Over the last couple of weeks our chatroom at work has revealed that nobody completely understands pensions. I find financial planning quite interesting, so this blog post is my attempt to gather what I think I know about the Civil Service pension scheme nuvos and hopefully be corrected by people who know more than me.
It should be pretty obvious from the fact this is written on my personal blog that it is absolutely not affiliated with the Civil Service and nobody there has reviewed it.
The first thing I had to get my head around was that there are at least two different types of pension scheme around.
The one I’m most used to is defined contribution. This is pretty straightforward because it’s how you expect these kind of things to work intuitively:
In the double-entry bookkeeping software I use, defined contribution is simple:
Account: Income Account Credit Debit August salary Gross salary Income 1000 Net salary Assets > Current account 600 Tax Expenses > Tax 200 Pension Assets > Pension 200
This means that my pension account has a balance which I can monitor over time.
Defined benefit schemes, on the other hand, are a bit weird.
As the name implies, they define the benefit you’ll receive when you retire and then the pension provider adjusts your contributions so that they have enough money in the bank.
Defined benefit plans confuse me because there doesn’t seem to be a way to reconcile the amount you put in with the amount you get out. It all looks a bit arbitrary.
In double-entry bookkeeping, I’ve set it up like this because I don’t know what else to do:
Account: Income Account Credit Debit August salary Gross salary Income 1000 Net salary Assets > Current account 600 Tax Expenses > Tax 200 Pension Expenses > Pension 200
Instead of storing my pension contribution as an asset and being able to track its change in value, I write it off as an expense.
nuvos is the default Civil Service pension at the moment. It’s a defined benefit scheme that comes with a 36 page instruction book which is an impenetrable FAQ.
The interesting parts can be distilled into a few bullet points:
This is changing slightly, but not massively, in April with the introduction of the new pension scheme “alpha”.
Written on Monday 16 February, 2015