Is a public sector pension the best type?
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Recently the media has spoken of the “great pension divide”, with private sector workers getting as little as £3 in retirement for every £1 saved. Public sector employees, however, receive as much as £10. Differences in pension type partly explain this.
Those in the private sector tend to have pension “pots” (i.e. defined contribution schemes), whilst public sector employees are more likely to have a final salary pension (sometimes called a defined benefit pension).
In 2018-20, the average pension value of a public sector pension was £65,400 yet the private sector pension average was £10,300. All of this raises an important question. Are the best pension schemes available in the public sector? Below, our financial planners explore this in more detail. We hope you find this content helpful.
If you want to discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
Public sector pensions
According to one study, the NHS has the best pension scheme. £1 saved at the beginning of a career is worth £10 over a 20-year retirement (starting at age 68). The teaching profession also has a strong pension scheme, with employers making a flat contribution of 23.68%. Under UK auto enrolment rules, employers are only obliged to contribute at least 3%.
One feature of public sector pensions is that many schemes (e.g. in education and the police force) are defined benefit schemes. These pay out a guaranteed lifetime income in retirement which rises with inflation each year – providing great financial stability. In fact, these schemes are often called “gold-plated” pensions due to their increasing rarity and benefits which are hard to replicate elsewhere.
These schemes have almost disappeared in the private sector as workers have become more mobile (changing careers often) and due to longer average life expectancy – making them hard for companies to afford. Public sector pensions, however, can be funded out of UK taxation and government borrowing.
Private sector pensions
By contrast, most private sector pensions use a defined contribution model. This involves a pot of money that both employee and employer must contribute to each month. The former must contribute at least 5%, and the latter at least 3%. However, some schemes are more generous, with the employer offering to match an employee’s contributions up to a certain point (e.g., 10%).
A defined contribution pension is not guaranteed to rise each year with inflation. Rather, it is the employee’s responsibility to manage his/her pension and make sure it lasts in retirement. With a public sector pension “central fund”, if the investments underperform, then the employer must make up for any shortfall (to ensure that former workers get the pension income they were promised). With a private sector pension, this security is not available.
Most argue that private sector workers make up for this pension divide by earning more over the course of their careers. However, figures from the ONS (Office for National Statistics) show that public sector workers earn, on average, £580 per week compared to £530 in the private sector. The latter also suffered more during the COVID-19 pandemic, with the accommodation and food industry hitting a redundancy rate of 27.6 per 1,000 in 2021. For the education sector, it was 4.3, by contrast, and for health and social work, it was 3.4.
What should I do with my pension?
So far in 2023-24, a strong case can be made that public sector pensions are, overall, superior to those in the private sector. However, this may not continue indefinitely. Last year, the bill to pay for public sector pensions surpassed the UK’s national debt, with liabilities standing at £2 trillion (although it could be £57bn higher, equivalent to 30% of the public sector payroll).
With the government still under pressure to balance the books after borrowing billions to pay for COVID-19 support measures, there is no guarantee that the current pensions landscape will remain in the coming years. Already, the Teachers’ Pension Scheme has changed—with the final salary scheme closing in April 2022 and a new “career average” system being introduced (effectively reducing newer teachers’ future pension income).
Of course, it is impossible to predict how future pension policy might change and to base your retirement strategy (and career choices) on best guesses. Rather, consider getting the best out of your current scheme, right now – regardless of the sector. If your business employer offers to match your contributions to 10%, then speak to your financial adviser about raising your own contributions. If you work in the public sector, take care not to exceed your pension allowances (e.g. the Lifetime Allowance) – which could lead to ‘claw-back’ of tax relief paid Speak to us if you want to find out more and craft an effective pension strategy.
Conclusion & invitation
If you are interested in discussing your own financial plan or retirement with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
