pension issues - defined contribution or defined benefit

hi, just looking for info on which is best.

i'm currently in a defined contribution scheme. my salary is €55,000. my contributions are 5% employer 7%.

i read in "Defined Contribution Pension Schemes - FAQ" In a Defined Contribution Scheme, you and your employer contribute a defined percentage of your salary to a pension fund. On retirement, the fund is used to the fund is used to provide income in retirement. The size of the fund on retirement will be determined by how much was contributed to the scheme and by the investment return achieved.

right, so i take it if i've been paying into the fund longer than another employee on the same salary, i'll get a larger pension, correct?

i'll also get my state pension, correct?

now, would a defined benefit scheme be better? i've been told that i don't get my state pension with this one? is this true? also, would my crontributions be the same?

also, if the you're guarenteed a certain % of your salary at retirement with the benefit scheme..... how long does an employee have to be paying into it to qualify? surely somone paying 10 years more than someone else should get more.......

paperclip said:

hi, just looking for info on which is best.

i'm currently in a defined contribution scheme. my salary is €55,000. my contributions are 5% employer 7%.

right, so i take it if i've been paying into the fund longer than another employee on the same salary, i'll get a larger pension, correct?

YES. Assuming the same money is going into the fund for more years, then you would have accumulated a bigger fund. Of course, this all depends on the state of world stock, bond and property markets.

i'll also get my state pension, correct?

YES. As long as you have sufficient PRSI contributions.

now, would a defined benefit scheme be better? i've been told that i don't get my state pension with this one? is this true? also, would my crontributions be the same?

You can have a DB pension and a state pension. They may be integrated.
DB schemes are usually better as the employer takes the risk/liability of paying your pension. It's not dependent on the growth of a fund.
You may or may not have to contribute to a DB scheme. A few employers offer 0% contribution. Typical in the public sector is 6.5% of salary.


also, if the you're guarenteed a certain % of your salary at retirement with the benefit scheme..... how long does an employee have to be paying into it to qualify? surely somone paying 10 years more than someone else should get more.......

Click to expand...

You are typically promised a percentage of your salary for each year of pensionable service. Example, in the public sector, it's typically 1/80 of final salary for each year of service, up to a max of 40/80 of salary.

Protocol said:

You are typically promised a percentage of your salary for each year of pensionable service. Example, in the public sector, it's typically 1/80 of final salary for each year of service, up to a max of 40/80 of salary.

Click to expand...

thanks for clearing that up. i wasn't aware it was for each year of service.

so, say you join the company at 25, and leave at 65, you're guarenteed a % of your salary for the next 40 years?

so, say you join the company at 25, and leave at 65, you're guarenteed a % of your salary for the next 40 years

Click to expand...

No, in this case you are guaranteed 40/80 ie half your salary as a pension till you die.

Most defined benefits also have a spouses pension built in of 2/3 of your pension

paperclip said:

so, say you join the company at 25, and leave at 65, you're guarenteed a % of your salary for the next 40 years?

Click to expand...

Not quite. Usually you would get 50% of your salary until you die. (40/80ths)

so if you live until you are 105 years old, then I guess Yes

Paperclip, as said above, the pension you get at retirement in a DB scheme depends on how many years service you have.

In your example, you join the DB pension at age 25, you stay in it for 40 years, you retire at age 65.

You get a pension from age 65 until you die. Typically, the pension might be 40/80 = 1/2 of your final salary. So if your last gross pay was 4000, your first month's pension is 2000. You may also get a tax-free lump-sum at retirement.

Other pensions operate on 1/60, i.e with 40 years service, you would get 40/60 = 2/3 of final salary, but with no lump-sum.

How your pension increases in retirement is another issue.......

Of course, all of this applies to DB schemes.

Just a few random thoughts on the merits of DB over DC schemes.

On the face of it DB schemes would appear to be better. The main reason being that the employER and not the employEE is taking the all investment risk.

There are variations on DB schemes some are not indexed ie you retire on a proportion of your final salary and that stays fixed. Some DB pensioners only get increases at the discretion of the trustees - so if a scheme is distressed in a any way pensioners may not get an annual increase. Some sechemes are indexed at a percentage or CPI whichever is lower. And finally - the creme dela creme some schemes are indexed with the current grade for the job and pensioners will get national wage agreement increases, benchmarking increases etc.

Because some DB schemes are funded and for whatever reason the scheme becomes underfunded members may find themselves retiring on a fraction of what they expected. (Irish Fertilisers).

In general DB schemes favour 'careerists' who spend their entire working life in the one organisation, start off on relatively low wages and end up on fairly high salaries. DB schemes dont favour people who have atypical work patterns (eg people on commission, piece work etc) or people whos career trajectory is flat or tapers down. DB scheme dont favour people who move from job to job regularily and in particular who move frequently from the private to public sectors and back again.

aj

Something to look out for in DB schemes is that they are designed for folk making it to 65, if you retire at 60 then you will most likely face penal clauses with seer reduction in pension.
In here its 6% a year below the age of 65, so for example if I retired early at 55, I would lose 60% of my pension!!!!!!!!
Check it out folks on DB