Advice for first time pension planner

Lokolo

mickflynn39 wrote: »

Dunstonh, you accuse me of posting myths. The one above is the biggest myth of the lot. I put my rose tinted glasses on and used the Financial Times pensions calculator. I made the following assumptions.
1. The fund would grow by 5% a year (4% is nearer the mark and over the last 10 years it's been less than half of that).
2. None of the fund would be converted into a tax free lump sum.
3. My age was 25 and I would retire at 65.
4. I wanted a pension of £15,000 which would increase in value by 3% per year to counteract inflation.
5. My contributions were to rise in line with inflation.
6. Inflation assumed to be 2.5%.

Using the following management charges which included all hidden charges (don't forget I've got my rose tinted glasses on) the contributions required were as follows:

1.5% £690 per month (includes tax relief)
1.0% £620 per month (includes tax relief)
0.5% £555 per month (includes tax relief)

I rest my case.

You made assumptions, so did he. He is comparing like for like. He isn't saying everyone will get £10k a year, but people can.

Read his post again.

£100pm in your 20s can get you over £10k a year pension in todays terms.

For instance, if you have your £600 a month etc. Now do it for someone whose started at 45.

Dunston is comparing what it is like for someone starting at 25 to someone at 45. His number's aren't going to be exact. But his theory is correct, and starting at a much younger age with lower contributions is going to return better than someone starting at 45 with higher.

You could even prove that yourself if you do it using the same assumptions.

mickflynn39

You made assumptions, so did he. He is comparing like for like. He isn't saying everyone will get £10k a year, but people can.

I would delete your post as soon as possible before anyone sees it or you will never be taken seriously again.

mickflynn39

You may be surprised to know that I've got some more interesting facts for anyone thinking of starting a personal pension in a bid to try and restore some balance to this debate.

Life expectancy is rising. Men who read this forum and reach 65 in 2020 are likely to live to over 90 years of age. As a consequence of rising life expectancy annuity rates have fallen and could well continue to fall. In 1980 a £100k pension fund got you a flat-rate income of £17k per year. In 2011 this had dropped to £6k. If you want an inflation linked pension you would be lucky to get £3500 (most people get less than this). 90% of retirees get the equivalent of a £1-2k inflation linked pensions. Currently anyone on a basic state pension gets almost £1500 a year in pension credits. Plus they receive other things like council tax benefit and help with their rent. Someone managing to save £45k could buy an inflation-linked annuity of just over £1.5k a year. But these earnings would automatically be deducted from their pension credit and other benefits leaving them not a penny better off. The way the pension credit works at the moment, it makes saving completely futile for anyone likely to have a pension pot of £45k or less - currently 8 out of 10 people. When you take account of the other benefits people on the basic state pension get, for the majority of workers saving for a pension may help get the government off the hook of looking after us and may make billions for the pension industry, but it will do less than nothing for most of the people who have saved.

laurel7172

My two pennorth:

It looks as if pension credits are going to disappear or be severely limited, replaced by a higher state pension for all. Planning for a retirement 20-30 years away on the basis of a particularly generous current benefit system is fairly risky. I've been aware for some time that my level of contributions put me in the pension credit mugs' zone, but I figured government policy had a long time to change, and I'd better take care of myself. Under the proposed system, I'd be glad I saved (subject to previous comments about policy having *lots* of time to change).

Your pension is a protected asset. If I'm made redundant, or become too sick to work, I will lose just about every other investment I have before I can get help from the state. But my pension savings will be safe.

Of course, that doesn't invalidate some of the other comments about charges etc, but pensions aren't all bad.

hugheskevi

Life expectancy is rising. Men who read this forum and reach 65 in 2020 are likely to live to over 90 years of age. As a consequence of rising life expectancy annuity rates have fallen and could well continue to fall.

Aside from Defined Benefit pensions, life expectancy increases will impact any form of retirement provision, eg, ISAs, housing - the money has to stretch further from all of them.

If you want an inflation linked pension you would be lucky to get £3500 (most people get less than this). 90% of retirees get the equivalent of a £1-2k inflation linked pensions.

What data source shows that 90% of retirees get £1-£2K? The Pensioner Income Series on page 45 shows that 66% of recently retired households receive a median amount of private pension income of £130 p/w.

The amount of income from Defined Contribution sources is quite small as very few will have had more than a decade or so of saving in them, and many reaching retirement now will still have a decent amount of Defined Benefit pension provision.

Someone managing to save £45k could buy an inflation-linked annuity of just over £1.5k a year. But these earnings would automatically be deducted from their pension credit and other benefits leaving them not a penny better off.

