couple of pension questions

quotememiserable

panny300 wrote: »

my 24 year old son has been offered a pension where the employer matches what he puts in.
1] how do you work out how much he would have to put in to get an average pension?

A popular rule that often gets quoted round here (I'm amazed no-ones mentioned it yet) is that you put in a %age equal to half your age when you start. So your son could put in 12% (total, including his and the employers contribution) and continue at that rate til he retires. There all sorts of pension modellers on line that will illustrate how this will outturn given various salary increase assumptions etc.

panny300 wrote: »

2] if let's say he had a pot of 100,000 and he died a couple a years after he retires,what happens to the pot of money?

A lot of people worry about this, but its a rare case. If he were in poor health at the time of retirement you might choose to add a 5 year underpin to the pension, which ensures the estate gets the balance of 5 years pension if he dies before this. Or any length of underpin you like, but the longer it is the lower the initial pension.

jem16

quotememiserable wrote: »

A popular rule that often gets quoted round here (I'm amazed no-ones mentioned it yet) is that you put in a %age equal to half your age when you start.

Already mentioned in Post 3;

dunstonh wrote: »

A really dirty and unreliable way is to half his age and that should be the contribution. If he wants earlier than state pension or lower risk investments then he would need more.

Rymo_2

Conversely, if he lives longer than average age, those that die before him and did not collect their full pension would be subsidising him!

Not sure that's the case. I believe that money will go to the insurance company's profits.

The provision of pension income from DC schemes in this country needs totally sorting out. Even some of the insurance companies themselves have stated that they make massive profits from annuities.

Perhaps we need to look at the possibility of the government themselves offering annuities, especially now we have Auto Enrolement.

dunstonh

Not sure that's the case. I believe that money will go to the insurance company's profits.

The insurance company employs actuaries to work out the average life expectancy and factors their profits into the annuity rate given. Those that die early provide the gain on the annuity rate. It is known as mortality gain.

Even some of the insurance companies themselves have stated that they make massive profits from annuities.

Yet most insurance companies are not active in the annuity market as it is not that profitable.

Perhaps we need to look at the possibility of the government themselves offering annuities, especially now we have Auto Enrolement.

I really hope not as Government tends to be inefficient and expensive. I dont see why the taxpayer needs to fund another load of civil servants doing a job that would be identical to that offered by the private sector.

The problem with annuities is that they are based on low risk investment returns that are heavily influenced by interest rates.

Dominic9

I really hope not as Government tends to be inefficient and expensive. I dont see why the taxpayer needs to fund another load of civil servants doing a job that would be identical to that offered by the private sector.

That wasn't the finding of the Pension Commission (page 251):

4. Selling and administration costs: PAYG state-run pension systems typically achieve far lower running costs than systems of voluntary private savings. Figure 7.3 repeats Figure 6.9 from Chapter 6, but with the cost of the UK state pension system added. The UK’s state system running costs are about 0.1% of the value of the pension liability, compared to 0.2% in large scale occupational schemes and well over 1% in most personal pensions. A crucial issue in compulsory savings schemes is therefore whether the elimination of the need to persuade the customer to save can lead to a major reduction in Reduction In Yield (RIY), bringing the operating costs of funded schemes closer to those of a PAYG scheme.

redbuzzard

dunstonh wrote: »

The problem with annuities is that they are based on low risk investment returns that are heavily influenced by interest rates.

Agreed, and the problem with annuities is that a comfortable retirement based on annuitising a pension pot at current rates is not practically affordable for most people, while insurers are making profits of c. 20%of the purchase price.

They do have an excuse for this, which is that they need to be cautious. There must be no possibility of the insurer running out of money.

But there must be a better way and there needs to be now that defined contributions are becoming the default for pensions.

Perhaps the profit could be regulated, and earned surpluses paid as bonuses to future annuitants via a central pool. Or maybe the gubbermint, which can better afford to use best estimate *95%, rather than best estimate * 80%, could provide the annuities, with any surpluses benefitting the taxpayer.

I don't believe everything (or very much) that I read in the Daily Mail, but they are pretty much on the mark with this article -

This is Money - Annuity Profits

Thrugelmir

panny300 wrote: »

you may as well as enjoyed spending it for the las 40yrs

Then people will have a very limited lifestyle in retirement.

dunstonh

Agreed, and the problem with annuities is that a comfortable retirement based on annuitising a pension pot at current rates is not practically affordable for most people, while insurers are making profits of c. 20%of the purchase price.

20% of the purchase price paid over 20-25 years is not very profitable. indeed it is less than the net interest margin on savings.

I don't believe everything (or very much) that I read in the Daily Mail, but they are pretty much on the mark with this article -

This is Money - Annuity Profits

You are right not to believe everything. The devil is in the detail. The £29k figure in the article assumes worst case. I can quite imagine the likes of Friends Provident with their in-house rates for example having a high margin However, you cannot accuse those active in the open market options as having anything near that. A figure of £6500 is shown in the article as being more common for those. And remember that this is spread over 20-30 years.

If it was a highly profitable part of business then insurers would be falling over themselves to get a chunk of it. Yet all we have seen in recent times is insurers pulling out. The article, for example, doesnt seem to cover the costs of meeting solvency requirements. There is also the risk factor. Where risk is taken, the company is entitled to profit. Annuity provision has been largely loss making for most insurers for the bulk of the last 25 years as people live longer than predicted whilst getting an annuity rate that is 5 times greater then gilt yields.

The article mentions standard life. It says it doesnt pay nowhere near the worst in the industry. However, typically standard life is the worst or thereabouts of those that are active in the open market option.

Whilst annuities are not perfect and there are certainly issues, the article itself makes a number of conclusions based on assumptions that the worst is the norm and, is common with newspapers, they take a profit over a long term period (which may not be realised for 20-30 years) into todays money when it should really be in future money terms (i.e. if a profit on annuity averages £6500 over say 25 years. then in 25 years time, £6500 then wont be the same as £6500 today.

kidmugsy

If selling annuities were hugely profitable then more and more companies would be busting a gut to enter the trade. But, on the contrary, companies have been leaving the market for years. So, as usual, people who are too (shall I say?) set in their ways to understand how competition works are shown to be wrong by the facts.

Presumably the market will eventually have such reduced levels of competition that it'll be an attractive business again. That's when I expect to see adverts involving that odious bearded bloke pushing his exciting new Virgin Annuities. And, of course, the competition will eventually reduce the prices.