Is this calculator right?

Linton

Results of calculations on annuity at 55 vs annuity at 70 using current annuity rates. Of course annuity rates may change in the next 15 years.

Scenario 1

---

Buy a fixed rate annuity at 55 with £100K and invest all the income at x%.

Scenario 2

---

Invest the £100K at x% for 15 years and then buy an annuity at 70. Invest all income at x%.

X:age when cumulative Scenario 2 exceeds Scenario 1

---

0%:109
1%:101
2%:95
3%:91
4%:89
5%:87
6%:85
....
10%:80


So on the given assumptions whether the annuity early is better than taking it later depends on your age at death and the investment returns you can achieve. Someone living an average lifespan and unhappy to invest substantially in equities would be better off taking the annuity early.

sandsy

Ok, so keeping it simple...

If you pay in £300pm (gross) for close to 30 years, and there was no interest, then at its simplest, you'd be able to draw it out again at a rate of £300 for 30 years.

By the way, 30 years is round about the average life expectancy for 55 year olds so there'd be a 50% chance it will have to last longer.

Obviously, other things to consider are:
- £300 in 30 years time won't buy as much as £300 does today
- the more you put in, the more you can take out
- similarly, the better the returns, the more you can take out.

The pension pot you've quoted of £120,000 seems to be an inflation adjusted estimate (otherwise it would be well over £200k), which assumes you'll increase your contributions in line with earnings each year.

The annuity figure you've quoted is based on an annuity which is fixed for life so it's buying power will decrease over time. A one which retains it's buying power will probably produce about half that amount at the point you start taking it.

But it all comes back to the fact that the biggest influence on what you get out depends on what you put in.

coyrls

Linton wrote: »

Results of calculations on annuity at 55 vs annuity at 70 using current annuity rates. Of course annuity rates may change in the next 15 years.

Scenario 1

---

Buy a fixed rate annuity at 55 with £100K and invest all the income at x%.

Scenario 2

---

Invest the £100K at x% for 15 years and then buy an annuity at 70. Invest all income at x%.

X:age when cumulative Scenario 2 exceeds Scenario 1

---

0%:109
1%:101
2%:95
3%:91
4%:89
5%:87
6%:85
....
10%:80


So on the given assumptions whether the annuity early is better than taking it later depends on your age at death and the investment returns you can achieve. Someone living an average lifespan and unhappy to invest substantially in equities would be better off taking the annuity early.

Not sure if it works out the same but I'd like to see the cross over in age for total income for:

1) Taking an annuity at 55
2) Taking income from an investment equivalent to the annuity in 1) (assuming different rates of return) from 55 and then taking an annuity at 70 with the balance left.

jumperabv3

atush wrote: »

putting your pension in cash is unlikely to be a good thing to do

It's not in cash.
It kept in invested funds but with minimum risk.

See here:



Here is the funds plan details:

http://www.fundslibrary.co.uk/fundslibrary.dataretrieval/documents.aspx?user=Aviva_lifecust&type=packet_lp_fund_unit_doc_factsheet&Lipper=72005379

Your_Hero

jumperabv3 wrote: »

It's not in cash.
It kept in invested funds but with minimum risk.

See here:



Here is the funds plan details:

http://www.fundslibrary.co.uk/fundslibrary.dataretrieval/documents.aspx?user=Aviva_lifecust&type=packet_lp_fund_unit_doc_factsheet&Lipper=72005379

That is a Cash/Money market fund. You get next to nothing and yet you paying management charge on your plan to keep it there.

You are 29 and you want to keep it in cash deposits until you are 55/65. You need some financial education and read up some more on inflation, interest rates, real return etc. to understand that this is probably the worst financial decision you can ever make.

On a very simplistic level, I hope you realise that £100 in 36 years' time is not the same as it is today? Even if you had your "20% interest" (not 25% by the way as you stated), i.e. it only cost you £80, this is not much growth at all in 36 years, i.e. 0.5% a year approx. This is excluding the money you lose from charges in the pension.

You need to speak to a professional adviser to set a good strategy for you (or DIY if you are comfortable) and don't be so afraid of investing.

ffacoffipawb

jumperabv3 wrote: »

It's not in cash.
It kept in invested funds but with minimum risk.

See here:



Here is the funds plan details:

http://www.fundslibrary.co.uk/fundslibrary.dataretrieval/documents.aspx?user=Aviva_lifecust&type=packet_lp_fund_unit_doc_factsheet&Lipper=72005379

That is a cash-type fund so it's as near cash as you can get. The clue is in the name 'Deposit'.

jumperabv3

Your_Hero wrote: »

That is a Cash/Money market fund. You get next to nothing and yet you paying management charge on your plan to keep it there.

