Workplace Pension Confusion

dunstonh

Jack_Griffin wrote: »

No they weren't, 8% was never realistic, inflation exceeding 8% only lasted 5 or so years in the mid to late 70's & the record is better over any period in the UK over the last 250 years, I have a pension projection in my files from the mid 80's when inflation was much lower which uses 7% growth, that is not realistic either.

I don't care if it is the government of the FSA which stopped this nonsense, that isn't relevant to the argument, the point still holds, the projections were ofen if not always unrealistic, end of...

7% or 8% is very realistic. Monetatry growth projections that you are referring to dont factor inflation into them. So, a non adjusted for inflation growth figure of 7% or 8% p.a. is quite realistic.

SMPI basis projections do factor inflation into them and that deducts 2.5% from the example growth rates. So, 7% minus 2.5% effectively.

One last thing is that illustrations using say 7% are assuming 7% gross of charges. So, if a fund had a 1% charge, then the illustration figures are based on 6%. Investment performance tables and factsheets etc are based net of charges.

So, if we take a fund that is pretty bog standard and mass market; the aviva mixed investment 40-85% fund and go back to 1st July 1988 when personal pensions were introduced and you did £100pm gross, that would now be worth £58,433.90 (total paid in gross £29,400). That equates to a net return of 5.2% p.. With a charge of say 1.5% p.a. that means it would not be far off the old mid rate projection figure of 7% and it includes one of the worst investment decades on record.

The 80s, 70s, 60s etc all had double digit per annum figures on average and things were different back then. So, you can largely forgive them for not predicting the move to lower returns and a major financial crisis. However, projection rates have been pretty reasonable for a long time.

dtsazza

Jack_Griffin wrote: »

No they weren't, 8% was never realistic, inflation exceeding 8% only lasted 5 or so years in the mid to late 70's & the record is better over any period in the UK over the last 250 years, I have a pension projection in my files from the mid 80's when inflation was much lower which uses 7% growth, that is not realistic either.

I'm not sure whether you're overlooking it or I'm misunderstanding, but it seems very likely that those are nominal growth rates. In which case they're very achievable.

In fact, if inflation is at 8%, then a company can get 8% nominal growth simply by standing still. Wages and prices rise by 8%, so it's paying 8% more in costs but bringing in 8% more in revenues due to larger numbers across the board. Hence profit grows by 8% - not in a particularly meaningful way, simply because of inflation meaning that the same real output is worth 8% more £s.

(Of course, in the real world inflation isn't perfectly level across every sector, so this would be unlikely to work out exactly. But there would be winners and losers, and across the entire economy it would average out pretty well.)

But even in "normal" times, I'd expect that 7% growth is entirely realistic. The inflation target is 2% (CPI), which means that RPI is likely to be 2.5-3%. Are you saying that you consider a real return of 4-5% for equities to be unrealistic? You can if you want (there's no solid proof of the future after all), but this strikes me as entirely reasonable any manageable.

7% real growth might be pushing it, but 7% nominal growth should be no problem at all.

taking_stock

MissSea wrote: »

Hi,

I'm a little confused by workplace pensions - and since auto-enrolment is beginning soon for me, I thought it's the right time to start thinking about whether to join my workplace pension scheme.

I'm 22 and work for The Co-op Group, so what they've got on offer seems pretty good (pensions.coop if anyone can help decipher).. I don't fully understand the pension promises, and just know that my Dad who has a private pension has lost so much money that it seems crazy to join a pension scheme.

I don't know whether to start putting money into a cash ISA that I'll label 'my pension fund', or join the complete pension scheme my work offer - I put in 8%, they put in 16%. Ultimately though, can anyone help me understand whether workplace pension schemes are worth it? On the face of things they look brilliant, but am I risking my hard earned cash by paying into one of these instead of an ISA?

Help!!

hey MissSea

with all this discussion going on, please don't miss the key point here from everyone - JOIN THE PENSION SCHEME.

it really is free money and doesn't come wit the pitfalls (albeit of expectation) that schemes may have had in the past. I often feel that having a pension will in the coming decades look like home ownership looked like 30 years ago, in that some people understand the benefit of buying rather than renting long-term, but others considered it not worth it on the grounds you'd have to pay for your own maintenance costs etc.

the bottom line remains - as it always has - that those who commit to their pension scheme are more likely to retire at 55 - 60 than those who think it's not worth it and then find that the state wont pay them even a very modest amount until well into their late 60s. You really do have the choice now as to whether you want to be in the former group or the latter. good luck.