sackofspuds

My wife teaches at an FE College. She hasn't worked there long but is entitled to join the Teachers Pension - http://www.teacherspensions.co.uk

This is a final salary scheme and, from memory, were she to join, her employer would contribute around 13% and she about 6%. A government actuary calculates that this percentage is sufficient for the final salary scheme. The actuary reviews the percentages every so often. Not too difficult is it? There's me thinking that employers dropped final salary schemes in their droves because their liabilities could be open ended. Doesn't seem like it to me.

Anyhow, I digress. Do teachers (schools and TAFE) in Oz have similarly generous pension arrangements?

How about other employees? I understood that the government insists on compulsory contributions to Super from both employer and employee. What are the minimum percentages?

How about employees employed on a casual basis? Are their employers obliged to contribute anything?

Don

I think you'll find that companies are dropping final salary schemes so fast because they are finally realising that these schemes are over-generous. Various factors IMHO lie behind this, eg historically poor input/ governance by shareholders to look after their own interests - ie the employee tail was wagging the dog that is the ownership of the company; wrong and over-optimistic assumptions about reasonable investment returns by pension funds; increased longevity.

Actuaries are very fallible.

The public sector will not be too far behind in making their final salary schemes less generous. I hope.

Get in quick to public sector final salary schemes and pay for extra years, if possible, is my advice to anyone that gets the chance because the reduced levels of benefit are unlikely to be completely retroactive.

NKSK

From my understanding, the Australian scheme is not anythig like as generous. It seems to be exactly the same as any other private sector job - employer contributes 7% (or is it 9%?) into a superfund.
I'm not sure about any 'fringe' benefits though.

I'm hoping someone on here will show me that I'm wrong!!

Grayling

Slightly OT but there a some features of the pensions in the public sector that are missed in these debates.

When I first became a MH nurse in 1969 salaries were pretty poor but we were always told that the pension scheme was designed to compensate for this. ie good pension in lieu of decent salary.
It was also part of my pension package that I could retire at 55..simply to attract people into working in mental health.

My wife is a civil servant and the same arguments have been used to restrict their pay and I am sure the same applies to teachers, police etc.etc.

This has been used by governments (of all colours) as a negotiating factor in pay discussions.

So I do not see the pensions as over generous when they have always been used as a negotiating tool when it suits.

G

Don

Fair point. The problem is, the govt/ administration tends to change every 4/5 years and promises can turn out to be empty.

Another way of looking at 'over-generous' is to read it as unsustainable/ unaffordable in the long run.

NKSK

I agree - but I would say that wouldn't I?!

Do you know if there are any similar positive aspects to public sector pensions in Australia?

Grayling

I would not disagree but I feel the responsibility lies with the employers (the government) rather than the employees.

You would not believe the amount of 'stick' I sometimes get from people about how I am 'living off their taxes' because I retired at 55.

G

Grayling

As I understand it the employers pay a fixed 9% into superannuation schemes and it is up to you to add to it. I believe there are tax concessions to assist this.

The schemes will not be as good as the UK unless you put a fair amount in.

I have not paid it much heed as I am already drawing a UK pension.

However, if I work when I get to Australia I will pay as much as possible into a super scheme to offset tax.

I will take expert advice nearer the time.

G

NKSK

So no different from all other schemes in the private sector?

Grayling

That's how I read it but I am no expert.

It depends on how long you have been in a public scheme in the UK but I would think it preferable to leave it where it is.

This really is an area for the experts though as there could also be tax implications.

G

sackofspuds

Just did a bit of Googling and found this regarding Victorian teachers - http://www.eduweb.vic.gov.au/hrweb/e...ary/superg.htm

It appears that there have been several pension schemes, all of which are closed to new members except the one above, which has employer contributions of 9%. This compulsory scheme came into being with the Superannuation Guarantee (Administration) Act 1992.

I found more info on the ATO site:
http://www.ato.gov.au/individuals/co...01/007&st=&cy=

Basically, the Guarantee covers just about everyone and would include casual workers. Just as well in Oz, given the numbers of casual workers!

My wife has only just gone back to work after being at home with the kids so hasn't yet joined the teachers pension plan.

sackofspuds

If I accept your point that the new reality is that final salary schemes are unaffordable then personally I would restrict or abolish them except for front line staff like nurses or teachers. I really can't see why the office workers are any more entitled to final salary schemes as people in the private sector. However, IMO teachers (secondary school teachers in particular) and nurses deserve all the rewards society can offer.

