daveyeff wrote:Robert, can you explain how the money paid to individuals is paid until death. on a pound for pound basis you receive thousands upon thousands more than you pay in. an example, a mate of mine who took his in 1999. he receives about 800 quid a month. that's 18 years. over that time he has received well over 150 grand but paid in nowhere near that amount. how can this be done?
Good question!
It’s partly down to the other contributions made by the employer and the government(tax relief) which often amount to a lot more than the worker pays in. Plus the compounded investment returns over a long period of time will grow the money massively. So we’re talking about pension pots worth huge amounts of money which can increase in value by £ Billions in a good investment year.
But the answer really is why DB pension schemes(I assume that’s what your mate has got?) are a noose around the neck of many employers and have been closing left right and centre for the last 20 years.
They make promises to thousands of their workers to pay out an income for life and hope that the contributions and investments will provide a big enough pot to pay out for everyone. In practice it’s the older workers or those who take their pensions relatively early in a schemes’ existence who get the best deal. Because the terms are often better for those people and they get worse for later entrants – the RM pension scheme is a good example, with Sections A, B & C all getting progressively worse.
Then the scheme starts to struggle to keep up with its liabilities due to an ever bigger membership, plus increased life expectancy and lower than expected investment performance. It then gets closed for new entrants and in turn for existing employees too – again RM is a good example. But because the pensions of those who’ve already taken their pensions can’t be touched(except under certain circumstances), they continue to get their nice big pensions, while the current workers get less.
Basically the workers of today are paying for the pension promises made to the workers of yesterday because the schemes can’t cope with paying out generous incomes for everyone. So your mate gets a nice income for life, while someone 20-30 years younger and doing the same job as he did will be getting less to pay for it.
