Pension Statement Query

borgon_baxter

Hi,

I've been lurking around on this forum for a while trying to get a better understanding of pensions.

I'm 43 and have been have a pension through my employer. I started paying into a pension when I was 25 and I have always paid the maximum possible to take advantage of my employer matching my contribution.....this started at 5% me / 5% employer...recently this has increased to 10% / 10% (this of my pensionable salary which approx £10K lower than my gross once you exclude car allowance etc).

I thought this was a decent amount to contribute however I have recently received my pension statement which has given me a shock. It showed...

Current value of fund £82K

Est value of fund at 2035 (age 60) £295K - could be used to purchase an annual pension of £5.8K.

Or could take 25%, £73K lump sum which would reduce fund to £221K - could be used to purchase an annual pension of £4.3K.


It says that the projection 'has been made using statutory money purchase illustration rates and brought back into todays terms and assumes your contribution continues at the current rate'

I've read a few similar posts suggesting that in some cases these projections are on the pessimistic side - could this be the case here?

Currently trying to balance overplaying on mortgage, savings & pensions but if the above is correct I may need to pay in considerably more.

Thanks

JoeCrystal

You are right in assuming that it is quite pessimistic. Ultimately, it is what is your retirement income goal is and working it back to get some idea of how much to contribute. 20% contribution is pretty outstanding! Here is the most recent post about the issue you highlighted.

Pension shock - can this be right?

dunstonh

Est value of fund at 2035 (age 60) £295K

That is in today's figures. Not future money terms.

could be used to purchase an annual pension of £5.8K.

Thats about a third of what you can get but it too will be in todays figures.

I've read a few similar posts suggesting that in some cases these projections are on the pessimistic side - could this be the case here?

Well seeing as it has a deduction for inflation to show the spending power as if it is today and uses a type of annuity that no-one actually buys and is around 1/3rd of the drawdown or more common annuity types, then yes.

Projections are pessimistic. A good idea that they are but they have taken it a bit too far in that direction. However, do remember that anything you pay into a pension is money you are putting aside for later. You get tax relief and the returns are likely to average double what you are paying on the mortgage (after income tax/NI too). So, don't be afraid to add more to the pension. The more you add, the safer your retirement will be. You would expect the pension to be better than any form of savings account and financially better than overpaying the mortgage (at this time - although the comfort factor of reducing your mortgage is not a bad thing).

borgon_baxter

Thank you for the responses...very helpful.

Where would I be able to get a more accurate projection from that accounts for the things you have mentioned....inflation, future money terms etc? I know there are a few websites but will they all give the same pessimistic view?

Thanks

AnotherJoe

Well, one figure is to take 3.5-4% of the total sum as relatively safe for drawing down.
So, £11.5k lets say.
However, since the growth projections may be pessimistic, I'd say that would also be lowball since you could get higher than the £295k.
Would i be right in thinking that like most people, you have no clue at all what funds you are invested in? That would be a good place to start, finding out what they are. If you are in the typical[STRIKE] dire overcautious [/STRIKE]prudent default set of funds, you could most likely do much better if you have a choice.

borgon_baxter

You are right – I’ve been paying in but it’s really only now that I’m questioning and trying to get a better understanding of everything…

Based on the documentation that came with the statement I am on the default ‘Annuity Option Lifestyle profile’ and I am currently invested in the Aegon Blackrock Aquila Life Global Equity fund.

Apparently, this profile where ‘contributions are invested in equities up until 5 years prior to retirement then switched to a combination of inflation linked and corporate bonds and cash such that the mix is 75% bonds and 25% cash…..to provide greater diversification, the growth assets are invested in a fund that is designed to match the performance of broad basket of UK and international companies, where 60% is invested in the UK equity market….’

There are 2 other profiles….
Cash option lifestyle profile – as above except all of the pot will be invested in the Aquila life Cash fund
Income drawdown Option profile – as above except 40% Aquila Life Global Equity fund, 60% in the Aquila Life Corporate Bond index Fund

There is also an option to invest in one or more of a list of Aegon BlackRock funds if I don’t want to choose one of the 3 strategies….Corporate Bonds, Cash, UK equity, overseas bonds etc…..

As I say I’m new to this so I don’t feel confident that I understand it enough to change strategy or choose my own funds. I get it depends on the margin of risk / reward?

Thanks

MallyGirl

That is quite a wide range of risk for the 3 options. I would say that where you are is the best of the bunch for a bit while you get a bit more up to speed. For now you are in 100% equities which is quite feisty but you are a long way off the lifestyle thing kicking in.
40% equity / 60% bonds is pretty conservative (probably won't see enough growth).
You can read up on the self select options and make a more personal choice once you understand it a bit better. I split my contributions between a passive equity fund and an active multi asset fund to achieve my desired end result.