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    • Mudegg
    • By Mudegg 13th Jun 17, 5:37 PM
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    Mudegg
    Pension Profit/Interests Query
    • #1
    • 13th Jun 17, 5:37 PM
    Pension Profit/Interests Query 13th Jun 17 at 5:37 PM
    Hi Everyone,

    My workplace pension will be enrolled this month, I am just confused about how the pension works from certain aspects.

    My company uses The People's Pension, I've read the site and the pension basic guide on MSE.

    What I failed to understand is, The People's Pension says it will ask me to choose from one of the investment option, so low, medium and high risk one.

    But what difference would that make to my personal pension pot, will the profit generated by their investment somehow end up in my pension pot as interests?

    So I understand that my pension is made of my contribution/ employer contribution / government tax-relief. But apart from these, does the money in my pension pot generate interests as well like a savings account?

    I can't seem to find any information...... Please could anyone help?

    Hope I made myself clear.
Page 1
    • Linton
    • By Linton 13th Jun 17, 5:53 PM
    • 7,958 Posts
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    Linton
    • #2
    • 13th Jun 17, 5:53 PM
    • #2
    • 13th Jun 17, 5:53 PM
    Your and your employers contributions are used to buy funds of shares and bonds in your name. The shares may generate dividends which will be used to buy more shares & bonds. The bonds will generate interest which again will be reinvested. The shares will also hopefully increase value over time.

    Each year you should get a statement of what your pension pot is worth. This in most years should be significantly more than you would have expected simply from the amount of contributions paid in. However in some years prices will fall. That is to be expected. Bonds are normally less prone to major variations in price, however their return tends to be lower than that for shares.

    Low/medium/high risk refers to the split between shares and bonds. More risk means a higher % of shares. Assuming you are relatively young a higher risk portfolio makes more sense if you can accept short term falls in value because of the higher return and the fact that you have many years for the shares to recover.
    • dunstonh
    • By dunstonh 13th Jun 17, 6:31 PM
    • 88,303 Posts
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    dunstonh
    • #3
    • 13th Jun 17, 6:31 PM
    • #3
    • 13th Jun 17, 6:31 PM
    But what difference would that make to my personal pension pot, will the profit generated by their investment somehow end up in my pension pot as interests?
    The greater the risk you take, the higher the potential gains will be over the long term but also the greater the losses will be during negative periods. So, on a high risk investment, you would be inclined to expect the highest returns over the long term. However, each time you get a statement, it will zig zag in value significantly.

    The more cautious you are, the lower the expected returns will be but the ups/downs will be more wavy line than zig zag.

    does the money in my pension pot generate interests as well like a savings account?
    I am going to answer in a way that is not technically correct but for your case and your pension, it is. The answer is no. It is not like a savings account.

    You buy investments that get a daily value that goes up and down. Those investments generate income (which is reinvested).
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • Mudegg
    • By Mudegg 13th Jun 17, 8:45 PM
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    Mudegg
    • #4
    • 13th Jun 17, 8:45 PM
    • #4
    • 13th Jun 17, 8:45 PM
    Thanks, that makes sense.

    So, say my pension pot contributed by me, employer, government is 1000 pound for this year, but the investment option I chose performed well, so I could end up with like 1100 pound?

    And likewise, I could Also end up with only 900 pound if it performed bad.

    Is this correct?
    • Linton
    • By Linton 13th Jun 17, 9:01 PM
    • 7,958 Posts
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    Linton
    • #5
    • 13th Jun 17, 9:01 PM
    • #5
    • 13th Jun 17, 9:01 PM
    Correct, fortunately it is more likely to be up than down.
    • dunstonh
    • By dunstonh 13th Jun 17, 11:21 PM
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    dunstonh
    • #6
    • 13th Jun 17, 11:21 PM
    • #6
    • 13th Jun 17, 11:21 PM
    nd likewise, I could Also end up with only 900 pound if it performed bad.
    A loss does not mean it has performed bad.

    Losses are inevitable. They are also needed.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
  • jamesd
    • #7
    • 14th Jun 17, 3:49 AM
    • #7
    • 14th Jun 17, 3:49 AM
    The high risk one isn't really risky in the sense that you could lose the lot. It's just that if you were to sell during a down time you would take a loss. Since pensions are long term this doesn't matter much until you get within a few yeas of retiring.

    The high risk one will be all or mostly invested in shares. If that was just in the UK stock market a very bad year like 2008 would be a 45% drop in value. A very good year might be around 30% gain. Long term average has been about 5% plus inflation increase each year, so around 7-8% at the moment.

    The big risk is people seeing the big drop and getting so worried by it and the doom stories in the media that they sell. It's really a great time to be buying more.

    If you can't stomach a 45% drop even with people here telling you it's just what markets do you should pick medium risk instead. That replaces some of the shares / equities with bonds. Those move up and down less but also grow less. Less chance of being so worried that you sell but the price you pay is lower long term growth, so you end up poorer in retirement for the same amount of money paid in.

    Assuming that you're relatively young, go for the high risk one and see how you stomach the next big drop. If you can't handle it, back down to medium instead. Later on you're going to end up with hundreds of thousands invested. Seeing a pot of £100k drop to £60k can be a real shock even when you know it's just normal ups and downs. Important to get in some real money at stake experience before the amounts get that big, to help you deal with it!
    Last edited by jamesd; 14-06-2017 at 3:52 AM.
    • Mudegg
    • By Mudegg 14th Jun 17, 5:29 PM
    • 3 Posts
    • 1 Thanks
    Mudegg
    • #8
    • 14th Jun 17, 5:29 PM
    • #8
    • 14th Jun 17, 5:29 PM
    Thanks everyone, I think I got a clear idea of how it works now.

    I understand that since the rates can be so different based on the share market performance, they can't give you an estimated rate to tell you how much you are likely to earn, but the pension provider site could have given a simple example really, it's a bit frustrating that they just don't mention it anywhere on their site.

    Also the various calculators didn't help since they gave me the impression that there is a set amount you get as your final pension pot upon retirement that solely depends on how much has been contributed.

    It could just be one of those 'this is really obvious we assume everyone understand how it works so we are not gonna explain it' situations.

    Anyway, thank you everyone for your help!

    I think I'm gonna go with the high risk option then since I'm only 24 and it will be a really long time before I need to be more cautious about the risk.
    • MatthewAinsworth
    • By MatthewAinsworth 14th Jun 17, 5:45 PM
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    MatthewAinsworth
    • #9
    • 14th Jun 17, 5:45 PM
    • #9
    • 14th Jun 17, 5:45 PM
    I agree, especially when so young, you need growth and can wait out many market cycles
    • dunstonh
    • By dunstonh 14th Jun 17, 5:46 PM
    • 88,303 Posts
    • 53,531 Thanks
    dunstonh
    I understand that since the rates can be so different based on the share market performance, they can't give you an estimated rate to tell you how much you are likely to earn, but the pension provider site could have given a simple example really, it's a bit frustrating that they just don't mention it anywhere on their site.
    They do issue a projection using a range of assumptions. You will get one each year with each statement too.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
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