Savings Credit component of Pension Credit? Someone with basic state pension only - £97.65 p/w - plus £29 of private pension income would still be receiving Guarantee Credit component, so would be passported to full Housing and Council Tax Benefit. They receive 60% of the extra £29 from the Saving Credit, ie £17.40 per week. So they are considerably better than a penny a week better off.

The way the pension credit works at the moment, it makes saving completely futile for anyone likely to have a pension pot of £45k or less - currently 8 out of 10 people.

So it would be pointless to say, build up a pension pot of £10,000 and Trivially Commute it - that amount of capital would have zero impact on Pension Credit.

Is the 8 out of 10 people just for Defined Contribution pension pots? A lot of people have very small DC pots as they have DB pensions which make them ineligible for Trivial Commutation.

mickflynn39

What data source shows that 90% of retirees get £1-£2K?

I can't remember where I saw that information but rest assured it was from a reputable source. Here's a link that states that the average pension pot is only £25k which would seem to back up my point. http://www.dailyexpress.co.uk/posts/view/103089

mickflynn39

Savings Credit component of Pension Credit? Someone with basic state pension only - £97.65 p/w - plus £29 of private pension income would still be receiving Guarantee Credit component, so would be passported to full Housing and Council Tax Benefit. They receive 60% of the extra £29 from the Saving Credit, ie £17.40 per week. So they are considerably better than a penny a week better off.

I've only been investigating personal pensions for the last 2 weeks so I bow to your greater knowledge. It would seem that my source for this information was being economical with the truth.

mickflynn39

So it would be pointless to say, build up a pension pot of £10,000 and Trivially Commute it - that amount of capital would have zero impact on Pension Credit.

Is the 8 out of 10 people just for Defined Contribution pension pots? A lot of people have very small DC pots as they have DB pensions which make them ineligible for Trivial Commutation.

You've lost me. You obviously know a lot more than me about Pension Credit. Once again I bow to your greater knowledge.

mickflynn39

Your pension is a protected asset. If I'm made redundant, or become too sick to work, I will lose just about every other investment I have before I can get help from the state. But my pension savings will be safe.

That's a valid point. I suspect that any future governments are going to become increasingly generous to the older generation simply because they are going to form a larger and larger part of the electorate as time goes on. The ConDems have already started the ball rolling with a view to winning some votes at the next election. In my opinion this would mean it is less likely that we are going to have to rely on our own pension provision as much as we think.

dunstonh

Dunstonh, you accuse me of posting myths. The one above is the biggest myth of the lot. I put my rose tinted glasses on and used the Financial Times pensions calculator. I made the following assumptions.
1. The fund would grow by 5% a year (4% is nearer the mark and over the last 10 years it's been less than half of that).
2. None of the fund would be converted into a tax free lump sum.
3. My age was 25 and I would retire at 65.
4. I wanted a pension of £15,000 which would increase in value by 3% per year to counteract inflation.
5. My contributions were to rise in line with inflation.
6. Inflation assumed to be 2.5%.
7. No spouse or dependent's pension.

Using the following management charges which included all hidden charges (don't forget I've got my rose tinted glasses on) the contributions required were as follows:

2.0% £767 per month (includes tax relief)
1.5% £690 per month (includes tax relief)
1.0% £620 per month (includes tax relief)
0.5% £555 per month (includes tax relief)

I rest my case. Just for a laugh I would appreciate it if you could provide a breakdown of the fantasyland figures you quoted.

Your assumptions are unrealistic. However, they are assumptions. If you want to work on them then fine. You are also using short term information and timing to make your figures appear worse. For example, the use of 10 year figures in one of the worst 10 year periods for generations. If you want to work on those figures then it is cautious to do so and fine. However, over 20 years, the figure for just average performance on balanced managed funds is 7.266% p.a. AFTER charges.

I used the same assumptions as you for a 25 year old finishing at 65 and income using market rates and real pension products with real charges and not hypothetical and the starting premium @ 7% p.a. before charges is £208pm. At 5% p.a. before charges it would be £321pm. (source:O&M Pension profiler).

I used growth rates before charges to actually make my figures appear worse to reality has someone started 20 years ago when personal pensions first came out (another point to note is that they have only been going just over 20 years - No-one has a full working life of paying personal pensions yet). So, when I use 7% p.a. in that example, its actually net growth of around 6%.

To get your figures, then £762pm would require growth before charges of 0.3%. i.e. it would actually be losing money each year.