Pension with profits fund

toga38

Hello, I recently turned 55yrs and have now started to take notice of my pensions. My post is regarding a small pension pot (from a previous employer) that I have with Standard Life. Now that I have started looking at my annual statements, it is causing me some confusion.


I was encouraged to take out the pension in 1988 as part of the opting out of SERPS (which I did). When the pension was sold to the workforce we were told that there would be a guarantee 4% growth per annum regardless of market conditions. My confusion is as follows:


When I look at the fund growth rate (stated on the penultimate page of my statement) its states: "Pension with profit Fund growth rate 1.5%", a "reduction of 2.5%" being taken to allow for inflation (which takes the growth rate up to 4%).


I have had no clarity from Standard Life (or at least their reply doesn't clarify anything from my point of view).


Regards


Could anyone offer some clarity on this e.g. is this correct, as I would have expected the 4% regardless of inflation.

Malthusian

The penultimate page of your statement is an illustration, a theoretical guess about what your pension will be worth in the future.

The most important thing to understand is that you are still getting 4% added onto the pension fund each year and Standard Life are honouring the guarantee. If your pension fund is worth £10,000 now, next year your statement will say £10,400.

However, £10,400 next year won't be as worth as much as £10,400 is now, due to inflation. The statutory illustration attempts to take this into account by showing the figures "in today's money", which means guessing what the rate of inflation will be and reducing them accordingly. Your pension increases by 4% each year in pounds and pence, but its value in today's money only goes up by 1.5% (if you simply deduct 2.5% inflation from the 4% growth rate).

Statutory illustrations cause far too much confusion and worry given that they are essentially meaningless. Nobody has any idea what inflation will be over the next 10 or 20 years.

dunstonh

As said above, projections can be a pain in the neck when there are guarantees in place. The projections have terms set by the regulator. They are examples based on charges, inflation and a set rate of return (and usually an annuity rate that is below the typical annuity rate currently available).

The fact that the Std Life WP fund has a 4% guarantee is not factored into the projections. Also, its 4% BEFORE charges. Last one I saw had an annual charge of 2.3%. So, the net benefit of the guarantee was 1.7%

Projections are not perfect. Too many assumptions and the outcome being shown as 1-3 projection examples. Many advisers have stochastic modelling which gives you a pod chart showing where you are likely to end up in 90% of cases. Or a statistical likelihood of hitting a certain amount. However, these too are based on assumptions but they show the the much wider range of possible outcomes. 1-3 examples on a statement are not enough. You have more chance of winning the lottery than you have of you pension actually hitting one of those three projected figures.

Mothman

dunstonh wrote: »

The fact that the Std Life WP fund has a 4% guarantee is not factored into the projections. Also, its 4% BEFORE charges. Last one I saw had an annual charge of 2.3%. So, the net benefit of the guarantee was 1.7%

Where are With-Profits charges usually taken from, are they usually adjusted out of the Terminal bonus figure? I only ask as I have a Pru (ex Scot Am) With-Profits pension which also has a 4% guarantee , the accumulated amount on the yearly statement appears to grow by 4% p\a, only the terminal bonus seems to vary. When I asked the Pru they were unable to tell me what the annual charges were that applied to the policy.

dunstonh

Where are With-Profits charges usually taken from

It varies depending on type of with profits plan and the provider (and some providers do it different ways depending on version). There is no one method.

xylophone

What does your original policy document say about charges?


http://www.pruadviser.co.uk/content/nav/about/26674/pghome/49880/

otherwise the technical helpline might assist?

Mothman

xylophone wrote: »

What does your original policy document say about charges?


http://www.pruadviser.co.uk/content/nav/about/26674/pghome/49880/

otherwise the technical helpline might assist?

Original Scot Am contract says charges of £10 p/a with the caveat that 'charges may be varied by the society'. I guess the Pru could be charging what they like as there appears to be no way of verifying what has been deducted.

toga38

Thanks for the replies, the illustrations have caused me confusion but the posts have given some clarity to the situation.