How long are work pensions paid for??

Legacy_user

Hey guys,

Very new to pensions and I don't understand very much about them so forgive me if this question seems stupid!

I am thinking of joining a works pension... What I wanted to kow was... Let's say I put in £60 a month and my employer does too. Over a year I would save up £1440. Over lets say 35 years that would save up £50,400.

My question is how much a month would I get when I retire? Because if I got lets say £800 a month from it, it would only last around 5 years? So what happens if I live to say 95? Would my work pension carry on paying out? How would £50,400 last from retirement age to 95 years old for exapmple?

I don't understand it and can't get my head around it.

Hope someone can help

Thanks
Craigh

jem16

Craigh1983 wrote: »

Hey guys,

Very new to pensions and I don't understand very much about them so forgive me if this question seems stupid!

I am thinking of joining a works pension... What I wanted to kow was... Let's say I put in £60 a month and my employer does too. Over a year I would save up £1440. Over lets say 35 years that would save up £50,400.

it should end up a lot more with 35 years of growth. This is assuming it's a defined Contribution pension - is it?

My question is how much a month would I get when I retire? Because if I got lets say £800 a month from it, it would only last around 5 years? So what happens if I live to say 95? Would my work pension carry on paying out? How would £50,400 last from retirement age to 95 years old for exapmple?

I don't understand it and can't get my head around it.

Hope someone can help

Thanks
Craigh

As I said it will be much more than that.

At the moment there are 2 ways of getting a retirement income from your pot. One is to buy an annuity where the insurance company agree to pay you a set amount of money until you die so it never runs out.

The other way is to drawdown an amount of income whilst keeping the pot invested so it continues to at least keep track with inflation but hopefully to also grow. However if you withdraw too much you could run out of money.

Linton

Assuming you dont have a DB (final salary) pension....

The money both you and your employer contribute will be invested probably in funds that invest in shares. By the time you retire the pot size should have grown significantly above your joint contributions. At that point you have a choice of two options....

1) Buy an annuity which will guarantee to pay you a steady income until you die

2) Keep the money invested but "drawdown " the money as you need to spend it. You would be responsible for ensuring that you didnt run out of money before you died.


As to what you can expect from a pension....

1) A fixed annuity say 6%/year of your initial pot, but you lose all access to the pot.

2) An index linked annuity perhaps 3%/year of your total pot, again you lose access to the pot.

3) Drawdown perhaps 4-5% a year without any major danger of running out of money. The amount you can safely drawdown may very roughly rise with inflation, and any money left over when you die goes to your beneficiaries.

In your example numbers £120/month is fairly low. To get a decent pension you should be putting away more than that.

princeofpounds

It's not a stupid question, it's one of the important questions to be asking!

Start with an income figure you might like to receive in your retirement, and the age you might want to retire. These are your objectives.

The number can be in today's money, i.e. don't worry about inflation and what might be a decent wage in 2050!

Remember that the state pension should supplement your income. We don't know precisely when or how much, but current assumptions are ok. Also you may be mortgage free on a house by then and generally require much less income; only you know if that is realistic.

Let's assume you want £15k p.a from your pension.

This income is produced in one of two basic ways. You either buy an annuity (an income for life), or you draw down on your pension savings, which may be better value, but involves more variability. You can make all sorts of assumptions, but a 4% drawdown is a good rule of thumb.*

Therefore dividing the desired income by 0.04 will give you an estimated size of the pension pot you need on the day you retire.

15k / 0.04 = £375k (You can see this is on a different scale to the sort of contributions you are picturing).

Now, the good point is that you have many years to invest, so you don't have to put all £375k in, as investment growth will do a lot of the lifting for you.

The growth that matters is the growth above inflation, which is called 'real' growth. This assumption is very important and very uncertain. You will see assumptions from 2% to 8%. Personally I would assume something like 3%.

The sums for that are a little more complicated because each year has a different amount of time to grow.

Whilst it is not hard on a spreadsheet, the good thing is there are lots of pension calculators that will do it for you

https://www.moneyadviceservice.org.uk/en/tools/pension-calculator
http://www.aviva-pensioncalculator.co.uk/
http://www.standardlife.co.uk/c1/guides-and-calculators/pension-calculator.page

Remember that you can repeat the analysis every few years, and should, to see if you are keeping pace or not. All the variables will change over time, but gradually, so you just keep adjusting.

Please do go through the process, find out what you need, then come back and discuss with us the results, tell us if anything surprises you etc.


* the reason why this might work until you are 95 is as follows:

Every year, you take out 4% of your 375k pot. The pot then grows. It might grow 3% in real terms, using our earlier assumption, in which case your pot is almost the same size in real terms as when its started (precisely 370.8k in fact). So the pot can last for many many years - way beyond your lifespan.

In reality, at that age you may have less risky investments, so it probably won't grow as much as when you were saving your pension. You also need a safety buffer, so your income is not hurt too much if investments go south for a few years, or you live for a long time. So that's why the number has to be somewhat careful.

atush

Or try a pension calculator?


In any case, wondering abt what happens in 30 years + time IS important. But the most important thing is to join your work pension IMMEDIATELY. And work out how much more you should pay in etc can be February's project lol.

