Pension and inflation?? Worried!

SG27

I've just recently started my first pension at 30. I pay in about 16% of my income as suggested on the guides. They sent me a forecast of 3 different possible outcomes for my pension pot at 65. the highest forecast was about £180,000. Which sounds ok. But not so good if you take into account 35 years inflation. It works out to around £45,000 assuming 4% inflation. Which obvioulsly isn't very much! I'm putting as much of my income into my pension as possible at the moment and have no prospect of wage rises in the foreseeable future so am I just destined to a retirement of poverty despite paying in a hefty chunk of my wages? Someone please tell my I've worked this out wrong!?

Lokolo

Is the pension forecast in money terms or todays terms?

The £45k is obviously your tax free amount you can take out. The rest would buy an annuity.

You will also (hopefully) also receive state pension.

princeofpounds

It is highly likely the forecast accounts for inflation, though not entirely certain.

One thing that might help is if you can tell us your monthly £ contributions, or read the small print on the forecast.

SG27

No I think says that the figures don't take inflation into account. Which is why I decided to work it out. I can double check when I get home later.

The lump some was 25% of the £180k so £45k.

SG27

Lokolo wrote: »

Is the pension forecast in money terms or todays terms?

The £45k is obviously your tax free amount you can take out. The rest would buy an annuity.

You will also (hopefully) also receive state pension.

The £45k was the result of an inflation calculator, 35 years at 4% using £180k

SG27

Would it be normal to increase the monthly contributions with inflation for example each year +4%? I couldn't do this until my wages rise (hopefully??) obviously in 30 years time the £200 I'm paying in monthly now won't be worth very much.

Lokolo

Right.

You need to work out whether the forecast is in todays terms or in real terms. Inflation could have already been taken into account.

http://www.hl.co.uk/pensions/interactive-calculators/pension-calculator

Using this, starting at 35, £200 a month for 30 years will get a pension fund of £120k. Based on 2.5% inflation and 7% growth. This is in todays terms.

redbuzzard

>>Would it be normal to increase the monthly contributions with inflation

That's exactly how you should think about it. It's logical to think of at least maintaining the contribution level in real terms, so keeping the percentage of your earnings the same is a kind of yardstick.

Increasing contributions faster as a percentage over time is an appealing idea, as people often have more spare money later in life. In practice you can't rely on that so chucking some extra in when you have it has been my approach!

I put an unusually good bonus into AVCs back in the mid 90s. I'd pretty much forgotten about it until recently when it turns out that will provide my 25% PCLS without touching the related defined benefit pot - result!

mania112

I don't look too much into inflation-adjusted values.

Projections to maturity are guesses already, to add in a guess for inflation too just dilutes the calculation too much.

I would say 4% is too high. This year it was 3.2% and that's on this high side already.

Secondly, if I had bought a pint of milk last year it is exactly the same price today: http://www.mysupermarket.co.uk/grocery-categories/milk_in_tesco.html

Some things have increased in price by over 3.2%, which is why we have that average, but the value of goods effects people differently, depending on what they spend their money on.

Thirdly, the inflation-adjusted calculation is not what you will receive, it's the value of what you receive. I would prefer to know the pound notes in my pocket.

dunstonh

the highest forecast was about £180,000.

it is not a forecast. It is an example projection. A pot of £180k in 30 years is very low. It suggests that either the contribution is low or inflation has been taken into account.

Would it be normal to increase the monthly contributions with inflation for example each year +4%

Yes. One of the most common whinges about pensions is that they pay out less than they thought. However, you tend to find the people doing this failed to ever increase their contributions. For example, starting £30pm in 1988 was a very good contribution level. (comparison would be that you could get around 4-5 tanks of petrol for that). If you left it at £30pm, as so many have, then that is now a rubbish contribution that is barely worth the effort. It will pay out less than they expected as they have never taken inflation into account.

You should increase the pension annually.

CLAPTON

mania112 wrote: »

I don't look too much into inflation-adjusted values.

Projections to maturity are guesses already, to add in a guess for inflation too just dilutes the calculation too much.

I would say 4% is too high. This year it was 3.2% and that's on this high side already.

Secondly, if I had bought a pint of milk last year it is exactly the same price today: http://www.mysupermarket.co.uk/grocery-categories/milk_in_tesco.html

Some things have increased in price by over 3.2%, which is why we have that average, but the value of goods effects people differently, depending on what they spend their money on.

Thirdly, the inflation-adjusted calculation is not what you will receive, it's the value of what you receive. I would prefer to know the pound notes in my pocket.

Strange way of thinking; whatever is the use of knowing the number of pound notes but not knowing what they buy.

It was the basis of all the shocking mis-selling of endowments and pensions in the 80s and 90s; fantastic projection of cash but totally ignoring that they would buy damn all as it all depended upon high inflation.