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Index Fund vs Pension Fund

Including Financial Independence and Retiring Early (FIRE)
JohnB
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Re: Index Fund vs Pension Fund

#400585

Postby JohnB » March 31st, 2021, 12:53 pm

I assume the physical requirements of the Fire Service means most don't get to State Retirement Age, and so the pension scheme has attractive early retirement terms. Firemen are always striking about changes, so I expect the terms are good, but getting worse.

If the OP is concerned about their pension, they can always open a SIPP in addition to their occupational pension, but as they are under 40, they should look at a LISA, as that gets tax relief, and can be accessed earlier, so is useful for a house deposit.

Urbandreamer
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Re: Index Fund vs Pension Fund

#400602

Postby Urbandreamer » March 31st, 2021, 1:58 pm

ConfusedFirey wrote:Unfortunatly 12.9% is the maximum I can contribute to the Pension scheme. It should also be noted I don't have a 'pot' which is invested. My payments pay the pension of members who have already retired, it's actually akin to ponzi scheme. I actually don't know how my pension is accrued, but I'm very certain it isn't invested and I can't find much information on the SPPA website. When I retire I won't have access to any of the money I've paid in. Instead I get £2100pm (pre tax) until I die. The £553,000 sum was worked out by factoring in the tax and then assuming I live to 95. I then multiplied the yearly pension by the difference between my retirement age and when I turn 95. It should also be noted the £553,000 sum was accrued through a 47 year career, paying £341pm into the scheme. As far as I'm aware, an investment horizon of 47 years with £341 paid monthly, an end sum of £553,000 is quite mediocre (4% compounded per year) when compared to the potential returns of an index fund? I also don't like being trapped by the pension if it changes again. A perfect example is a number of my colleagues experience. They were due to retire at 50, but the pension was changed and they now need to work to 60 with no increase to the value of their pension. It's pretty shocking what happened to them.


There is quite a lot to deal with there, Others have pointed out that your current pension has very many benefits, so I'll just address the downside points that you make and any I think that have been missed.

In "theory" you might make better elsewhere, or you might be a LOT worse off. This is why the advice to remain in the scheme.

Retirement age, seen that. I wanted to retire at 50. I didn't have the finances, though I was not far short. Of course I couldn't access my pension, but I could use funds from my ISA to support me until I could. My wife also intended to retire at 50, which she could until the government moved the goalposts. She was relying upon a pension.

My wife can't access her current pension for five years, yet she intends to retire next year. How? Ah the flexibility of the standard ISA.

I didn't start my SIPP until very two years before I could access it. For me, as a standard rate tax payer, the disadvantages in lack of flexibility were greater than the financial advantages.

The sort of scheme that you describe was common when I started work. If the scheme allowed you to retire "early" (60) the employer could refuse to allow you to claim from the scheme until 65. That said they are VERY secure these days.You will get that payment regardless of stock market performance. This allows you to take greater risks with your other investments. If they come good they will garnish your income. If they don't then you have a guarenteed minimum to live upon.

While on the subject of the difference between ISA and pension, here is something for you to think upon.
I intend to retire in two years time and won't pay income tax for the following 5-7 years

How?

Well I shall draw less than my personal tax allowance from my SIPP and top it up with money from my ISA to match my lifestyle.
At 65 an old "final salary" or "Defined Benefits" scheme will start to pay out. It will probably be just less than the personal allowance, so I could continue paying no income tax by reducing the amount that I take from other pension schemes. At 67 I'll get the state pension and have to start paying income tax. When I die, any money left in my "Defined Contribution" schemes will pass to my children free from IHT.

Knowing what the current, ever changing, tax and pensions landscape is can make a huge difference. Hence my comment about the more interest that you pay in what's happening, the better the outcomes.

ConfusedFirey
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Re: Index Fund vs Pension Fund

#400636

Postby ConfusedFirey » March 31st, 2021, 5:33 pm

Thanks for all these excellent replies. There's a lot of reading and research in them so I apologise in advance if I am slow to respond.

JohnB wrote:Firemen are always striking about changes, so I expect the terms are good, but getting worse.


I would like to address this, and hopefully it doesn't come across as confrontational as it isn't intended that way at all. The last time Firefighters went on strike was in 2002 following a recommendation from an independent body (the same body who evaluated politicians salaries) that they should be on £30,000 per year. Only in 2018, 16 years later, have the wages surpassed the £30,000 mark. As someone who is proud to be a firefighter serving his community I'm a little gutted this appears to be public opinion. Hopefully you don't have too bad an opinion of us firefighters and now don't see us all as striking moaners (although we do like a good moan!).

JohnB
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Re: Index Fund vs Pension Fund

#400640

Postby JohnB » March 31st, 2021, 5:48 pm

I'm on the side of the Firefighters, I was just observing there always seem to be disputes with management over benefit cuts. There are 2 pension stories in the first page of https://www.fbu.org.uk/news

hiriskpaul
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Re: Index Fund vs Pension Fund

#400658

Postby hiriskpaul » March 31st, 2021, 6:42 pm

I would totally endorse what most others have said. Don't give up your DB Pension. It is a major perk of your job and its current replacement value would be around 50 times the annual payment at age 60 as it is linked to inflation.

Index linking may not seem worthwhile in today's low inflation environment, but this DB provides you with insurance against future high inflation. When the country/World last moved from low to high inflation, in the late 1960s to 1970s, stock markets failed to keep up with inflation, even with reinvested dividends. After adjusting for inflation, it took 15 years for the FTSE all-share (with dividends reinvested) just to return to its 1968 peak.

I would suggest an ISA rather than a SIPP for other investments, as you can draw on it before you can your DB pension. If you want to drip feed into tracker funds monthly, Vanguard would be a good place to start. Only 0.15% platform charge and no charges for investment. You can always move later to another platform to save fees.

Spet0789
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Re: Index Fund vs Pension Fund

#400721

Postby Spet0789 » April 1st, 2021, 12:30 am

ConfusedFirey wrote:Thanks for all these excellent replies. There's a lot of reading and research in them so I apologise in advance if I am slow to respond.

JohnB wrote:Firemen are always striking about changes, so I expect the terms are good, but getting worse.


I would like to address this, and hopefully it doesn't come across as confrontational as it isn't intended that way at all. The last time Firefighters went on strike was in 2002 following a recommendation from an independent body (the same body who evaluated politicians salaries) that they should be on £30,000 per year. Only in 2018, 16 years later, have the wages surpassed the £30,000 mark. As someone who is proud to be a firefighter serving his community I'm a little gutted this appears to be public opinion. Hopefully you don't have too bad an opinion of us firefighters and now don't see us all as striking moaners (although we do like a good moan!).


It seems firefighters last went on strike in 2016.

https://www.bbc.co.uk/news/uk-england-29846243

Personally I have a very high opinion of firefighters but a lower opinion of senior fire officers and a very low opinion of the FBU.

My perception of the FBU is that they are heavily politicised and focussed only on what is good for them as an institution. The general public and firefighters come a long way down their priority list. The slow pace of reform (co-manning of Fire and Paramedic response for example) seems to me to be down to recalcitrance of the FBU.

The quality of leadership (at least in the LFB) apparent from the Grenfell Tower testimony of senior fire officers (with the exception of Andy Rowe, now the LFB commissioner) was appalling.

More generally, firefighter pay is perhaps the best example of Marxism vs Capitalism... On the one hand it’s a job with obvious inherent value (so pay them more!). On the other, there are 10 qualified and capable applicants for every job (so pay them less!).


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