Case studies: How DC pensions can pay off

  • John, 65, is about to retire. He earns £15,000 a year and has been in a final salary plan for 40 years. It is contracted out (so he does not get Serps or state second pension (S2P)), pays a 1/60th benefit but makes a state scheme deduction of half the basic state pension. His final salary pension is 40/60ths times £15,000 less half of 52 x £97.65 (£5,078) = £10,000 – £2539 = £7,461. He also gets a state pension of £5,078, giving a total pension of £12,539 a year.
  • Jim, 65, also earns £15,000 and has been in a contracted-in DC plan (qualifying for Serps and S2P) for 40 years, paying contributions of 15% of earnings. His pay has risen by 3% a year over 40 years and his fund’s rate of return is 6% net of charges, giving him a fund of £155,000. He uses this to buy an RPI-linked pension with 50% spouse’s benefit, giving a DC pension of £5,388. Jim also gets a basic state pension of £5,078 and Serps/S2P of £3,200, giving him a total pension of £13,666.
  • Although John was in a final salary scheme, Jim has over £1,000 extra income.

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