Pensions - yay or nay?

uf353432

I have a private company pension and the company pay into it the same as I contribute - lucky old me. Hubby has a basic stakeholder pension which we pay £100 per month into, both of us are early thirties and have been paying into pensions for a number of years.

Hubby got a predictive statement of what his pension will be worth per month if and when he retires - £16 per month. Now logically I don't think its worth us paying £100 per month into a pension for a return of £16 - am I missing something?

I'm not up on pensions - I do however want to provide for our future - and I know that If we put more into the pension we'll get a bigger return - but £100 is currently our maximum available for this purpose, and also think based on this return we are simply throwing hard earned cash into a black hole - someone else is getting our money and not us!! I can't help thinking that I would get a better return if I either saved the cash and then reinvested it - or paid an extra £100 off the mortgage so that we have the equity in our property which we can utilise when we retire.

Can anyone who is pensions and or savings savvy offer me any guidance on this issue.

EdInvestor

uf353432 wrote:

Hubby got a predictive statement of what his pension will be worth per month if and when he retires - £16 per month. Now logically I don't think its worth us paying £100 per month into a pension for a return of £16 - am I missing something?

I guess this projection is

a) inflation adjusted
b) based on the most expensive annuity money can buy, with every bell and whistle available including index linking
c) based on extremely conservative projected fund value or on a fund which has extremely poor potential.

Which insurance company is the money with and what fund is it invested in?

Friend of mine got a projection from Allied Crowbar recently that said the fund would be worth the same if he paid in for another 23 years as it was worth now.

He moved it away from there smartish I can tell you, and it's already up by about 10%

deemy2004

Put your £100 a month into a cash ISA

£16 per month --- you won't be able to buy a packet of peanuts with that in 25 years time
£100 per month - without indexing i.e. paying exactly £100 per month, at 5% would be worth £62,000 in 25years time !

So go figure... and don't listen to none of the nonsense that Cash Isa's end in 2010 as they will either be extended or replaced with something very similar

P.S. The tax free income per month on a fund of £62k would be £260 per month !!!

If I were you I would aim to save the maximum i.e. £3k each per year - imagine how big your pot will be in 25 years time !

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Still imagining ?
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Okay it would be £311k !!! - Providing an income of £1300 per month - TAX FREE !

And guess what ? The money will ALWAYS be yours ! - No gready insurance company taking it ALL away in exchange for a paultry annuity which if you croke next day after signing on the dotted line means all that capital is GONE !

Who needs a pension ?

ronaldmacdonald

crikey £16 a month? i would trouser the loot now to be honest, its likely if/when you get to 67 that your pension will be classed as income against any benefits you may be able to receive, so why save £100 a month now to get a return of £16 a month in 30 years time and potentially lose out on any meanns tested benefit that you could be eligable for which would probably be more than £16 a month anyway lol

dunstonh

Something is not quite right, unless you happen to be 64.

Ed is quite correct on the logical reasons it may be there. I have come across a number of Pearl projections that show a decreasing fund value over time. Anything is possible.

Modern pensions can be much better value than old personal pensions (pre 2001). However, some pre 1995 pensions have guarantees built into them which can make them very attractive too.

ReportInvestor

Standard assumptions for such projections now include:

Full Pension to be paid for minimum of five years even if you keel over on retirement
1/2 pension for your surviving partner
Pension increases in line with inflation
Future income quoted is in today's prices, taking inflation into account.

EdInvestor

I forgot to mention that it might just be a mistake: best to ring up and rule that one out first

BTW if the idea of these new projections is to wake people up so they are galavanised into action to contribute more to their pensions, I have to say it doesn't seem to be working.

Rather, people are so unimpressed by the meagre amount they can expect that, like this poster, they decide to stop pension saving completely and instead do something that seems more productive, like pay off the mortgage.

Department of unintended consequences, methinks.

Pal

A slight misunderstanding by Deemy and others: Statutory Money Purchase illustrations are in real terms, so £16 is the projected value of the monthly pension at the retirement date, adjusted for inflation. I.e. £16 a month will buy about 32 packets of peanuts both now and in retirement.

That said the figures still look low. Perhaps the fund is invested in cash? If so the projected returns would be barely above inflation. Definitely need to look at the statement and start asking questions, and also consider the investment funds being used. The adviser that sold the pension should be willing to provide an explanation, particularly if commission is being paid on the policy.
The use of equity in a house to fund retirement is a trap that many people are falling into (mainly, it must be said, those that can't be bothered to save for their retirement). It relies on either selling up and moving, or expensive equity release. If longevity rates are making pensions expensive, the impact on equity release costs is going to go through the roof!

wayne

i stopped paying into my pension the day my dads matured and was worth a lot less than he,d payed into it.i now pay into an isa.

dunstonh

i stopped paying into my pension the day my dads matured and was worth a lot less than he,d payed into it.i now pay into an isa.

On identical investment funds, the pension will have a greater maturity value. It's a bit like saying i sold a Jaguar because it didn't go very fast and bought a Skoda instead.

A pension and an ISA are just tax wrappers. They have no value. One will not outperform the other. It is what you place inside of them that matters. And if you place the same thing inside of each of them, then the only difference will be the charges, taxation and wrapper rules (such as how the maturity is paid).

EdInvestor

Then again, given the addition of tax-free cash upfront to a pension*, if after a decent period it is failing to make more than what you have put into it, it's not surprising that an investor might get discouraged.



*an ISA doesn't get tax free cash upfront, but is tax free at the end, unlike the pension.