New job, which of these 2 pensions to opt into?

[JustRollWithIt]

My 19yr old son has his first full time job in a services department at a University, which he is very happy in. He has to make a choice of these 2 pensions. Which should he go with?

1. Auto enrolment is into a defined contributon, trust based pension. Employee contributions 5% matched at 5% by employer. Retirement age any time between 55-75.

1. He can choose instead to join a Superannuation and Life Assurance Scheme. Defined benefits and career revalued. Employee contribution is 7.77% and employee contribution 17.93%. Retirement age 68.

I am trying to describe to him the importance of pensions even at this young age. But which should he opt for?

With the first one, I believe the age you can take your private pension is going up to 57 anyway, and may rise again.

What contribution rate is the DB? I can see the employer contribution but not what he gets - will be something like 1/70 salary.

I would suggest that the DB scheme is better value. The ‘can’t take it until 68’ is a bit of a red herring - a lot of people won’t be able to retire much before that in any case on a DC scheme unless they put a lot more than 10% in

Cynically, I’d assume the auto-enrol one wasn’t as good. The huge advantage of the second one is how much more the employer puts in. It’s basically free money!

I don’t know if defined benefit or defined contributions would be better. Defined benefit is usually thought of as better but it may depend how long he plans to be with this employer? If it’s a university he may well stay there for a long time in a range of different roles?

It says 'accrual rate 1/80th'

Yes he has no intention to move anywhere else at this point, and it would be common for employees to stay there and perhaps move around roles through time, but I guess you never know what the future holds.

The defined benefit.

Defined benefit is almost always better than defined contribution because regardless of the value of the pot from an investment perspective, the amount you will receive is 'guaranteed'.

That said, an independent adviser would be able to run some numbers for you and model the outcome for each scheme.

On option 2 the employer contribution is irrelevant. What matters is his contribution (so he knows his net salary) and the accrual rate (what he will get - which is not affected by contributions in the way a DC sceme is).

Advantage of DC scheme - flexibility.

Advantage of DB scheme - certainty.

In this case the accrual rate for the DB scheme is OK work for 40 years and you get a pension worth half your salary (plus whatever state pension there may be by then). But it's lower than many DB schemes, and I suspect the retirement age is linked to state pension age, so could increase. Although there is likely to be the option to take it up to 10 years earlier with actuarial reduction.

This DB scheme isnt as good as something like the LGPS version with a 1/49 accrual - but personally I would take it. Then once my earnings allow I'd take out an additional SIPP to get the best of both worlds.

Also note that option 2 is a Superannuation and Life Assurance Scheme. So it includes death in service benefits that presumably aren't available if you're in the DC scheme.

At 19 he won't be thinking about life insurance, but it's a valuable benefit if he takes out a mortgage in future - he will save on buying life cover for that (or will only need a smaller, and therefore cheaper, top-up policy).

I would go with the defined benefit scheme.

Defined benefit everytime. Very few places offer a defined benefit scheme anymore because they are costly to run. I work in finance in a university.

Another one to say “DB every time”.

He will be able to retire earlier than 68 from
the DB (reduced for early payment), if he retires early from the DC scheme then he’ll also get a lower pension because (I) less will have been paid in and (II) it will need to last longer.

Always pick a DB rather than a DC.