Company pension plan - join or not?

H3llR4iser

Hello all,

Recently I started a new job with a multinational company; Among the various perks they offer, there is a "company pension plan" that, on paper, looks quite inviting, as you'd pay 3% of your salary to it each month, and the company itself will make an additional contribution of 7% of your salary.

The not-so-funny part starts where it says that the money will be put into "medium risk" investment; Also, if I leave the company before 2 years time I'll be allowed to claim the funds back but if I stay over 2 years the funds will be locked in, with the only option to transfer them to another company plan in Ireland.

Now, the information above is LITERALLY all the company provides - I am still bugging HR to see if there are any more financially-savvy people I could contact, perhaps in the very financial institution (whose name I still don't know) providing the service.

Questions now:

1. I know the 3% will be calculated from the monthly GROSS salary, e.g.:

GROSS 2400€, 3% = 72€

But will it be deducted before or after taxation? In other terms, with the example above, tax will be calculated on the remaining 2328 or the full 2400? Being a private fund, I suspect the latter...

2. What is a pension fund's real risk? When they say "medim risk", does it mean I might go and ask for my money in 30 years time and be told "sorry, we put it on some shares that looked solid but turned out to be toilet paper"?

3. Inflation - is it even taken into account? What I mean is that 30 years ago, a newspaper costed a sum that would be arithmetically exchanged for about 0.08 -0.09 cents today; It's a purchasing power loss of around 1000%.

Another thing that bugs me is the locking of the funds after two years - In case I decided to change jobs, I would need to find a company that offers a pension plan and is in Ireland, or I would essentially lose the money put in the plan until I'm 65 or so.

I don't really know what to do; At a first glance, it's a classic case of thinking that joining the pension plan is the right thing to do, being sensible and planning for the future. Looking again, however, it looks that it might NOT be very sensible at all, involving more risks than rewards.

Being reasobably away from retirement (32) I am inclined to opt out of the plan for the immediate future, as the money is a bit tight and there will be some expenses coming over the next year or so, and then join as the waters calm down a bit (hopefully, by then I'd have collected more information).

I'd like to hear some thought on this.

Thanks!

KenHy

1. That should be a deduction on your gross pay - i.e. you won't pay PAYE on it. You do pay PRSI/USC on it though. See - http://www.citizensinformation.ie/en/money_and_tax/personal_finance/pensions/occupational_pensions.html

2. I've no idea - you'll have to get details from the provider to see what that relay means. It is always possible that they could loose all your money - probably unlikely though, it's definitely not gaurenteed that you will make money either though. They will likely invest in numerous places though - so even if one investment goes down the drain - they would hope the rest won't. e.g. a large fund will be very diversified.

3. Not sure what you mean by this - it's likely a defined contribution scheme - which means that you contribute X amount per year - that's invested and when you retire the proceeds of these investments are used to pay you a pension - there would be no gaurentee of how much that is however. It's not linked to inflation at all. (you would be hoping that the investment return will be above it though!)

Can't really answer is it better for you to take them up or not - need to balance out all the options - overall it is probably best to start planing pensions as early as possible as the later you leave it the more expensive it gets. And if you don't take it up you loose out on that 7% - even if you can never get that for years! But as you've pointed out there are a few good reasons why you'd prefer to just look after it yourself - I'd talk to an expert on the matter. If your working for a large company I'd be surprised if they/their pensions fund managers didn't have someone available to explain the workings to you. Just keep hassling them to get someone for you!

Browney7

7% for 3% is quite an alright deal. At 2400 per month though you wont be on the higher rate of tax I presume. So a 3% gross contribution will cost you approx 2.4% of your net pay and for that you get 10% put into a plan for 30 odd years. Youll more than likely have a tax free lump sum on retirement and the annuity income will get taxed.

If you leave employment you could leave your money where it is or to a retirement bond id imagine

FernandoTorres

It's a no brainer, you get 10% from the employer (closest thing you'll get to free money these days!) and you'll get tax relief on your own contributions, although if you're on the lower rate this won't be as beneficial as if you were on the higher.

It's a DC scheme so essentially its your own pot of money. It's in trust so not linked to the employer so your fund can't just dissapear. The medium risk fund they refer to is probably just the default fund that the trustees have chosen. Usually you can choose your own fund if you want. As with all investments, the value can rise and fall. Inflation doesn't come into it as you're contributing every month based on your salary so unless your salary is staying static for years on end its not a worry.

broker2008

Join

Generally when you get "this is the expected value of your fund at 65 and this is what you'd be able to get as an annual pension" projections, they will take inflation into account. Any investment returns should be inflation + risk rate though of course there is no guarantee
In my own place I can have the option of lower or higher risk funds as I choose, and later on I can switch to more safer funds as I get closer to 65 and more nervous.

The 2 year thing is a standard rule, it's not just your company. Return of contributions up to 2 years, otherwise your pension pot stays as a pension pot.

The tax relief and generous company contributions - I'd say go for it, but inquire about other fund investment options for the pension if you can

Henry Ford III

Go for it.

Most schemes offer permanent health insurance and death in service benefits too. Are these included?

The 2 year lock in is a legal requirement btw. If you take a refund of contribs. before 2 years scheme service you'll lose the employers contribs.

Marty09

Yes , go for it.
In present recessionary times 7% employer contribution is v.good.

The 2year lock down as stated is standard anywhere but if you move jobs after 2 yrs it should be possible to transfer the funds to your new pension if pensions are similar.
Again ask the pension provider of your employer on this to be sure.