Is my civil service pension enough?
Q: I am 29 and I work for the civil service. I am on a final salary pension scheme. I currently earn £30,000. I have five years of service and would like to work in the civil service until I retire.
However, nothing in the civil service is guaranteed nowadays, and I am considering investing money elsewhere to add to my pension in case I leave in the next 20 years.
I'm currently looking at open-market HomeBuy schemes, as I don't have enough money for a deposit on a property. I would also like to look into other ways of saving for my pension. The civil service offers an 'added' pension scheme. But is this worth it?
At the moment, I would only have £35 to £60 to invest monthly. Can you please suggest ways that I can invest my money and also give your opinion on the civil service added pension scheme?
A: Francis Klonowski, principal of Klonowski & Co in Leeds, replies:
The first point to make is that even if you were to leave the civil service before the normal retirement date, you would still benefit from whatever pension you have accrued within the scheme.
The civil service scheme allows you to buy extra or "added" pension, which is not taken away if you leave. In that sense, I can't see what you would gain by building up a pension fund elsewhere.
If your employment lasts until the normal retirement date, so much the better. Buying the added pension through the scheme is the best way to increase your benefits, if it is extra pension that you want.
If, however, your aim is more to accumulate a lump sum from which to draw in future, a good international investment trust is worth considering. This would meet your higher-risk profile, and it could be saved within a stocks and shares individual savings account.
My only reservation about them is that, in my experience, over the years, such sums are often used for other purposes than pension provision, usually to deal with some sort of emergency. They are then no longer available for their original pension planning purpose.
One aspect of your situation concerns me here. As you haven't managed to save a deposit for a property, I imagine you don't have much in the way of cash savings.
In that case, you ought to consider building up a reserve before making any longer-term investments or considering additional pensions.
I would normally recommend that an individual builds up a cash fund equivalent to up to six months of net earnings. You could save such a sum within a cash individual savings account for tax–free interest.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
Final salary pension
A defined benefit pension scheme is one where the payout is based on contributions made and the length of service of the employee. A typical scheme would offer to pay one-60th (0.0168%) of final salary (the one you’re earning when you finally retire) for each year of contributions to the scheme (even though these years were probably paid at a lower salary). Someone retiring on a final salary of £30,000 who had been a member of the scheme for 25 years would receive a pension of 42% of their final salary (£12,300 a year before tax). Sadly, many companies are winding up their final salary schemes or closing them altogether, meaning pension benefits accrued after a certain date (or those available to new employees) may be on a less generous money purchase basis.