) and the government is £9k a year worse off.

So effectively tax relief on pensions means the government is giving you back that £9k that otherwise they would have taken, and putting it directly into your pension.

Are public sector workers not paying taxes paying a huge lump into pension, more than private, a month? Maybe get off your high horse

Really not sure how you think this works. I do know someone who was 25 years in the central CS culminating on about £30k

And a £30k per year annuity equates to around £750k saved from salary in a DC pension scheme. With index linking and options for widow/ widowers pensions etc you'd be looking at nearer £1m. Was this person you know paying £40k per year i.e. well over £3k per month from their salary in pension contributions over those 25 years? You don't seem to comprehend that the pensions being paid out of these DB schemes far exceed what the recipients are paying in. That's the problem.

No. Not taxing someone until later is not the same as giving them money. It is their money, that they have earned. Nobody is giving them anything. And it isn't tax free: it is deferred tax. With pensions the entire point of the system is that everyone contributes tax free, and the tax is deferred so everyone is instead taxed when they take the pension income. This is exactly the same for DB and DC schemes, so is totally irrelevant to the comparison between the public sector and private sector schemes anyway because NOBODY is taxed on pension contributions. That is literally the whole fundamental principle of both systems. It is taxed at a later date, not tax free.

It is just the opposite system of ISAs. With ISAs you take the income as pay when earned and are taxed at that point and then can invest it tax free and withdraw it tax free. With pensions the tax is applied when you withdraw it not when you save it.

How can there be so many people who don't even understand these basics and think that the Government is "giving" people money on pension contributions?!

That would be the case only if they had spent the entirety of those 35 years on £43k or the equivalent - remember it's career average. Much more likely that they had spent the majority of the time in lower grades, say 10-15 years in the equivalent at today's rate of £25k so accruing around £500 a year, and another 10-15 years at a today's rate of £30-35k so around £700-750 a year. Also bear in mind that the recipient is paying at least half of the contributions.

Then factor in that to get a pot of £750k you don't have to put £750k in due to typical growth and compound interest (as I noted above) - I've run the pension shortfall calculators and you're talking about an equivalent yearly contribution to your DC pot, employers and employees contributions combined, of nearer £7500pa.

So all in all, the actual salary differential is £4k a year or less.

I should note that I worked for some years as a pensions administrator often working with DB pension transfers into DC pensions.

Good for you. I am an economist and chartered accountant and have worked in the private sector and in the public sector on financial regulation and law including with the organisations determining actuarial regulation, so I think I understand tax law and pensions regulation thank you. I don't think I need the system explaining to me by someone who was an "administrator" transferring people between schemes and seems to think this makes them an actuarial expert.

What you've written is completely nonsensical I'm afraid. I very much hope you weren't providing any financial advice to anybody.

Yes, schemes are career average now. So given that people spend some time in lower grades the amount should be lower. My calculations were based on them earning the amount stated throughout their entire career, no part time work, no time building up to that salary, earning it from day 1, to make the example simple: taking the most generous analysis and it STILL comes out showing that contributions nowhere near cover the pension payments. The point you have made about it being career average just reinforces what I've said because the person would have paid in LESS than that on average making the discrepancy between what they pay over their working life and what they receive jn retirement even larger.

This discussion was about unfunded DB schemes. There is no compounding because there is no fund and current contributions are paying current recipients so there is nothing to compound. That's the entire problem with the ponzi scheme.

You don't seem to understand even the most basic concepts of either system.

If you object to tax relief on DC schemes then it'll have to be removed from DB schemes, too. So add up the % contribution from your employer (often 20-30% for public sector schemes) plus your own (10% maybe). So let's say 35%. Now multiply that by your salary, and your highest % tax rate, and you'll be getting that deducted from your net pay every month if you want to remove tax relief on pension contributions. It will apply to both DB and DC schemes because contributions into BOTH receive full tax relief. Nobody is taxed on contributions because the tax is paid when you retire and receive the income.

How can somebody say they worked in the pension industry in any capacity and not understand even this basic principle of the income tax being deferred and that it applies to all types of pension schemes? It is literally the entire point of the system, the fundamental principle upon which all types of pension schemes were designed. It isn't a "Government contribution". 🤦🏻‍♀️🙄😆😆

For most DB schemes (NHS being our biggest employer) career average was only introduced in 2015. Then the government managed to cock that up as well by discriminating against old/young people by allowing those that were a few years away from retirement to stay in the old scheme and moving everyone else into career average by 2022.
After the government lost the court case at the highest court, effectively everyone was given a choice to stay in the final salary scheme until 2022.
So your less generous career average pensions are not going to filter through for many many years.

God that's amazing. I think you'd earn in 5 years roughly the same payout annually that I've built up over the last 25 BC mine is DC.

