Am i missing something ?

elantan

hi all,

me again sorry, this time it's not the NEST lol

got a letter in from my pension provider today as i pay what is called single contributions every month instead of a monthlly contribution ( i dont always pay the same amount so paying this way has suited me, if i have more due to overtime etc i pay more)

i phoned the company up to find out a few things, current value of plan and is it still ok for me to pay single contributions, and why has my pension changed so much since 2007

two things here i am looking for one i think i understand what has happened the other i am flummoxed

first thing ( the bit i think i understand)

in 2007 i had £7,462.80 in my pension plan and the bit where it says your yearly pension in todays prices could be the answer was £3,280 each year estimated growth of fund 7% and estimated inflation 2.5%

in 2012 my pension plan is sitting at £15,057.23 with a pension in todays money of £1,150 a year estimated growth 5% estimated inflation 2.5% so 2.5% lower in estimated growth and yet same inflation estimation

so i have doubled the current amount (roughly) in my pot and yet i will get 60% less ( very roughly ) surely that isnt right?

i think its to do with the FSA cracking down on illustrations but i am not too sure, it really is a huge difference in illustrations though so i am a bit concerned about it all

the second thing and the one that is making me think of paying no more into a pension is this

if i die before my pension age my husband gets the amount in my pot ... i'm happy enough with this and have no complaints

if however i die within the first 5 years of drawing my pension my husband will only get the remainder of the 5 years ( ie: i die 3 years after retirement husband gets 2 years of money then no more)

if i die after 5 years husband gets nothing

now my pot is estimated to be £35,330.24 so my husband would get if i die before retirement the full £35,330.24 ( assuming it preforms the way it is illustrated to)

if i live to retirement age i will take the 25% tax free lump sum of £8,832.56 and a yearly payment of £1,150 ( i think, though not sure as it doesnt say i get that with the 25% tax free lump sum or not) now say i die in year 3 i will have had the use of £12,282.56 and my huband would get a further £2,300 totalling £14,582.56 and no more, meaning that the last £20,747.68 is lost and probably lands up in the pockets of the pension company

is that right? would my husband loose £20,747.68?

basically, i am best to either die before i retire so my husband gets the £35k or live till i am atleast 90plus ( which is highly unlikely) in order to get my value of my money out of my pot, is that right?

the reason i ask this is that the likelyhood of me living to long past retirement is not great, i wont live too long past retirement age due to health

would i not be better putting the money every month into an I.S.A where i atleast know my husband will get the money? yes i know i loose the tax relief from not putting it in a pension but atleast my husband would get the money all be it less tax relief

dunstonh

think its to do with the FSA cracking down on illustrations but i am not too sure, it really is a huge difference in illustrations though so i am a bit concerned about it all

Every few years the FSA tells the companies what illustration rates they should use. No crackdown. Its part of the normal process.

Since 2007 you would have seen 7% to 5%. Annuity examples would have changed as well. Typically from single life, level basis to joint life, increasing basis. The whole range of assumptions have dropped down.

the second thing and the one that is making me think of paying no more into a pension is this

Assumptions dont change reality. It doesnt matter what investment wrapper you use. The same assumptions could be applied to all options. So, it isnt really logical to stop paying into the pension for that reason.

if however i die within the first 5 years of drawing my pension my husband will only get the remainder of the 5 years ( ie: i die 3 years after retirement husband gets 2 years of money then no more)

if i die after 5 years husband gets nothing

Only if you pick an annuity with a 5 year guarantee. If you dont want that option then you dont have to pick it. Maybe pick 100% spouse or a 10 year guarantee or a capital return annuity or dont even pick an annuity.

if i live to retirement age i will take the 25% tax free lump sum of £8,832.56 and a yearly payment of £1,150 ( i think, though not sure as it doesnt say i get that with the 25% tax free lump sum or not) now say i die in year 3 i will have had the use of £12,282.56 and my huband would get a further £2,300 totalling £14,582.56 and no more, meaning that the last £20,747.68 is lost and probably lands up in the pockets of the pension company

is that right? would my husband loose £20,747.68?

No its wrong. You are mixing up todays money terms and future money terms. Don't worry. The media do that all the time. You need to use future money terms across the board to get a realistic figure. Using future money terms for the pot but todays money terms for the income will always make it look bad.

would i not be better putting the money every month into an I.S.A where i atleast know my husband will get the money? yes i know i loose the tax relief from not putting it in a pension but atleast my husband would get the money all be it less tax relief

use the same assumptions on the ISA an you end up with an income figure that is lower than the pension. ISAs and pensions share the same investment options. So, charges and returns can be identical. The only difference is the tax relief. If you plan to draw an income from the ISA without the guarantee for life then there is an equivalent on the pension called unsecured pension income. On death with the unsecured pension income, the fund can be passed to spouse and onto a beneficiary after that.