You are 29 and you want to keep it in cash deposits until you are 55/65. You need some financial education and read up some more on inflation, interest rates, real return etc. to understand that this is probably the worst financial decision you can ever make.

On a very simplistic level, I hope you realise that £100 in 36 years' time is not the same as it is today? Even if you had your "20% interest" (not 25% by the way as you stated), i.e. it only cost you £80, this is not much growth at all in 36 years, i.e. 0.5% a year approx. This is excluding the money you lose from charges in the pension.

You need to speak to a professional adviser to set a good strategy for you (or DIY if you are comfortable) and don't be so afraid of investing.

Thank you for your comments.
My intentions are of course to raise the deposited amount so it won't remain £300 gross per month for the rest of my life ... in fact I hope to start raising it to £360 soon, and hopefully after a year or two get to £400 - £500 per month.

However I always like to consider the worst case scenario, where I'm financially down and can only afford to set aside £300 or maybe even less god forbid.

I'm not too sure what's the difference between doing that and/or risking the funds through riskier products?

Your_Hero

jumperabv3 wrote: »

Thank you for your comments.
My intentions are of course to raise the deposited amount so it won't remain £300 gross per month for the rest of my life ... in fact I hope to start raising it to £360 soon, and hopefully after a year or two get to £400 - £500 per month.

However I always like to consider the worst case scenario, where I'm financially down and can only afford to set aside £300 or maybe even less god forbid.

That's fine. My point was that it is still your own capital with no growth. No matter if you are paying in £100, or £500, it is just your own money (plus tax relief) and it is not growing at all.

I'm not too sure what's the difference between doing that and/or risking the funds through riskier products?

I'm not quite sure what you meant by this?

To an extent, you are take some risk with your money at the moment. Inflation risk is huge over 30 odd years and is no different to keeping your money under the mattress.

The bottom line is that you need to take risk with your money and you can afford to with your age/time horizon, or else your pension will be worth very little. I suggest you read up some more about pensions and investing.

jumperabv3

Your_Hero wrote: »

To an extent, you are take some risk with your money at the moment. Inflation risk is huge over 30 odd years and is no different to keeping your money under the mattress.

I understand, thank you.
Can you link the pension to the ISA rate or anything similar that can add 2% per year to the amount?

LXdaddy

Firsty congratulations on thinking seriously about your pension at age 29. Far too many people don't think about it until much later in their working life.

I'm only going to talk about your investment strategy. Between now and your desired retirement age you have 26 years. If you add to your current pot of £6,000 at the rate of £300 (gross) per month you would get to contributions of £99,600. You will throw in some additional contributions you say and might get to a pot of £120,000 if things go well for you - that's not unreasonable.

You view the additional 25% that you get as tax relief as being your "interest". For the £100 you earn you pay the governemnt £20 in tax (assuming basic rate for a moment) you put £80 into the pension pot and the government adds £20 to it. You are viewing the £20 as an additional 25% added to your £80. Others describe it as 20% of the £100 that ends up in your pot.

But you have this in a Deposit account earning virtually zero interest. The basic theory of saving for your pension is that early in your savings time you need to be looking for larger returns which means a level of risk but you have time to recover from adverse swings; later in your career as you approach retirement you need to switch the strategy so taht you have less risk and accept lower returns. This is often called a "Lifestyle strategy". The early years could be a balance like 80% equities and 20% bonds; later moving towards 50% equities and 50% bonds and in the last year of so moving more to 20% equities, 30% bonds, 50% cash (deposits).

My company pension (defined contribution style) and AVCs were originally in a balance of equities and bonds but a few years ago I switched to a lifestyle fund where the fund operator changes the balance automatically each year as I approach my desired retirement age (I gave that to the scheme operator). So I don't do anything myself they do the maths of rebalancing.

The error in your choice of Deposit fund at 26 years away from retirement is that you are going to miss out on the potential growth over the next 20 odd years. And worse, in that time inflation is going to erode that value of the money in your pot.

If inflation is ONLY 1% higher than the return in your deposit fund the £120,000 will be worth less than £93,000 in today's values. If as is more likely inflation is 2.5% higher than the returns you will get on your deposits your £120,000 will have the buying power of only £63,000 in today's money.

You should change the fund that you are using. I am sure that Aviva will have more appropriate funds available for you.