Police pension or invest in my own?

[Scott1234]

Hello all, new user here looking for some advice on how to invest for a future pension. You might have to bear with me as I’ve been looking at this for a couple of months but still have a lot to learn.

I’m a 33 year old police officer earning circa £41k a year. I’m now at the top of the pay scale and financially comfortable, the £22k a year I started on wasn’t enough for me to save any money at the time but it’s time to put that right.
The first thing people will think is to go into the police pension. For a couple of main reasons I don’t think I’m going to:
The first being that they’ve already changed the law so they could make it worse it since I joined in 2014 and is likely to happen again. Some cops have ended up paying more money in to get less out and are having to work an extra 10+ years to collect their pension.
The second that so many cops become bitter and feel like they’re stuck in the job when otherwise they’d have left but the pension keeps them locked in, there’s a penalty for leaving the force meaning that you can’t withdraw the pension until 67.

I’ve decided I’d prefer a bit more financial freedom.
-If it went into the police pension today for 30 years (which would take me to 63) I’d pay approx £450 a month and the pension would be 22k a year
-Alternatively if I put £500 a month (increasingly yearly with inflation assumed at 2%) into investments for that same 30 years and could earn 5% a year off it I’d have £512K. 6% would make it £623K.

Assuming I could live off a 4% a year return on that £512K that would give £20.5k. The pension would win out narrowly. The other massive benefit of course is that I’d have £512K to pass on to my children (minus any inheritance tax etc) whereas with the police pension I’d have nothing to pass on.
The other sad truth is that being a police officer and working shifts takes a toll on you and a lot of officers die quite soon after retiring, meaning they never really cash out any of it.

Is there a major flaw in my maths? Something unforeseen I’m missing out on? Are my percentages unrealistic? I just can’t see why more aren’t doing it.
If my reasoning is sound the next part of the question will be how best to invest but for now I’m just after opinions on my rationale. I’m grateful for any advice from the forum users who are quite clearly more knowledgeable than myself!

[tjh290633]

Are you not ignoring the employers' contribution to the pension fund? By not joining you are voluntarily giving up that contribution.

TJH

[pje16]

The police also offer salary sacrifice which means as you also get tax relief on your National insurance as well as your gross pay

[pje16]

you must know more than me as you in in the job but are you sure about 67 as being the pension age?
there are lots of sites that talk about 55 and 60 according to the length of service

[Scott1234]

In relation to the employee contribution, I’m not sure how it ends up working out but the figures I posted are what you end up with. They’ve come from using the governments own police calculator. I understand they match contributions but 30 years still comes out at 22k a year. I’m not sure how they come to that figure as effectively there’s £900 a month going into it (officers £450 plus matched £450). The same in an investment account would give an astronomical figure.

With regards to the lower national insurance, that is true. The pension payments are taken out pre tax meaning that the amount you actually pay tax on is less. I’d have to find out exactly how much. From the top of my head it would be 20% of the 450 so £90 less tax. That £90 a month put into a 5% investment would see me at 94K over the 30 years. I still think I’d be a lot better off with the (potential) £512K

[tjh290633]

In relation to the employee contribution, I’m not sure how it ends up working out but the figures I posted are what you end up with. They’ve come from using the governments own police calculator. I understand they match contributions but 30 years still comes out at 22k a year.

Have they allowed for inflation, or is that at today's salary levels?

Effectively half pay on retirement after 30 years is something most people would give their right arm for.

TJH

[Urbandreamer]

Have you considered doing both?

That would mean that you could benefit from the employers contribution and the salary sacrifice element, yet also have a second pension that you could draw earlier should you need to.

[Midsmartin]

If the police pension is a defined benefit (based on salary) scheme I would stick with that. Any excess cash to have can then go into a shares ISA to top it up.
The certainty of income it offers is of huge value.
If you take a private pension, you will be at the mercy of future investment returns, interest rates and so forth.

Your anticipated 4% withdrawal from your own funds is very optimistic, I think. It might work. It might not. I would personally reckon on 3% or even less. I would like a big margin of error to avoid either running out of money, is even just the stress of worrying that you might. Your close to guaranteed police pension will help you sleep at night.

[Scott1234]

you must know more than me as you in in the job but are you sure about 67 as being the pension age?
there are lots of sites that talk about 55 and 60 according to the length of service

67 is the pension age if you leave the job. It’s currently 60 if you want to retire with a full pension but that only includes how many years you put in.
I could retire at 55 but I’d only have 22 years pension as I’m currently 33
For comparison. 22 years in the pension would give 19k a year, 22 years £500 a month at 5% return would give £285k. Living off 4% of that would equal £11.4K. These figures are quite different. The extra compounded interest on the investment accelerates exponentially the longer you have it in obviously


The figures I posted are for 30 years which would take me to 63. The days of retiring at 50 are long gone. Retiring at 55 is only really viable for those who have a lot of service and are being ‘tapered’ into the new pension unless you join very early.

