Pension shock - can this be right?

dandy-candy

My husband took out a pension with Scottish widows 20 years ago. He started in 1999 making payments of £3k a year but they kept going up and up, until these last few years he has been having to pay in £6k a year. In total he has paid in about £90k of his wages in 20 years. They have written and told him he will receive a pension of £3k a year back. We are so shocked. Hes been paying in double that for the last few years. Our council tax alone is over £2k a year. He will have to live to 85 just to make back what he has paid in alone. Can this be correct? Also he thinks if he dies i only get half the money, so he said he would have been better stuffing it in a mattress because at least he could have left all what he paid in to me and the kids!

He has the option of taking a lump sum but they said that we have to pay tax on it then (he currently is just over the 40%) but do we pay that on the whole amount, even what we paid in? (and were taxed on when he earned that money)

Terribly shocked and not sure what to do.

dunstonh

They have written and told him he will receive a pension of £3k a year back. We are so shocked.

Yes. The projection assumptions are really dire at the present and doing more harm that good. You can totally ignore them as a) you are misreading them and b) they are massively pessimistic.

Can this be correct?

On the assumptions used, yes. However, the assumptions are garbage.

Also he thinks if he dies i only get half the money, so he said he would have been better stuffing it in a mattress because at least he could have left all what he paid in to me and the kids!

he thinks wrong. Again, that is only on the assumption. Not reality.

Terribly shocked and not sure what to do.

Either spend some time to understand why its wrong or get a local IFA out to see you and they can explain it.

Basically, the projections show really low growth rates (lower than reality). They then deduct 2.5% p.a. for inflation to give a real terms figure (in todays spending power). They then assume an annuity type that nobody buys. It is the lowest income rate of any type.

Tell us what the current value is and his age. I would not be surprised to see the real world figure being upto 10 times higher than the figure shown on the statement.

dandy-candy

The current value in total is £140k and he turns 55 this year so his last payment to them was this month.

enthusiasticsaver

Presumably it is a defined contribution scheme? Does he get statements telling him how much is in it?

Ignore the forecasts. Often they are using current annuity rates to quote projected income and not many of us do that these days. He needs to know what is in the pot total and where it is invested.

The information about the tax on the lump sum is misleading. He would be able to get 25% of the pension pot on retirement tax free. If he liquidates the whole pension pot in one go then yes he would have to pay tax on 75% at his marginal tax rate but again hardly anyone does that. I would agree that you either need to educate yourself about how pensions (specifically yours and your DHs) work or get some advice from an IFA. You do not say how old you and your DH are so this could be relevant. What pension do you have and have you both checked your state pension forecasts?

enthusiasticsaver

dandy-candy wrote: »

The current value in total is £140k and he turns 55 this year so his last payment to them was this month.

So he can take up to 25% tax free when he reaches 55 which is £35000 and take the rest in the most tax efficient way possible over the years up until his state pension kicks in and beyond if necessary. Is he looking to retire early and how much will you need to live off? What about your pension arrangements and do you have other investments/savings?

Dazed_and_confused

He has the option of taking a lump sum but they said that we have to pay tax on it then (he currently is just over the 40%) but do we pay that on the whole amount, even what we paid in? (and were taxed on when he earned that money)

If he is earning over £50k then why does he want to take taxable income from the pension now?

dunstonh

£140k at 4% income draw is £5,600 without any more contributions paid in.

he still has another decade. So, that figure will go up a lot more. With contributions and growth, it could more than double that.

So, a figure of around £10k income is more realistic. And remember that pot of money is not given up or lost. If he dies before drawing a few years income out, the remaining pot value is passed to you (and if you have gone, onto children or other nominated beneficiaries).

These projection assumptions are now so ridiculous that they are doing more damage than good nowadays and we are seeing almost daily posts. Providers have no choice but to follow them. IFAs don't. So, if you want independent verification of what we are saying on here, then check with a local IFA. That may well be worth it too as a 1999 SW pension with his fund value is likely to be improved upon with a modern pension. You could kill two birds with one stone.

AnotherJoe

You've got to wonder how many people close their pensions and just take the money out taking a tax hit, as a direct result of these wholly misleading garbage projections.

xylophone

Your husband could book an appointment with Pension Wise to discuss his pension options.

https://www.pensionwise.gov.uk/en


Have you and your husband obtained State Pension forecasts?

https://www.gov.uk/check-state-pension

dunstonh

AnotherJoe wrote: »

You've got to wonder how many people close their pensions and just take the money out taking a tax hit, as a direct result of these wholly misleading garbage projections.

Indeed. The sensible ones come here and educate themselves.

I managed to stop a scammer a few years back who had used the Aviva statement projection at the low rate of -1.4% to say that his pension was awful and that Cape Verde property would be so much better. The Aviva pension was actually growing at over 6% p.a. and the person would never use an indexed joint annuity that the statement was using. Luckily I got it stopped in time but these new rates make it easy for scammers.

We are getting posts like this almost every day now. Indeed, another one has just appeared making it two today.

Silvertabby

Gone from one ridiculous extreme to the other.

Before Pension Freedoms, we had people opting out/transferring out of the LGPS because private pension schemes were 'paying' far more than we were.

However, the comparisons were between the LGPS deferred benefit statement (which showed the pension accrued to date - but obviously not the cost of living increases between date of leaving and retirement age) and the private scheme based on increases of 9% per year and 10 -15% annuities.