Pension will pay less a year than husband paid in?

dandy-candy

My husband has a Scottish widows pension and he’s been looking at the paperwork. He pays in £5752 a year and they say he will receive £3420 taxable income a year on retirement. Given that he’s paid in a total of £75k over the years he would have to live a long time after retirement just to get back what he’s paid in? Can this be right?

dunstonh

nd they say he will receive £3420 taxable income a year on retirement.

They are not saying that. The projections on statements are synthetic projections using assumptions. The assumptions often leave a lot to be desired and usually understate the likely outcome.

For example, the projection figure is reduced to give a todays spending power figure. Not what it will actually be in the future.

The growth rates used are typically lower than expectation.
The income rate used is significantly lower than what is likely.

The current projection methods forced on providers is creating more damage than good. You are not the first and won't be the last to misread them.

bostonerimus

To understand these projections you need to know the inflation rate and interest rate used. Low interest rates will give large CETV, but also low annual income for a traditional index linked lifetime pension.

Mistermeaner

all that said an annual income of £3420 from a pot of £75K is approx 4.6%... isn't the rule of thumb to use around 3% as a sustainable draw-down figure?

JoeCrystal

Mistermeaner wrote: »

all that said an annual income of £3420 from a pot of £75K is approx 4.6%... isn't the rule of thumb to use around 3% as a sustainable draw-down figure?

Considering dandy-candy said that her husband paid in £75k over the year, it is possible that the pension pot is more significant due to the returns over the year rather than a simple £75k pot. She doesn't say if the projection takes into account of continuing contribution, how far away he will be from the scheme retirement age and so on. I do agree that predictions on pension paperwork are pretty depressing.

Besides, from what I understand, it is now more common to opt for drawdown on the pension pot rather than annuity since the annuity rate is so dire.

Mistermeaner

JoeCrystal wrote: »

Considering dandy-candy said that her husband paid in £75k over the year, it is possible that the pension pot is more significant due to the returns over the year rather than a simple £75k pot. She doesn't say if the projection takes into account of continuing contribution, how far away he will be from the scheme retirement age and so on. I do agree that predictions on pension paperwork are pretty depressing.

Besides, from what I understand, it is now more common to opt for drawdown on the pension pot rather than annuity since the annuity rate is so dire.

i reads 75K over the yearS - i.e. the total pot was 75K

dunstonh

But remember the projection is not future money terms but artificially reduced to give todays spending power.

What you actually pay in over the years has no artificial adjustment for inflation.

Albermarle

would have to live a long time after retirement just to get back what he’s paid in?

Life expectancy has increased a lot and average for a man in UK is around 84, so nearly 20 years after retiring at 65.
If a pension has to keep up with inflation during that 20years , then the starting figure at 65 has to be lower

westv

I very much doubt whether the Scottish Widow's projection is a drawdown rate. It's more likely to be based on buying an annuity for 75% of the pot - maybe single life no escalation.

hugheskevi

Life expectancy has increased a lot and average for a man in UK is around 84, so nearly 20 years after retiring at 65.

Latest (2016-based) cohort life expectancy for a man aged 65 is 86 years of age, with a 1 in 4 chance of reaching age 93.

AnotherJoe

OP what they are showing him is what he'd get back if he bought an annuity from them, which he shouldn't do.
There are many other ways he can take the money.