Police pension is too expensive for my daughter: Should she give it up and save elsewhere?

My 25-year-old daughter joined the police force two years ago and automatically enrolled in the police pension scheme.

Of her £28,000 a year salary, she pays 12.5 percent or £300 a month towards her pension.

This seems like a very high amount compared to what you would normally pay into a company pension plan (5 percent?), and she struggles to keep up with rent and living expenses.

I believe that this is no longer a traditional final pay scheme where you get a pension based on your last annual salary, but that you earn a pension based on the annual salary paid. Not nearly as good.

So, should she continue paying to this scheme or would she be better off:

1) Pay the money in a Lifetime Isa instead to save for a house, and then/or

2) Invest in a personal pension plan?

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Steve Webb replies: There’s no question that a 12.5% ​​contribution to a retirement plan is significantly more than many people contribute, and it’s understandable that your daughter is considering whether she can afford this or not.

However, before opting out of this retirement plan, it’s worth understanding how valuable it is.

The first thing to say is that although your daughter pays about 12.5 percent of her salary, the police as her employer pay about double this amount.

This is because the pension she receives is very valuable and your daughter only pays about a third of the full cost of the pension.

If your daughter were to opt out and (say) move into a personal pension, she would throw away all these employer contributions and save a fortune to match her police pension through a personal pension.

One of the valuable things about the pension is that upon retirement it still offers a guaranteed benefit linked to salary.

You rightly say that this is now calculated on the basis of the average salary over the career rather than the final salary, but police officers now accrue a higher percentage of pension than in the old scheme.

As a result, the new arrangements may be more generous, especially for those who do not end their careers in a very senior position.

You can read more about the reason for these changes here.

It would be fair to say that providing these salary-related, guaranteed pensions has become so expensive that most private sector employers have given up on offering them, so they should not be given up lightly.

A second important point is that the police pension scheme (for newcomers) has a retirement age of 60, which is much lower than many other schemes.

Your daughter can therefore receive a full pension from this scheme for at least eight years before she becomes entitled to AOW (aged 68 under current legislation).

While most people can expect to have to work in their mid to late 60s before they can afford to retire, if your daughter stays in this arrangement throughout her career, she has a lot more options than to retire early. most people.

A third advantage of investing a pension is that you receive a tax reduction on your premiums.

While your daughter may see around £300 a month in pension contributions on her pay stub, it will only cost her £240 a month (assuming 20 percent income tax), because the pension contributions are taken off her pay before her tax is calculated.

Active participation in a retirement plan can also provide other benefits, such as a life insurance policy that would be lost if your daughter opted out.

There have recently been stories of NHS workers opting out of the NHS pension scheme for cost reasons and then tragically dying, only for their families to discover that there was no death benefit to support them.

You will find an overview of everything Here are the benefits from the police pension scheme.

As for the option to save in a Lifetime Isa to build up a down payment on a house, I can see why this can seem appealing, especially if your daughter is paying a lot of rent.

However, from the numbers you’ve provided, it sounds like she’d only save about £240 a month by opting out, or maybe just under £3,000 a year.

Given the typical size of first-time buyers’ deposits, at that rate, it could take many years to build up a credible down payment, and in all that time she’d be missing out on valuable retirement benefits, including a large employer contribution.

I appreciate the pressure on young people and the difficulties in saving enough for a down payment, especially with bills rising.

For example, I know that some have moved in with family for a while to save on rent and build up a deposit faster, but I don’t know if that’s something for you or your daughter.

I would just like to say that if she were to consider giving up her police pension, she should ideally do so for the shortest possible period of time, as it remains an extremely valuable employment benefit.