As a side note, you should always put in the amount to get the maximum contribution from your employer. So if they will match up to 5%, put in at least 5%. If they match up to 10%, put in 10%.

jamesd

Craigh1983 wrote: »

I am thinking of joining a works pension... What I wanted to kow was... Let's say I put in £60 a month and my employer does too. Over a year I would save up £1440. Over lets say 35 years that would save up £50,400.

To get the final value use a regular savings calculator if it is a defined contribution pension, where you have investments specifically for you. Use that calculator and put in £120 monthly payment. Put in 35 as the duration. Put in 4.5 as the interest rate - a bit over half a percent below the long term return of the UK stock market, after deducting inflation. That will tell you that the final value will be £122,129.03. This is in today's money and assumes that you increase the monthly payments by inflation each year.

Craigh1983 wrote: »

My question is how much a month would I get when I retire?

There os a rough guideline that a person can take 4% of their pension pot as income when they retire and increase that with inflation without an excessive chance of running out of money before they die. The £122,129.03 using this guideline could provide you with an income of £4,885.16 a year, increasing with inflation.

That assumes that you use income drawdown, leaving the money invested. Annuities are available but they currently pay out substantially less than this as an interest-protected income at normal retirement ages. The deal gradually improves as you get older and sometime between ages 75 and 85 it can become a good deal to buy an annuity. An annuity can also be useful just to guarantee the income for life. However at present it is normally a better idea to defer claiming the state pension instead because this usually pays more in increased state pension than an annuity would pay for the same spending.

Craigh1983 wrote: »

Because if I got lets say £800 a month from it, it would only last around 5 years? So what happens if I live to say 95? Would my work pension carry on paying out? How would £50,400 last from retirement age to 95 years old for exapmple?

An annuity would continue to pay out, drawdown you'd adjust the income if necessary, say if there was a substantial and sustained drop in investment markets. Dropping the income a little, even to 3.5%, could greatly reduce the chance of running out of money in bad times because that is close to the normal dividends paid by the UK stock market, so there would be little drawing on capital. If markets do well you could increase the income.

For rough planning today you can assume that each £120 a month going into the pension today could pay you £4,885 a year/ £407 a month in today's money for as long as you live after retiring.

Because investments vary all investment planning should include a safety margin. I tend to use historic or close to historic growth rates and add explicit safety margins to the target value at retirement of 50% or 100%. So if I wanted £407 a month I'd aim to pay at least in £180 a month instead of £120 a month. Other people prefer to use lower growth rate assumptions than historic averages instead, I just like to be very explicit about safety margin levels and think that's best done with values rather than reduced growth rates, partly because people tend to under-estimate the effect of even quite small reductions in growth rate over long times.

saver861

Craigh1983 wrote: »

Hey guys,


I don't understand it and can't get my head around it.

You are not alone in that situation on pensions.... and in your age even more so - assuming you are in early career stages.

Certainly you can get lots of info on a forum like this, but also lots of info thrown at you that compounds the confusion! While you are certainly right to be thinking about getting into a pension, equally it will do you good to have enough knowledge to know what you are getting into and the various options.

So if terms like, defined benefits, defined contribution, drawdowns, annuities etc are not meaningful, as they were not to me when I started to look into pensions, then getting some background knowledge will help a great deal.

Not saying you need to be a technical expert on pensions, but I'd definitely be advising getting sufficient knowledge about different types of pension, particularly what your employer is offering, different options etc.

http://www.pensionsadvisoryservice.org.uk/ is one source where you can call or web chat and ask specific questions for your circumstances - there are many others also.

Better to know the system before you make your decision than to make your decision and then find the system is not the best one.

JohnB47

Craigh1983 wrote: »

Hey guys,

Very new to pensions and I don't understand very much about them so forgive me if this question seems stupid!

I am thinking of joining a works pension... What I wanted to kow was... Let's say I put in £60 a month and my employer does too. Over a year I would save up £1440. Over lets say 35 years that would save up £50,400.

My question is how much a month would I get when I retire? Because if I got lets say £800 a month from it, it would only last around 5 years? So what happens if I live to say 95? Would my work pension carry on paying out? How would £50,400 last from retirement age to 95 years old for exapmple?

I don't understand it and can't get my head around it.

Hope someone can help

Thanks
Craigh

I may have missed it in the earlier excellent replies but just to answer the question in the title of your post, once your pension is in payment you receive it until you expire. Even then, a wife may receive half of it until they exprire -depending on the pension. What I've already received from my company pension, in 13 years, far exceeds what I paid in, over 25 years. Thanks, former employers!

greenglide

But that only applies to a defined benefit scheme or to an annuity purchased from a DC scheme.

An uncrystallised DC pension or a pension in drawdown is just a pot of money, it has no concept of a fixed payment or end date.

ic

Have a play with this calculator:

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

Teaandscones

In terms of how long pensions are paid, my great aunt received a widows pension from her late husband's service in the army until 2009 when he first joined up in 1914. Don't underestimate how long you or your widow(er) will live, it is often much longer than you think.