Lump sum into a pension - must be missing something

Zebsy

Hi all,

I'm a bit of a pensions newbie, so I must be missing something here.
Please don't laugh if I'm being stupid!

I am currently 39.
My pension is with Standard Life and their projection is that I'll get a pension of 11,400 per year at retirement, age 65.
If I use their prediction tool to put in a lump sum of 30,000 now then this 11,400 only increases to 12,000.
i.e. I gain £600 per year for adding 30K to the pot now.

I don't understand why this is so poor.
If I put the 30K in a savings account now and say (for ease of calculation) that the interest rate is the same as the rate of inflation, then in 25 years time it will still be "worth" 30K in todays terms.
So if I then live for 10 years until I'm 75 I can pay myself £3,000 per year.
Even if I live for 20 years then that's £1,500 per year from my 30K.
So why do I only get £600 per year if I put it into my pension?

Surely I'm missing something?
Any ideas please?

Cheers,

Zebsy

sandsy

Does the projection tool let you change the terms of the annuity?
Eg. The age at which you start taking the income, whether it's level or increasing, whether you take a lump sum out of the fund before the income commences, proportion of spouse's pension after your death?

All of these things could affect the potential income that could be purchased with your £30k.

kidmugsy

Zebsy wrote: »

My pension is with Standard Life and their projection is that I'll get a pension of 11,400 per year at retirement, age 65.

What do they give as the current value of the "pot"?

Is their pension projection based on the assumption that you take a 25% lump sum?

Zebsy

I believe the tool is very simple, just a forecast of a fixed pension income per year , doesn't say it's increasing so I assume fixed.

Current pot is 54 k
It assumes I'll be paying in each month til I retire
Its projecting another 100k contribs before retirement.

I believe I set the lump sum to 0 but you can change it if you want.

So 154k plus interest will get me 11 k per year?
Isn't that rubbish?

dunstonh

Are you using the assumptions as the std Life projections?

So 154k plus interest will get me 11 k per year?
Isn't that rubbish?

There isnt interest but that is a different issue. Is that projection future terms or todays terms? I would reckon todays terms unless your annuity assumptions and selection are brining the annuity rate rate down very low.

jamesd

The assumptions in the public planner at SL are:

o Annuity purchased with RPI inflation increases.
o 50% pension for a spouse three years younger.
o investments grow at 7% minus 1% charges.

Zebsy

Thanks for the replies.

dunstonh, when you say there is no interest, what do you mean?
I thought the pension pot gained interest around 7% per year?

These figures do look very low to me.
Maybe the next port of call for me should be an independent financial adviser?

Cheers,

Zebsy

jem16

Zebsy wrote: »

Thanks for the replies.

dunstonh, when you say there is no interest, what do you mean?
I thought the pension pot gained interest around 7% per year?

Interest is a guaranteed return on savings. Investments within a pension are subject to investment return and are not guaranteed. Each year the return will vary. However over the long term, investments normally give a greater return than savings.

These figures do look very low to me.
Maybe the next port of call for me should be an independent financial adviser?

Depends on what you need. If you need advice then yes.

Zebsy

jem16 wrote: »

Interest is a guaranteed return on savings. Investments within a pension are subject to investment return and are not guaranteed. Each year the return will vary. However over the long term, investments normally give a greater return than savings.
Depends on what you need. If you need advice then yes.

I see what you mean but there's not much difference in my mind.
Especially when they're quoting an "assumed rate of growth" of 7%.

Unless anyone has any more useful advice I'll have to go to an IFA.
Would it be worth contacting Standard Life and asking them about these figures?

bigadaj

Zebsy wrote: »

I see what you mean but there's not much difference in my mind.
Especially when they're quoting an "assumed rate of growth" of 7%.

Unless anyone has any more useful advice I'll have to go to an IFA.
Would it be worth contacting Standard Life and asking them about these figures?

I know what you mean in terms of assumed growth, and so this is all you can do on the basis of projections.

I'd contact standard life if I were you, as Jamesd has stated the default options are the most'expensive ones, so if you opted for a level annuity then the annuity would be higher, same if no spouse pension etc.

Even given all this then your annuity return is only around 1.8%which is very low, if you lived to 65 your projected lifespan would probably be longer than your twenty years, but even so a savings account looks favourable if. You ignore the tax relief you get now.

Not sure how you'd get on with an IFA as I assume he'd want paying a couple of hundred quid for a review?