Matt asks: “I’m struggling with our DB schemes and how to include those in the net worth calculation. I also have a DC pot from a previous employer where the statement is issued annually. How should I account for the monthly value of this?”
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Q&A 43 – How To Treat DB Pension In Net Worth – Shownotes
Today’s question comes from Tony:
I’m struggling with our DB schemes and how to include those in the net worth calculation. Obviously our pots have no capital value so how do I include them?
I also have a DC pot from a previous employer where the statement is issued annually. How should I account for the monthly value of this?
DB Pension Schemes
It’s a toughie Matt. My wife is in exactly the same boat and it’s a challenge we had in recording the results for the Moneystepper Savings Challenge. Clearly putting more into a DB pension in order to increase the final salary should be rewarded, but if you are putting money into something which can’t be valued it becomes tricky.
As you say in your question, the DB pension doesn’t have a specific inherent value today. However, it does have significant value in the future.
As such, our solution (and the suggestion for the Moneystepper Savings Challenge and the Tracking Template) is not include these figures in your net worth, as it cannot be accurately estimated and cannot be turned into cash today.
The exception for this is if your pension provider offers you a transfer value, and then you could use that in your net worth.
However, you would include your contributions in the “allocated to” section in the “monthly budget” tab, but they don’t actually hit the “net worth” tab. This way your savings rate is accurately reflected and you are rewarded for saving into your pension scheme.
What you must do, however, is keep your final salary pension in mind for any “financial independence” and “retirement” decisions. The future income generated from your DB pension can be included in your future income to determine if your retirement income will exceed your expenses, or at least allow an acceptable draw-down rate.
DC Pensions
Regarding your question on the DC pensions, this is a little more straight-forward. This should be included in your net worth, and if you only receive an annual statement, then simply update this annually. Whilst it may skew your figures each month against your pro-rata goal, it is better than taking the time to estimate given that it has no impact on your current cashflow or savings rates, etc.
However, these days, the majority of DC schemes will provide an online account where you can login and take the closing value of your account from the previous day. If you have this option, it’s probably worth the 60 seconds each month updating your accounts to keep an accurate reflection of its true value in your net worth calculation.
Moneystepper Savings Challenge
Thanks for your question Matt and thanks for being part of the challenge. If you want to join The Moneystepper Savings Challenge, it’s currently only £39 to join. This will increase shortly back to the standard entry fee of £99 so you can save big (in every way) by joining today. I hope to see you there.
Also, as a podcast listener, use the promo code “podcast” and you can receive an additional 10% off entry. See – I told you it was worthwhile listening!
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Sara @ Debt Camel says
It’s not easy to clue a DB pension but I think if you are interested in “the complete picture” you have to try. For most people lucky enough to be in a DB pension this can be a very large part of their overall wealth. And for many people there will be difficult years, perhaps you have recently got a large mortgage and a young family, where the pension is the only part of your “weath” that goes up.
The government faced this valuation problem a few years ago when setting the LTA (it doesn’t really matter for this purpose what that is as it is irrelevant for the vast majority of people) and they came up with the figure of multiplying the DB pension by 20. But declining annuity rates means most experts now reckon multiplying by 28-30 would be more accurate, see http://www.professionalpensions.com/professional-pensions/news/2400367/will-the-government-change-how-db-schemes-are-valued-for-lta-purposes.
You can also think of the State Pension as a DB scheme and multiply that in the same way.
Adnan from The Money Habits says
Transfer values can also be misleading as some pension providers actually can show reduced transfer value if they are transferring your pension to other provider. I have written this post on how to understand your pension costs and charges and may provide you some guidance in this regard
http://themoneyhabits.com/how-to-understand-your-pension-costs-and-charges/