[jonesa1]

This is a tough one. Your reasons for not wanting to rely on the police pension seem very sound, but you would be swapping one set of uncertainties and issues for another. For example, you can assume a personal pension will continue to grow at 5 or 6% pa, but it might not. We've had multi-decade periods in the past when assets declined in value, there's no way to know whether we'll get another during the next 30 years, you would be carrying the risk, rather than the state. Also, assuming a safe withdrawal rate of 4% might be too optimistic (have a look at ERN's website to get a sense of what's been safe historically: https://earlyretirementnow.com/2016/12/ ... t-1-intro/). Is there any way to get an employer contribution if you opt out?
My gut feel is that if you opt out, you should try and invest more than the £450 / £500 (if that's realistic) into either a SIPP or an ISA or both. And if you opt in, consider trying to build up a separate SIPP or ISA pot to help bridge any gap between wanting to retire and being able to draw the DB pension. The advantage of using an ISA is that the funds would be available in an emergency, with a SIPP you'll have to wait until 10 years before state pension age (unless the rules change again).

[Scott1234]

Have you considered doing both?

That would mean that you could benefit from the employers contribution and the salary sacrifice element, yet also have a second pension that you could draw earlier should you need to.

If I were to do both I’d have 22k pension plus the extra £90 saved in tax and £50 to put into investments. That at 5% would give me £146K in addition which does make it more appealing.

A big factor I should have mentioned is my wife is also a police officer and she is in the pension. We would have our mortgage paid off well before retirement and we do not live extravagantly.

I think the appeal of the investment is the chance to leave some money as a legacy to my children. I come from a modest background and think investments and the power of compound interest is what keeps the rich people rich and the poor people poor. Being able to leave a significant amount of money to my two children could leave them with a massive advantage over what I have had.

[swill453]

I think the appeal of the investment is the chance to leave some money as a legacy to my children. I come from a modest background and think investments and the power of compound interest is what keeps the rich people rich and the poor people poor. Being able to leave a significant amount of money to my two children could leave them with a massive advantage over what I have had.

Bear in mind that your children could be in their 50s or 60s and approaching retirement themselves before they inherited from you.

Scott.

[pje16]

In relation to the employee contribution, I’m not sure how it ends up working out but the figures I posted are what you end up with. They’ve come from using the governments own police calculator. I understand they match contributions but 30 years still comes out at 22k a year. I’m not sure how they come to that figure as effectively there’s £900 a month going into it (officers £450 plus matched £450). The same in an investment account would give an astronomical figure.

With regards to the lower national insurance, that is true. The pension payments are taken out pre tax meaning that the amount you actually pay tax on is less. I’d have to find out exactly how much. From the top of my head it would be 20% of the 450 so £90 less tax. That £90 a month put into a 5% investment would see me at 94K over the 30 years. I still think I’d be a lot better off with the (potential) £512K

Thanks for that explanation which does make sense
All I would add is that the tax and NI relief you get from a salary sacrifice scheme makes an enormous difference
20% tax and 12% NI means that's every £100 investement only costs you £68
That's an immediate return of 47% (much better than any stock market !)
as has been suggested perhaps do the police one and one of your own as well

[Wuffle]

The key point here isn't the maths.
It is the 'ownership' of the accumulated assets - you (and the wife) or the kids.
A much loved neighbour died at or around her scheduled retirement date from a career in teaching so I get it.
And you are right to be concerned. It is all about 'the waterfall' now.

From watching the world, and being outside of the government employee bubble, the police pension will be the best gig in town.
Do not let conversations with other colleagues about it being worse than before (worse than amazing) cloud your judgement.
But it will be associated with you, and you might live forever (nearly) and be able to just give the kids money (which they will need because all the wealthy old contributors on here will be doing the same) or you might not. The doubling up and likely spousal arrangements on death probably do you favours because both are unlikely to go early, but we are down to the small print.

You will not spreadsheet the answer to this, sorry.

W.

[mc2fool]

If it went into the police pension today for 30 years (which would take me to 63) I’d pay approx £450 a month and the pension would be 22k a year
-Alternatively if I put £500 a month (increasingly yearly with inflation assumed at 2%) into investments for that same 30 years and could earn 5% a year off it I’d have £512K. 6% would make it £623K.

