How do you choose a pension?

jenner wrote:

BUT, firstly the figures above from my existing pensions, does anyone know if they are today's money, or the amounts that will be in 30 years time?

Figures should be in today's money. This permits an assessment of the extent to which you need to make up the shortfall (you state £12K net) by increasing contributions, etc.

secondly, how on earth do you choose a pension when 'past performance is no indicator of future performance'?

Fund performance is just one consideration in "choosing a pension". Another major factor is the effect of charges (fund-based and adviser charges), especially over the long-term. Also the flexibility of investment options. A pension is ultimately just a tax wrapper.

I keep seeing on pension websites that you 'must' get an annuity on retirement from your fund, but Im sure I have seen members on here say that this has changed? What is the rule, I dont really like the idea of an annuity

Annuity purchase is the most common choice for income in retirement. However, it is by no means the only choice. You can now consider 'income drawdown' (if you have a SIPP), and there are many 'third way' (but not in the Nu-Labour sense) products available too, which bridge the gap between annuities and income drawdown.

When you retire - many, many years from now (happy days! ) - there may well be a whole multitude of options available that mere mortals such as I cannot currently conceive. I would not consider the ubiquity of annuities in 2009 as a reason not to plan for your retirement using pensions!

Experiment with the Hargreaves Lansdown pension calculator. It suggests that you might reasonably expect to obtain £1210 a year of pension income for each £100 a month that you contribute for every year from now until you are 57.

That's assuming you take no lump sum. Better in your case is to take 25% lump sum and use that extra capital to increase your income until you get the state pensions. In this case you'd get £8310 of cash and £1025 of ongoing income for each £100 a month you pay in. The £8310 of cash could be spent, leaving none left at age 68, to get an extra £755 a year of income. So that's £1780 a year of income per £100 of contributions until you're 68 then dropping to £1025 after that when you're getting more income from the state pensions and possibly work pensions.

To further increase the income available before getting the state pensions you could also make stocks and shares ISA investments. Each £100 a month of S&S ISA contributions might be expected to deliver £26,500 of capital at age 57. Spending that as extra income, leaving none of it left at age 68, would produce around £2400 of income a year until you get the state pensions, then no more from age 68.

You expect £9,500 of pension income at state pension age and want £12500 net, about £12750 gross. This means that you need ongoing personal pension income of £12750 - £9500 = £3,250.

£3,250 / £1025 of ongoing pension income = 3.17 * £100 = £320 a month of gross pension contributions a month. That's £256 net before tax relief of pension contributions to deliver the target income when you're getting state and work pension money.

Moving on the age 57-68 the pension delivers 3.17 * £1780 = £5640 a year of income for those years using the lump sum to boost it. You're after £12500 net so this leaves you short by £12500 - £5640 = £4390. I use net target for this because much of the income will be from the ISA or pension lump sum and be tax free, so the ongoing pension part will be within your tax free personal allowance.

The S&S ISA delivers £2400 per £100 contributed so you need £4390 / £2400 = 1.83 * £100 = £183 a month of S&S ISA contributions to boost your income until the state and work pensions start.

So to probably reach your target of retiring completely at age 57 you need to make:

£256 a month of net pension contributions and
£183 a month of S&S ISA contributions
and need to increase those each year by RPI inflation.

As a very rough approximation for each age you could retire you'd need to contribute:

Age 55: £339 pension, £242 S&S ISA
Age 56: £295 pension, £210 S&S ISA
Age 57: £256 pension, £183 S&S ISA
Age 58: £223 pension, £159 S&S ISA
Age 59: £194 pension, £139 S&S ISA

Assumptions: born 1 Jan 1972, annuity purchase with 50% spouse pension for all income production, 7% growth, 1% annual investment charges, 3% annual pension increase, 5 year guarantee, income monthly in advance. Two years around 57 approximations are 15% a year compounded decrease or increase in contributions required. £9500 personal allowance in retirement, enough for all taxable income before then.

Sorry about that. Yes, you're right that you'd need £7k or so from the ISA investments, so the ISA monthly amount increases to £291.