Pension projection

littlesaint

Hi,

In the Observer money section today it said that a 26 year old who starts to pay in £75 p/m to a SHP can expect to get an annual pension of £8,000+. I started my pension last January when I had just turned 27 and I'm paying 100 p/m it says that my pension will only be £4,000 pa - how does that work?

EdInvestor

Your statement is probably adjusted for inflation ( ie, it's in "today's money").

At present rates, although low, inflation halves the value of an income over 20 years.

Paul_Herring

http://observer.guardian.co.uk/cash/story/0,,2000122,00.html for those who haven't seen it:

Observer wrote:

HSBC says 90 per cent of 16- to 24- year-olds and more than 44 per cent of 25- to 34-year-olds are not paying into a pension. A 21-year-old putting £75 a month into a stakeholder pension could build up a retirement pot worth £337,000 or an annual pension of £12,700. But delaying contributions until 26 would give an annual retirement fund of £8,790 - 30 per cent less than if they started paying in earlier.

What they don't supply in that article are what assumptions they're making. Nor have you mentioned what assumptions your pension fund company have made - if the assumptions are different (not beyond the bounds of possibility) then that would explain the disparity.

Assumptions include:
o Does the contribution increase each year?
o Are the figures given adjusted for inflation (i.e. are the values given what the actual amount would be at retirement, or what they equate to in todays money)
o How long are they saving? To 60? 65? 68?

dunstonh

Projections can be in monetary growth basis or statutory money purchase basis.

Monetary growth basis must use either the low rate (5%) and the high rate (9%) or the middle rate (7%) or use all three together.

SMPI basis uses one rate of 7% with a deduction of 2.5% for inflation.

The rates can be reduced to reflect low potential growth funds but cannot be increased.

Also, the observer article may have factored in £75pm increasing annually by NAEI or RPI to keep it worth the equivalent of £75 in real terms. Too many people do not increase their contributions over the years but expect the end result to be the same.

littlesaint

Well, mine are based on payments of £100 up to my 65th birthday, and yes, they are adjusted for inflation from what I remember. Not sure what the Observer based its assumptions on.

EdInvestor

If a 21 year old invested a flat 75 quid a month for 44 years to age 65 @7.5% growth, he would have a fund of 288,306 at retirment which would buy a pension of 20,181.But adjusting for inflation over that very long period, the pension would be worth around a quarter of that, say a level income of around 5k.

The estimate you have received may also include the cost of index linking the pension for inflation after you retire and possibly also providing a spouse's pension.