Workplace pension - projected value figures

grumbler

Can anyone explain the figures from my friend's statement (2016)?

Illustration of Projected Benefits at your Target Retirement Age of 65
Your Projected Fund Value at your Retirement Age £42600
Your Projected Pension at your Target Retirement Age £1230

What I don't understand is that even ignoring the interest after retirement, 42600/1230=34.6 while life expectancy in UK is currently 81.


What am I missing? Do they really expect life expectancy to grow to 100 in 10 years when the friend reaches 65?

zagfles

It's based on buying an index linked annuity, ie a rock solid guaranteed (or as close to as possible) inflation proofed income for life.

Yields on index linked annuities are currently negative, in the same way as interest rates are currently below inflation, ie money held in safe investments lose value in real terms.

Therefore these days an index linked annuity would pay less than the pot divided by life expectancy.

NedS

And that figure of £1230pa is based on what exactly? Purchasing an annuity? An initial drawdown rate of 3% rising in line with inflation?

Edit: zagfles answered first

grumbler

zagfles wrote: »

It's based on buying an index linked annuity, ie a rock solid guaranteed (or as close to as possible) income for life.

Yields on interest linked annuities are negative, in the same way as interest rates are currently below inflation, ie money held in safe investments lose value in real terms.

Therefore these days an index linked annuity would pay less than the pot divided by life expectancy.

Does this mean that the pension figure is for the first year only and will be indexed each year later?

NedS wrote: »

And that figure of £1230pa is based on what exactly? Purchasing an annuity? An initial drawdown rate of 3% rising in line with inflation?

Edit: zagfles answered first

I don't know if this is of any relevance, but

This pension value would represent 4.26% of your Lifetime Allowance for tax-priveleged retirement savings

I don't understand this either.

JoeCrystal

grumbler wrote: »

Does this mean that the pension figure is for the first year only and will be indexed each year later?


I don't know if this is of any relevance, but

I don't understand this either.

Not exactly, grumbler. It really depends on the small prints on the statement, what does it actually say? Both statements from two pension providers say that I will get a level pension whose monthly amount would not change

grumbler

MSE wrote:

Your request has been blocked.

Two times in a row I wasn't able to post a reply!
I'll try posting this and then edditing it.


EDIT


I'll ask for the small print (if it exists).
However, whatever it says, if the pension amount is fixed, this makes no sense to me.
<div>%3

grumbler

The bloody website keeps blocking my posts and I have no idea what triggers this blocking :mad:

bowlhead99

grumbler wrote: »

I don't know if this is of any relevance, but

This pension value would represent 4.26% of your Lifetime Allowance for tax-priveleged retirement savings

I don't understand this either.

Pensions are tax efficient, and to stop people with loads of wealth and income getting too much benefit out of them, everyone has a Lifetime Allowance for how much you can have in the way of pension benefits before an extra tax is payable. At the time the statement was produced, that Lifetime allowance was a million quid. If you cashed in £42.6k from this pension to buy a small annuity, you'd have used up 4.26% of the lifetime allowance.

As this pension is pretty modest, there is plenty of headroom within the Lifetime Allowance because this one is only using up 4.26% of the limit. There's another 95.74% spare. But if you also had another bigger DC pension with £450k in it using up 45% of the allowance, and a large DB pension paying guaranteed benefits of £x per year which are deemed to use up y% of the allowance, you might threaten to use up your entire allowance and be in line to pay that special extra tax.

So, pension statements giving a projected value will have a standard disclosure for how much of the lifetime allowance that projected fund size (for DC pensions) or annual defined benefits (in the case of DB pensions) would use up.

zagfles

grumbler wrote: »

Does this mean that the pension figure is for the first year only and will be indexed each year later?

The statement probably shows amounts in today's money terms, so it'll be the same every year in todays money terms, but of course the actual amount will increase with inflation.

Woby_Tide

Not sure if it's the same provider but the 34.6 multiple is exactly the same as my app shows a projected benefit.

My own query is why it's a projected benefit when I'm still contributing for another 20+ years. Even if the suggestion is my fund would only increase by inflation as would my annuity each year it seems overly cautious given the low/med/high equity percentage increases they are able to use to predict future potential growth?

Even if I stopped contributing tomorrow and left the pot at the mercy of the market/inflation the valuation surely isn't correct?

Albermarle

it seems overly cautious

This is part of the problem.
In the past these projections were overoptimistic but now they have swung the other way and are very pessimistic so best ignored .
On the other hand many people underestimate the extra cost of index linking .