Assuming I could live off a 4% a year return on that £512K that would give £20.5k. The pension would win out narrowly.

No, the figures are not directly comparable. The £22K the police pension would give you is in today's money, and I would expect that the police pension has some kind of increases or another in deferment for inflation.

You need to find out the details of that in order to make a sensible comparison, and, of course, there will be an element of unknowns, as neither they nor you know what inflation will be in future. But just as an example, if we use your assumption of 2%pa inflation and assume the pension tracks inflation, then your £22K quote now will be £39,850 in 30 years.

[airbus330]

As someone who has retired recently without the benefit of a DB pension, but knowing quite a few ex-officers who do have them, I'd be very reluctant to give up the secure benefits that it offers. One of my best friends retired with 33yr service and his pension I believe is about 28k (retired as Sgt), index linked. Another friend retired Chief Super and is on a heck of a lot more plus he took a sizable commutation which bought him a Buy-to-let outright. My point is that your predictions are based on current rank which will most likely change upwards and you have a partner also in the same scheme. It would seem to me that, all things being equal, you'll likely have a comfortable and secure retirement. That said, it is satisfying to have other strings to your bow. Since you are most unlikely to escape taxation post retirement, building as big a fund as possible in both your ISA which at retirement can be tailored to generate tax free income, will give you access to lump sum cash should it be needed and will likely be able to be passed down the generations. After quite a few chats about finance with my ex service friends, they all have done much the same, with the service pension paying the basics and another income stream for the luxuries.

[Scott1234]

If it went into the police pension today for 30 years (which would take me to 63) I’d pay approx £450 a month and the pension would be 22k a year
-Alternatively if I put £500 a month (increasingly yearly with inflation assumed at 2%) into investments for that same 30 years and could earn 5% a year off it I’d have £512K. 6% would make it £623K.

Assuming I could live off a 4% a year return on that £512K that would give £20.5k. The pension would win out narrowly.

No, the figures are not directly comparable. The £22K the police pension would give you is in today's money, and I would expect that the police pension has some kind of increases or another in deferment for inflation.

You need to find out the details of that in order to make a sensible comparison, and, of course, there will be an element of unknowns, as neither they nor you know what inflation will be in future. But just as an example, if we use your assumption of 2%pa inflation and assume the pension tracks inflation, then your £22K quote now will be £39,850 in 30 years.

You may be right here. It’s worded thus:

‘your projected benefits in current money terms (after adjusting for assumed inflation)’ the assumed inflation is 2%.
From reading that it looks like you are correct. Although I’ve put the correct year in to equate with my retirement it has produced the figure in today’s money, not the future one with inflation included?

[Scott1234]

As someone who has retired recently without the benefit of a DB pension, but knowing quite a few ex-officers who do have them, I'd be very reluctant to give up the secure benefits that it offers. One of my best friends retired with 33yr service and his pension I believe is about 28k (retired as Sgt), index linked. Another friend retired Chief Super and is on a heck of a lot more plus he took a sizable commutation which bought him a Buy-to-let outright. My point is that your predictions are based on current rank which will most likely change upwards and you have a partner also in the same scheme. It would seem to me that, all things being equal, you'll likely have a comfortable and secure retirement. That said, it is satisfying to have other strings to your bow. Since you are most unlikely to escape taxation post retirement, building as big a fund as possible in both your ISA which at retirement can be tailored to generate tax free income, will give you access to lump sum cash should it be needed and will likely be able to be passed down the generations. After quite a few chats about finance with my ex service friends, they all have done much the same, with the service pension paying the basics and another income stream for the luxuries.

The ‘final salary’ pension where you could just go up the ranks in the last few years to inflate your pension is long gone. It’s now a career contribution average.

If we were both in the pension we would certainly be more than comfortable. It’s certainly a lot more secure.

[Spet0789]

Pretty much every public sector DB pension pays £2 or more of value per £1 paid in for those who have decent pay progression and retire at the usual time.

You’d be quite literally insane to give it up, unless 1) you think it’s probable (ie more likely than not) that you’ll be leaving the police in the next 5-10 years, 2) you are very confident in your own ability to outperform as an investor, or 3) you expect a future government to retrospectively torch the benefit.

Don’t let the canteen gossip about the pension being not the £5 for £1 deal it was in the good old days mask they fact it’s still great!

[Alaric]

It’s now a career contribution average.

How do they word it? Is it a double accrual of perhaps 1/80th of salary for each year of service plus an accrual of a lump sum at retirement? Or perhaps they now copy the private sector in offering 1/60th for each year with a commutation option? Or have they ditched 60ths and 80ths entirely, instead expressing the accrual as a percentage of salary?