Stakeholder pensions

AngelaMR

 I have a question about stakeholder pensions. I am 56, self-employed and on a small salary. I took out a stakeholder pension in approximately 2014 and I pay in £100 per month. I have just had a forecast which states that when I retire at aged 65 (in 2029), I can expect an annual pension of approximately £720. So, from my calculations, by the time I retire in 2029 I will have paid in around £16k or more and I will only be getting a meagre pension. Do these figures sound about right? I reckon it would take me over 20 years to get my investment back. Thank you.

dunstonh

 I have just had a forecast which states that when I retire at aged 65 (in 2029), I can expect an annual pension of approximately £720.

It is not a forecast.  it is a projection.  Forecasts are something expected to happen. Projections are synthetic examples.  Indeed, statistically, a projection is unlikely to be correct.

So, from my calculations, by the time I retire in 2029 I will have paid in around £16k or more and I will only be getting a meagre pension. Do these figures sound about right?

No.   You need to understand the assumptions used in the calculations. The main things are inflation. The values are reduced to show it in today's spending power.  Not future money.   And the other is the annuity they use.     A small fund like yours is unlikely to buy an annuity.  You will more likely use phased UFPLS. (i.e. drawing ad-hoc lump sums each year) or drawdown.

I reckon it would take me over 20 years to get my investment back

It would be closer to that figure if you bought an annuity.  Is that your plan?    If you use drawdown then there is no breakeven point as the money as always there for you to draw. i.e. if your value says £16k then you have £16k.

Albermarle

The main point is like many people you are probably underestimating the cost of providing an annual pension that increases each year with inflation . For example if today a 65 year old wanted to buy a guaranteed pension ( an annuity ) of £1000 pa with inflation link it would cost over £30K . Without the inflation link then approx £20K.
Anyway as Dunstonh says , the projections tend to be based on a pessmistic scenario , so the £720 is almost certainly a worst case. 
It would be a good idea to increase your contributions if you can .

Alexland

AngelaMR said:

Do these figures sound about right?

Yes as above an inflation linked income is expensive. Even £720 pa from £16k or 1/20th draw down rate (given your 20 year breakeven statement) is between 4.5% and 5% which may not be sustainable so I wouldn't consider it as a worst case. People who enjoy comfortable retirements have often accumulated many hundreds of thousands of pounds in their pots. That doesn't happen by starting late and then contributing £100 per month. It would help a bit if you increased your contribution with inflation each year.

It's also worth checking your National Insurance history to see what level of state pension you can expect and if you have any options to improve it.

Dox

AngelaMR said:

 I have a question about stakeholder pensions. I am 56, self-employed and on a small salary. I took out a stakeholder pension in approximately 2014 and I pay in £100 per month. I have just had a forecast which states that when I retire at aged 65 (in 2029), I can expect an annual pension of approximately £720. So, from my calculations, by the time I retire in 2029 I will have paid in around £16k or more and I will only be getting a meagre pension. Do these figures sound about right? I reckon it would take me over 20 years to get my investment back. Thank you.

Remember that you don't have to retire just because you've reached State Pension Age - you may not be able to afford to. Nor do you have to stop paying in to your stakeholder pension if you don't have any earnings. You can pay up to £2,880 and get 'tax relief' claimed by the provider which is then added direct to your pot, topping up the contribution to £3,600 at a no extra cost to you.

AngelaMR

Thanks you all your replies and the information. I realise I started contributing to a pension late in the day. However, I was still "hopeful" of achieving perhaps £3k or £4k pa ... it looks like I was way off the mark

As I mentioned, I am self-employed on a small income (which has now been affected by covid) so sadly I'm not in a position to increase my monthly payments. In fact, I'm not really sure if I should continue with it at all. I can't see the logic in paying £100/month for 20 years (between 45 and 65) to receive a projected £60/month for 20 years (between 65 and potentially 85). Am I missing something?

Angela

Linton

AngelaMR said:

Thanks you all your replies and the information. I realise I started contributing to a pension late in the day. However, I was still "hopeful" of achieving perhaps £3k or £4k pa ... it looks like I was way off the mark

As I mentioned, I am self-employed on a small income (which has now been affected by covid) so sadly I'm not in a position to increase my monthly payments. In fact, I'm not really sure if I should continue with it at all. I can't see the logic in paying £100/month for 20 years (between 45 and 65) to receive a projected £60/month for 20 years (between 65 and potentially 85). Am I missing something?

Angela

You are missing 4 things:
1) Over the next 20 years your pot should increase significantly from investment returns, assuming it is held in an appropriate fund.
2) The £720/year is at this year's prices and when in payment it increases with inflation.  So your pay-back is much higher than a crude calculation of £720X20 would indicate.
3) 85 is an average life expectancy now.  In 20 years time it is expected to be higher.  And you have a 50% chance of living beyond that.
4) If you dont put the money in a pension what will you have to live on?  If you were thinking about keeping the money as cash savings you will lose out to inflation with the money in 20 years time being worth less than it is now.  If you choose to invest you should beat inflation and hope for more.  But then you could do the same thing with a pension and get valuable tax breaks.

dunstonh

Thanks you all your replies and the information. I realise I started contributing to a pension late in the day. However, I was still "hopeful" of achieving perhaps £3k or £4k pa ... it looks like I was way off the mark 

With a potential 30 or so years of paying out £4k a year, that is £120,000 you expected to be paid.   Plus, you need to consider inflation.   So, you need at least £100k in value 

You are paying in £100pm and have around 11 years to go.  That is £13,200 of contributions. Add in the £16k figure you mention and that is £30,000 (rounded).  Ignoring all growth, that could pay £100pm in retirement.  

Basically, your objectives and the amount you have put aside are not aligned to meet that objective.

In fact, I'm not really sure if I should continue with it at all. I can't see the logic in paying £100/month for 20 years (between 45 and 65) to receive a projected £60/month for 20 years (between 65 and potentially 85). Am I missing something?

You have already been told that it wont be £60pm for 20 years.  Pensions are by far the best option.  So, if you are not going to put anything aside, how will you expect to pay the bills in retirement?

LHW99

Each time you pay in, you get a tax refund from the Government, so you actually get more in a pension pot than your contributions. When you take it out 1/4 of the total is tax free, or all of it  could be if you are a non-taxpayer when you retire and if you take it out at a rate of £16,666 (ish) per year (as long as you have no other income).

AngelaMR

Thank you all for your advice.

I guess my posts have been based on a little disappoinment on my part. I am also easily confused so that's why I was asking about the logic of continuing to save in the pension. So I definitely won't be changing to saving the money instead. I'll keep investing and see where it takes me.