Linton

[QUOTE=elantan;57189577..................

if i live to retirement age i will take the 25% tax free lump sum of £8,832.56 and a yearly payment of £1,150 ( i think, though not sure as it doesnt say i get that with the 25% tax free lump sum or not) now say i die in year 3 i will have had the use of £12,282.56 and my huband would get a further £2,300 totalling £14,582.56 and no more, meaning that the last £20,747.68 is lost and probably lands up in the pockets of the pension company

[/QUOTE]


If you had a medical condition that made it likely you would die at the very early age of year 3 you could get a much larger annuity. If not there is a reasonable chance that you would live to year 23 or later.

With an annuity those who die early subsidise those who die late. It doesnt make any difference to the pension company which category you fall into.

elantan

dunstonh wrote: »

Every few years the FSA tells the companies what illustration rates they should use. No crackdown. Its part of the normal process. Does this mean in another few years say if my pot was bigger than it is just now i could still land up with even less? ( yes i understand i could land up with even more as well ) depending on how the current FSA illustration expectations?

Since 2007 you would have seen 7% to 5%. Annuity examples would have changed as well. Typically from single life, level basis to joint life, increasing basis. The whole range of assumptions have dropped down. This bit has me puzzled sorry, would i have had a change in annuity examples as i am not at the stage of looking at an annuity yet ( or am i?) my understanding is that i dont do that until just before i retire ( say 6 months) and i would go back to an I.F.A and discuss with him what one would be the best for me?

i thought the change from 7% to 5% was to do with the company being told to give more realistic illustrations



Assumptions dont change reality. It doesnt matter what investment wrapper you use. The same assumptions could be applied to all options. So, it isnt really logical to stop paying into the pension for that reason.



Only if you pick an annuity with a 5 year guarantee. If you dont want that option then you dont have to pick it. Maybe pick 100% spouse or a 10 year guarantee or a capital return annuity or dont even pick an annuity. Right i think this is the bit that i need to understand more, what the guy told me today on the phone is that basically their annuity? so could i say 6 months before i retire go to an I.F.A and get a deal that would mean that what is left in my pot could go to my husband/son ( you never know i may outlive the husband lol) instead of dissapearing after 5 years should i die early ( say 3 years after retiring), i imagine if i did ( and this may solve my dilema) i wouldnt get as big a yearly amount ( i would be ok with that as it still protects my pot)



No its wrong. You are mixing up todays money terms and future money terms. Don't worry. The media do that all the time. You need to use future money terms across the board to get a realistic figure. Using future money terms for the pot but todays money terms for the income will always make it look bad. Ok i think i understand , i am just going with what my 2012 statement says, my 2007 statement says you could get xx in todays money my 2012 statement just says what i could get it doesnt state whether that is in todays money or estimated (including inflation) future amount



use the same assumptions on the ISA an you end up with an income figure that is lower than the pension. ISAs and pensions share the same investment options. So, charges and returns can be identical. The only difference is the tax relief. If you plan to draw an income from the ISA without the guarantee for life then there is an equivalent on the pension called unsecured pension income. On death with the unsecured pension income, the fund can be passed to spouse and onto a beneficiary after that This could then be what the best option for our family is, as i would like to keep getting the tax relief i just was under the assumption after speaking to the guy today on the phone that if i died within 5 years then husband would only get the remainder of the 5 years and there was no way i could change this .

Dunstonh,

thank you very much for the help i do appreciate your input, please bear with me while i try and make sense of what you are saying ( not the brightest lightbulb in the world)

i do know i need to see an I.F.A i am just waiting till i have a full time job so that i can start making regular contributions rather than the sporadic ( although currently monthly) contributions, i want to be able to meet with an I.F.A and be able to understand the process and get myself into a position where i can make my money work effectively for me, just now my pension pot is only £17k so probably not worth his/her time

elantan

Linton wrote: »

If you had a medical condition that made it likely you would die at the very early age of year 3 you could get a much larger annuity. If not there is a reasonable chance that you would live to year 23 or later.

With an annuity those who die early subsidise those who die late. It doesnt make any difference to the pension company which category you fall into.

the person i spoke to today did mention something about health stuff but kinda brushed over it with the i cant really say anymore as our company doesnt offer this ... so i didnt push as i didnt fully understand ... maybe this is what he was talking about ?

dunstonh

Does this mean in another few years say if my pot was bigger than it is just now i could still land up with even less? ( yes i understand i could land up with even more as well ) depending on how the current FSA illustration expectations?