The £30k was her final salary, not her pension. If you read further down that post, you will see that I specified that the pension itself was around £15k, THEN she had to share half of that with her ex leaving her with £7.5k.

Regarding the tax being deferred, which I agree applies to both pension types, if you can take 25% of your pension tax free as a lump sum surely that makes a difference to the overall tax paid? You haven't paid your 20% (or whatever rate) on the contributions, then you get 25% paid without having to pay tax on it.

My statement regarding compounding interest and growth related to DC pensions, to try and show a comparison with what the true cost of having a pension pot of that sort of size should be to the employee. So not this £40k pa saved you suggest, more like £7.5k pa. The OP states "public service pensions" and doesn't specify central government, unfunded pensions. In the case of central government DB pensions, it really isn't the employee's fault that the government runs pensions the way they do, yet here we have people suggesting that they get the pension cut. For the majority of public service DB pensions these days, they are funded the same as DC pensions.

The main take away from this thread is that the central government unfunded DB pensions, which are no more generous in terms of the salary (whether final or career average) multiplied by years of service than funded DB pensions, are a compensation for the significantly lower salaries the civil servants receive.

I do understand rather well the principles of the schemes, though not up to speed on very recent changes, but you seem to be trying to catch me out & picking & choosing statements and taking them out of context (and missing qualifiers too). Rather than going into full technical details here, I've tried to write things in a way that people not versed in pensions may understand.

You do seem a little fixed on comparing things to the annuity rates. Comparatively few pensions are now used to purchase an annuity though it's an option that any IFA should consider (and usually rejects, depending on individual circumstances). It was a heinous rule that DC pensions needed to be used to purchase an annuity, and a major blessing when that was stopped.

And of course I never advised anyone directly regarding their pension, I am not qualified to give advice.

You’ve ignored the interest that saving that much money would generate. Assuming they retired immediately at the end of the 25 years and there was no time for the pot to grow between them finishing their CS job and retiring they would have needed to contribute ~27k a year. Not 40k. (I used the pension bee calculator to work this out).

Not saying it’s not a lot, but the general rule of thumb is that to get your career average salary you need to work 43 years. And during that time you are on a lower salary than you would get elsewhere so you are forced to save for retirement instead of having the option to spend that extra money on buying a house, holidays etc…

I worked in the private sector on less than 30k for 5 years before joining the public sector and ~10 years later with compound interest my private sector DC pension is actually average for my age. I was amazed that my colleagues were not saving the maximum amount our employer would match.

Most people who have the option choose not to save it, so comparing what people have at the end isn’t really that fair. Forgetting the extremely generous employer contributions for a moment…. My employee contributions* for my public sector pension right now are around £6k a year. If people saved 500 a month from age 21 to 67 they would have half a million in their pot with interest at retirement. The average pot at retirement is £228,200 for men and £152,600 for women.

edit:no idea what’s going on with the bolding here. Meant to bold employer and employee contributions 😆

I see all of the posts claiming that the public sector pensions are funded by central government taxation, but I don’t think that correct!

I am enrolled into the West Midlands Pension Fund - they invest my pension contributions into shares and projects which ensures that the fund is able to pay out pensions in the future. www.wmpfonline.com/sites/default/files/2023-04/ISS%202023.pdf

My previous public sector role also had a pension fund which invested in shares and projects in the same way!

There isn’t any central government underwriting of either of these funds so I struggle to understand why people are suggesting that tax payers will be left with the liability of me surviving until retirement?

Neither of my parents lived until state pension age, and I worry that all the contributions I have put into a pension pot will have been for absolutely nothing!

Imagine someone being a lower rate taxpayer essentially deferring 20% tax until retirement. Income tax thresholds have been frozen for a few years and will continue to be frozen. The proportion of higher rate taxpayers has been increasing year on year.
More and more pensioners will not only be dragged into basic rate tax but also into higher rate tax so couldvessentially be worse off by paying into a pension if they only saved 20% when paying in.
The 25% tax free cash mitigates against ending up potentially paying more tax for saving over many years.
There is already a limit on how much tax free cash you can take and I do not trust any governments to not reduce it further.

There are funded schemes and unfunded schemes. From what you've described yours is funded. Many public sector pension schemes are not and it is those that people are discussing in the context of taxpayers paying the shortfall between current contributions and payments. These include the pension schemes for the NHS, teachers, police, other emergency services and military.

You’ve ignored the interest that saving that much money would generate. Assuming they retired immediately at the end of the 25 years and there was no time for the pot to grow between them finishing their CS job and retiring they would have needed to contribute ~27k a year. Not 40k. (I used the pension bee calculator to work this out).

The entire point is that there is no compounding because these unfunded schemes are structured as ponzi schemes. That lack of compounding, alongside the vulnerability to changes in demographics that such a structure entails, is why they are not unsustainable.