Employer Pension Vs. Private Pension

Published December 20, 2017
If you don't have an employer pension plan, you can use a private pension (Personal Pension) to create one for yourself. Every dollar you put in buys you insurer-guaranteed income.
  • If you have an employer pension plan through your employer, congratulations! You’re part of an exclusive and ever-shrinking group. But what about the rest of us?
  • The closest thing to an employer pension plan available to buy for yourself is the Personal Pension.
  • In this post, I’ll explain a little bit about how the Personal Pension works and then describe both how it’s similar and how it’s different from an employer pension plan.

The Personal Pension: How it Works

Like the employer pension plan, the Personal Pension provides you with a predetermined amount of monthly annuity income once you retire. The monthly income never changes, no matter what happens in the market or how long you live. Contribute more and the amount of income you’ll get in retirement goes up. Stop contributing and the amount of income you’ll get each month stays where it is.

The income is guaranteed by a highly-rated insurance company, such as Lincoln Financial or Guardian.

To explain how it works, let’s use an example.

A Personal Pension Example

For example, let’s consider a 30-year-old male signing up for a Personal Pension that will start on his 70th birthday. The following table shows how much income he can expect to get for every dollar he puts in between now and then. To explain the first row of the table, at age 30, a $1,000 contribution would get him $291 per year starting at age 70.

Because the Personal Pension provides income for life, it’s impossible to calculate the return he’ll make ahead of time. But, if we assume he lives until 80, his IRR will be 2.6%. The longer he lives, the more income he’ll receive, and the greater his return will be. If he lives until age 100, his IRR will be 4.2%.

The rest of the table provides an estimate of future rates, but those are likely to change once he reaches those ages. Assuming no change in rates, though, the earlier you contribute, the more income you’ll get.

Personal Pension Rates

Current Age Annual Income per $ Contributed IRR @ Age 80 IRR @ Age 90 IRR @ Age 100
30 29.1% 2.6% 3.7% 4.2%
35 24.9% 2.6% 3.8% 4.3%
40 21.3% 2.5% 3.9% 4.5%
45 18.2% 2.3% 4.0% 4.6%
50 15.4% 2.1% 4.1% 4.8%
55 12.8% 1.7% 4.2% 5.0%
60 10.7% 1.1% 4.3% 5.4%
65 8.7% -0.5% 4.3% 5.7%

Rates as of 11/20/2017 for a male with income starting at age 70 and without the Refund At Death option.

Let’s say this 30-year-old gentleman contributed $1,000 annually until he turned 70. Using these rates to project forward, that would produce a pension benefit of $6,600 per year starting at age 70 and continuing for life. ($10,000 annual contributions would result in $66,000 per year.) If interest rates go up, it’ll be more.

Living to 100 would mean paying $1,000 for 40 years and then receiving $6,600 for 30 years. Over those 70 years, his pension will have produced an IRR of 4.6%.

How Is It the Same As an Employer Pension Plan?

  • Both provide a guaranteed, monthly fixed income that lasts for as long as you live and aren’t impacted by market ups and downs.

How Is It Different from an Employer Pension Plan?

  • Unlike the employer pension plan, the Personal Pension belongs to you, not your employer. You can take it from job to job and don’t have to worry about years of service or vesting.
  • With the Personal Pension, you choose the insurer or insurers you want to work with, and, although you can use 401(k) rollover, IRA and other pre-tax funds to purchase it, it’s not offered through your employer (yet).
  • The Personal Pension is generally more flexible than an employer pension plan. With a Personal Pension, your retirement paycheck is dictated by the amount you contribute, instead of an employer’s formula. That means you can contribute to it whenever you want, making the Personal Pension’s monthly annuity income as large or small as you want.
  • If your employer runs into trouble, your employer pension plan might end up with the US-government backed Pension Benefit Guaranty Corporation. If the insurer backing your Personal Pension were ever to run into trouble, the insurer would need to work with your state’s State Guaranty Fund.

Next Steps: How Can I Start a Personal Pension?

If you’re interested in starting you own Personal Pension, you can do so here on our website. Click below to see what annual contributions into a Personal Pension will guarantee you in annuity retirement income. After just a few years in retirement, you’ll have recouped your initial investment, and the rest will be profit. A $5,000 contribution is necessary to start an account.

From there, you can fill out the information to have one of our specialists follow up with you, or continue with the enrollment process on your own. To do that, start with the Personal Pension Builder, where you’ll be able to set a goal for how to grow your pension over time. Note that all future contributions are optional, but it’s always great to have a goal.

 

Interested in learning more about retirement and the Personal Pension? Sign up here to be on our newsletter.

 

Matt Carey

Matt Carey

Financial Planning Professional

Matt Carey is the co-founder and CEO of Blueprint Income. He believes in the power of technology to make retirement simpler. Matt is a regular contributor to Forbes.com and has been quoted in both the New York Times and Morningstar.