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Surprised at projected future income?

buel10
Posts: 469 Forumite


Hi there,
I'm sure there is a good explanation for this, and I can't see it, so please can I ask for some help here:
My friend is 29, has a pension fund value of approx £19,000, pays in £212 per month and her employer puts in £265 and the AMC is 2% (but is phrased as 'real terms 1%') but the projected annual future pension income is 'just (subjective, I suppose) £7,450, in today's prices.
Please can I ask why this appears to be such a poor return?
I'm sure there is a good explanation for this, and I can't see it, so please can I ask for some help here:
My friend is 29, has a pension fund value of approx £19,000, pays in £212 per month and her employer puts in £265 and the AMC is 2% (but is phrased as 'real terms 1%') but the projected annual future pension income is 'just (subjective, I suppose) £7,450, in today's prices.
Please can I ask why this appears to be such a poor return?
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Comments
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Thrugelmir wrote: »Care to clarify the amount.
Done. Thank you.0 -
Pension fund projections (not predictions) all have to use the same specified returns. They are generally regarded as pessimistic.0
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Why do you consider that a poor return? It's an income for life.
More importantly it demonstrates that to achieve a decent retirement income you need to save more. The earlier the better.0 -
Hi there,
I'm sure there is a good explanation for this, and I can't see it, so please can I ask for some help here:
My friend is 29, has a pension fund value of approx £19,000, pays in £212 per month and her employer puts in £265 and the AMC is 2% (but is phrased as 'real terms 1%') but the projected annual future pension income is 'just (subjective, I suppose) £7,450, in today's prices.
Please can I ask why this appears to be such a poor return?0 -
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It sounds reasonable enough to me, given the limitations of projections and the lack of information on the shape of the annuity income.
There's just under £6k going in each year for the next 30 odd years, presumably maintaining its value in real terms. Growth after inflation (probably projected as around 2.5%) is relatively small due to the 2% charges, so net real growth of 0.5%. And the payout for the following 25-30 years (a typical life expectancy in retirement for someone aged 29 now) will pay out a bit more than what was put in, in real terms, to reflect those lowish real returns.
If a bigger number is required, hope that real returns are better than projected which may be the case, reduce the charges being paid or put more money into the pot.0 -
Please can I ask why this appears to be such a poor return?
It is a synthetic figure using a range of assumptions which many feel are too pessimistic. Especially when most of the population don't understand assumptions and synthetic projections.
Every figure used as an assumption is probably understating the likely outcome. Only inflation is probably the one nearest to likely outcome but it is just a guess like all the other figures.My friend is 29, has a pension fund value of approx £19,000, pays in £212 per month and her employer puts in £265 and the AMC is 2% (but is phrased as 'real terms 1%') but the projected annual future pension income is 'just (subjective, I suppose) £7,450, in today's prices.
As this is a workplace scheme, the AMC is unlikely to be above 0.75%. The 0.75% cap has been in place since April 2015. So, any calculation that uses 2% or possibly 1% is again, highlighting an issue with hypothetical calculations.
Lets say the calculation assumes 1% AMC but the AMC is actually 0.75%. The growth rates are probably artificially low as the projections use a figure before charges. The mid rate could be 4.4% but that wouldnt mean 4.4% after charges. it would be 4.4% before charges. The bog standard old balanced managed funds given by insurance companies are over 5.5% AFTER charges if you invested through both the dot.com and credit crunch periods. The assumption for income probably assumes annuity (which not many use now) and the annuity rate will likely be indexed (which barely anyone bought) and joint life. The figure could well be around half a sustainable drawdown rate would be.
We have gone from the 80s where figures overstated the likely outcome (with hindsight) to where they now understate the likely outcome. Although it is possible that the next several decades could be really dire and playing it ultra-safe in projections was the right thing to do.
The one thing we do know about synthetic projections is that you will not get the figure they say you are on track for.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
My pension is the same, i have around 6k being paid in between myself & employer, it estimates 7-8k pension if retire at 65 or 11k if retire at 68 , assuming i take 25% tax free, leave 50% to a partner and get 3% increase each year.
Now when i change this to no partner so no one to leave part of pension to, don't have a increase as i worked out it would be a minimum of 10 years before I see any benefit of taking a lower initial pension and retiring at 65 or 68 means i'd be 75 or 78 before i start to see a small difference, whereby I am probably better of having the money up front and either using if i need to OR saving it and dipping into that money should i need to in later years. The predicted pension figure jumps up to 18.5k at 68 or 15k for 65 i think. This is assuming i take 25% tax free which I plan to as again it works out 20+ years before i'd see any benefit which doesn't seem a good choice as i'd be 85 minimum by then and probably best to take the tax free lump sum to keep for any expecting bills such as new roof, windows etc. This is all based on a annuity as at the moment, i'm happier with the idea of knowing with an annuity once i get one, they pay me x per month for the remainder of my life, whereas with draw down your still taking a risk, if the markets crash you could loose a large amount of your money and the thought of having to struggle or get part time job etc at 68+ doesn't appeal at all to me. On top of this, I would obviously get a full state pension as I have missed some years whilst at college/uni but I am well on track to meet the required number of years to qualify for full state pension long before I am 68. On my last check, I believe I need another 10 years to qualify for it.
Kev0
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