Yes. Assumptions can be updated frequently.

This bit has me puzzled sorry, would i have had a change in annuity examples as i am not at the stage of looking at an annuity yet ( or am i?) my understanding is that i dont do that until just before i retire ( say 6 months) and i would go back to an I.F.A and discuss with him what one would be the best for me?

Yes. Assumptions are just assumptions and not personalised to you. When they change, they change across the board for everyone.

i thought the change from 7% to 5% was to do with the company being told to give more realistic illustrations

They went down because of fears that more recent returns may end up being that way for longer. However, even the bog standard balanced managed funds have exceeded 5% p.a. for the last 10 years and remember that 5% on projections is before charges. Not after. The real returns have been 5% after charges. So, that can make a difference. When a projection shows 5% it really means 4% (if 1% pa charge)

Right i think this is the bit that i need to understand more, what the guy told me today on the phone is that basically their annuity? so could i say 6 months before i retire go to an I.F.A and get a deal that would mean that what is left in my pot could go to my husband/son ( you never know i may outlive the husband lol) instead of dissapearing after 5 years should i die early ( say 3 years after retiring), i imagine if i did ( and this may solve my dilema) i wouldnt get as big a yearly amount ( i would be ok with that as it still protects my pot)

They are showing your their options. Not OMO rates or other options that they wont have available. Never rely on what your provider says. They will only show their terms/rates. Not those available elsewhere.

elantan

Dunstonh,


thank you very very much that makes things so much clearer for me now, i think i understand more, i was seriously considering just paying the money i currently pay into my pension every month into an I.S.A as i didnt want to loose it i knew that this would mean that i lost out on the tax relief, but thought it was the safer option for me due to health

i didnt understand that the 5 year thing was just their deal, i thought it was the deal of every company

thanks very much, much appreciated

now to get me a full time job so i can sort things out better

jamesd

Don't worry about what they say about annuities. The assumption is always that you'll buy an annuity and normally these days that you'll buy one linked to RPI and with I think a 50% ongoing income for the life of your spouse if you die. That means a much lower initial payout. You can get full payout and full spouse payout if you use income drawdown instead. Or you can choose different annuity deals. Lots of options out there.

What most people do is buy an annuity that doesn't increase with inflation and that doesn't have any payout to a spouse after five years from the time it's purchased.

elantan

jamesd wrote: »

What most people do is buy an annuity that doesn't increase with inflation and that doesn't have any payout to a spouse after five years from the time it's purchased.

i may be being dumb here... but why would anyone want to do that?

wouldnt people want their pension to increase with inflation? and wouldnt people want their loved ones to get the remainder of their pension pot?

i always knew pensions were confusing, but they are even more confusing than i thought

Linton

elantan wrote: »

i may be being dumb here... but why would anyone want to do that?

wouldnt people want their pension to increase with inflation? and wouldnt people want their loved ones to get the remainder of their pension pot?

i always knew pensions were confusing, but they are even more confusing than i thought

People would but they cant afford it. Increasing with inflation about halves the money you get initially. Adding a spouse is relatively cheap and should be done especially if the spouse has insufficient income in their own name.

My view would be that if you are only looking at annuities a reasonable strategy would be to inflation match the money in excess of the State Pension that you believe you need for a basic standard of living and have the rest on a fixed rate.

elantan

Linton wrote: »

People would but they cant afford it. what do you mean by this? in what way can they not afford it? would they loose some of their pension pot taking this out? Increasing with inflation about halves the money you get initially. is this the 25% tax free amount you are talking about? Adding a spouse is relatively cheap and should be done especially if the spouse has insufficient income in their own name. Does everything you do with your pot cost?

My view would be that if you are only looking at annuities a reasonable strategy would be to inflation match the money in excess of the State Pension that you believe you need for a basic standard of living and have the rest on a fixed rate ok silly time for me again, i dont understand this sorry do you mean if i think i would need £200 a week and the state pension gives me £150 i would inflation match £50 ? and if there is any left i would put this on a fixed rate? can i do that? .

i'll be honest with you i didnt think of anything like annuities etc till the phone call today as my plan till now was save as much as i can and when i get close to retirement find out then what my options were and go with the best ( this is because i know things can change over time and what may be classed as good advice right now may not be in 20 years time)

just now because i am only working part time i am only managing to pay in a small amount every month and its different every month as well, so i was just putting my money into my current pension pot ( which may possibly not be the best pot for me to put it in) but as i dont work full time and i am only putting in about £100 a month or so i didnt think it would be worth my while going to see an I.F.A until i am in full time employment and able to pay £200 or so a month into a pension