Pension projections - clarification

kingtravel

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HappyHarry

It could be either.

Most likely it will assume contributions continue at the current rate, but the illustration will tell you.

Apodemus

It may also be quoting on the basis that you use the money to purchase an annuity, which might not be the most beneficial approach.

ischofie1

My illustration assumes contributions will increase by 2.5% as an estimate for pay rises.
For what it's worth, I don't bother with the projections provided. They use so many pessimistic assumptions, I consider the projections will bear no resemblance to reality.

Anonymous101

ischofie1 wrote: »

My illustration assumes contributions will increase by 2.5% as an estimate for pay rises.
For what it's worth, I don't bother with the projections provided. They use so many pessimistic assumptions, I consider the projections will bear no resemblance to reality.

That and they assume you're going to buy an annuity at the god awful rates available today.

You're much better to work out for yourself where your pension pot is likely to be at whatever age you want to retire and assume a 4% drawdown to give you an estimated income.

ischofie1

I couldn't agree with you more.
Much better to work it out yourself.
I think some of the projections are doing more harm than good in that some people see the low figures & think, sod it I may as well not bother.

dunstonh

Most example projections have the following assumptions.

Annuity on 50% spouse basis with indexation (which very few would use -makes figure lower)
inflation at 2.5% (so figures are displayed in todays terms)
growth rates which are way below recent (as in last 20 years) and long term averages.

The assumptions are printed with the illustration. However, provider illustrations are a very blunt tool and more likely to be wrong than right. The very low assumptions appear to be doing more damage than good.

Linton

Agree with the comments that you should work out your projections yourself. Half an hour with Excel can give you a far better insight into the issues involved with retirement planning than any number of projections.

Anonymous101

For anyone that doesn't know how there's loads of information on the internet. A fairly basic way to work this out I've outlined below in 3 steps:

1) Find out what your current pension pots are worth and use a Compound interest for principal formula P(1+r/n)^nt

Principle amount P
number of years t
Interest rate r
Number of interest compounds per year n = 1

2) Work out what your future contributions total worth
PMT * (((1 + r)^t - 1) / r)
Annual payment = PMT

3) Add them together :cool:

This will give you an estimate of the likely pot size for a DC scheme. Work on 4% drawdown and that'll give you an estimate of income.

sandsy

A stututory annual illustration will assume contributions continue to be paid, and will increase in line with earnings inflation of 2.5%.

Any other projection of benefits will assume contributions continue to be paid, and will increase in line with earnings inflation of 4%. Further, any investment growth rates will be capped at no more than 5% nominal.

Generally, people read too much into how accurate they are or aren't. They're just meant to give you a rough idea of whether you're on track and prompt you to consider your pension provision - so it seems to have worked