This made me get my spreadsheet out. The teachers plan pays 1/80th of final salary per year of contributions, plus a lump sum of 3/80ths of final salary. So, great if you started teaching at 21. Let's be honest though, if you did 40 years of secondary school teaching your life expectancy after retirement would be minimal; the stress would kill you!

In terms of paying for extra years, it's not that cheap and it doesn't seem to work out from what I can see. I'd be grateful if you could tell me if I've missed anything out.

At age 40, it would cost 18% of your current salary to buy a year's worth of contributions. For someone earning £30k pa now, it would cost £54k to buy 10 years worth of contributions. When you retired you'd get a lump sum of £11,250 and a pension of £3,750.

Now of course, the lump sum and pension would be based on your final salary, but I'm assuming you'd emigrate in the near future so that your final salary would be £30k for the purposes of the scheme.

If you invested that £54k it would cost you to buy 10 years worth of contributions to the scheme, after 20 years @ 5% you'd end up with a pot of £142,960. At 5% interest, you'd get £7,148 per year without touching the capital, which you could leave to your kids.

Different story if you stayed in the UK. You pay 6% and your employer 13.5%. That's a hefty contribution by the employer, plus you get a guaranteed pension.

In Australia the employer would pay 4.5% less than in the UK and there are no guarantees. Whereas 4.5% doesn't sound much, for someone on £30k it's about £110 per month and if you invested that £110 after 20 years at 5% it'd be worth £46k and would earn you £2,300 pa in interest at 5%.

Megalania

No defined benefits super schemes left for vast majority. Compulsory super 9% for employees of gross salary. Employees can salary sacrifice any amount to super but employer can only claim as a business deduction up to:

Income year 2004–05
Under age 35 $13,934
Age 35 to 49 $38,702
Age 50 and over $95,980

Age based contribution limits

so that is generally the limit although some employers (legitimately) average the deduction per employee and limit deductions to a portion of salary (eg 50%).

Some employers, particularly government, make 1 for 1 contributions.

Super taxed at 15% on contributions, 15% on earnings during accumulation phase, 0% on earnings during pension phase, 15% tax credit against income tax on withdrawals as a pension. Reasonable Benefits Limits (RBL) apply:
Reasonable benefit limits—table

I attempted to provide a generalized answer here:
Whole Of Life Finances SpreadSheet

Read the thread for caveats.

Don

As it happens, I had a look at your link last night before you posted this, and reached some similar conclusions. If migrating, maybe not worth it.

However, if you were 40-ish and bought previous years and stayed in the UK, you could reasonably expect career advancement by retirement and increased pay, which would be beneficial to pension from the way that final salary is calculated.

If you chose Method A, you could get tax relief on the cost of your PAYs, making the spreadsheet calculation much more attractive.

In your 10 PAYs example, (let's assume everything is real prices at retirement and onwards as in effect with all the index-linked adjustments that makes sense,) the lump sum immediately reduces the cost of the 10 PAYs to £43K. If you live to 90 (female), retiring at 65 after 2020, that gives 25 years @ £3750 or £94k.

A surefire double your money scenario with little risk. Somewhat better than 5% pa return.

If you got that career and salary advancement along the way, so much the better.

You are also maybe ignoring the fact that tax has to be paid on bank interest, making your 5% pa bank investment return unlikely.

If you reworked your spreadsheet alternative for a basic rate taxpayer and a top rate taxpayer (UK) and factored in inflation @ 3%, I bet your alternative wouldn't come out so rosy.

I reckon there is a big place for PAYs in an investment portfolio when you factor in risk.

sackofspuds

Yes, this is the conclusion I reached.

Yes, this is a different ball game. However, you can pay a max of 9% extra by method A so at age 40, 9 years is the most you can buy over the next 20 years.

You end up with a pension of £3,375 and a lump sum of £10k. If you lived 20 more years and the index linking was worth 2.5% the total value works out at over £125k. Saving 9% at 5% interest (you could save in an ISA and have the benefits tax free) would get you a pot of about £90k and a pension of about £4k.

Of course, with pay rises your pension will be based on 9/80ths or 11.25% of your final salary, so yes, adding to the scheme as much as poss works out well.

I think the method B is aimed at people who want to use their lump sum to buy extra years of contributions.