Confused about 'estimated pot at retirement' figures

BSW89

Hi all, 
I'm really confused about how much I need to be saving into my pension and whether I'm on track. I'm in my early 30s and have a pot of about £45k so far across several DC schemes. I currently put 20% (including the employer contribution) salary into my pension - which I'd have assumed would put me in a good place. 
However when I log into my pension accounts, the 'estimated pot at retirement' figures seem very low. For example, my last annual statement for one pot (relating to a job I had years ago, no contributions made since) says the pension value as at August 2020 was £5,400, and that the estimated pot at retirement (35 years away) is £6,800, which could give me a lump sum of £1,700 + annual pension of £118! I don't understand why they think the pot will only increase by £1,000 (albeit adjusted for inflation) between now and retirement. 
Another pension pot currently has £15,000 in it, which has doubled in the five years since I stopped paying money into it, and yet the estimated value on retirement in 35 years time is only £30,000. Much better growth than the other example above, but I don't understand how so far its doubled in 5 years but they think in the next 35 years it will only double again?
Thanks!

Linton

Many years ago pension estimates proved to be very optimistic.  Thanks to regulation the pendulum has now swung excessively the other way.  The estimates also look low as they are given in current £ purchasing power terms and they  assume you are going to buy an annuity.  Annuities are expensive at the moment because interest rates are low.

So any estimate you make based on your experience is as likely to be right, if not more so, than the official estimates.  Though be careful as the very good returns over the past few years are not typical historically.  No-one, including both you and the pension companies, knows what the future will bring.

BSW89

I'm also confused that despite having paid into a pension since age 22, initially at 10% but then increasing to 20% a couple of years ago, and based on an assumption of continuing to pay in 20% until I retire, Standard Life's pension calculator tells me my retirement income (including state pension) will be significantly lower than what the average person needs for a comfortable retirement. The calculator says I'd need to increase by total contributions to 32% of salary for a 'comfortable retirement' (based on retiring at 68). This seems ridiculous for someone who's paid into a pension since they were 22.

Linton

BSW89 said:

I'm also confused that despite having paid into a pension since age 22, initially at 10% but then increasing to 20% a couple of years ago, and based on an assumption of continuing to pay in 20% until I retire, Standard Life's pension calculator tells me my retirement income (including state pension) will be significantly lower than what the average person needs for a comfortable retirement. The calculator says I'd need to increase by total contributions to 32% of salary for a 'comfortable retirement' (based on retiring at 68). This seems ridiculous for someone who's paid into a pension since they were 22.

It is possible, if for example you pension is invested extremely cautiously. If you told us the size of your pension pot and your age people could  give their opinion on your situation.

Albermarle

The size of pot needed for a comfortable retirement is often greatly underestimated , although as said these projections do tend to be very pessimistic.
Although 20% sounds OK , it depends on 20% of what ?. 20% of £100K is going to give a better retirement income than 20% of £30K .
Also probably  the calculator assumes you will never get a salary increase above inflation , or a promotion , which hopefully you will ?

sevenhills

BSW89 said:

I'm also confused that despite having paid into a pension since age 22, initially at 10% but then increasing to 20% a couple of years ago, and based on an assumption of continuing to pay in 20% until I retire

I am guessing that different companies will have different ways of giving estimates. I have a local government pension and I believe their estimates are for what have been paid in already, and continute to age 65.

Maybe some will give both figures?

In 2011 my estimate was £4,119

In 2020 my estimate was £6,233

Both estimates retiring at 65, in same job.

cfw1994

As a rule, 20% going in during your early 30s in general should be reasonable - the rule of thumb is half your age in % terms.
Can't say I had a clue what I was invested in at your age, but it is a good time to learn more about it, for sure!

Maybe investigate *what* the funds are invested in.....with a long horizon, my *personal* view is that one should be invested 100% in equities, ideally with a global spread....& some adjustments there can make a big difference over a 10-20year horizon.
Maybe you can check yours and then potentially tweak it.....

Thrugelmir

BSW89 said:

I'm also confused that despite having paid into a pension since age 22, initially at 10% but then increasing to 20% a couple of years ago, and based on an assumption of continuing to pay in 20% until I retire, Standard Life's pension calculator tells me my retirement income (including state pension) will be significantly lower than what the average person needs for a comfortable retirement. The calculator says I'd need to increase by total contributions to 32% of salary for a 'comfortable retirement' (based on retiring at 68). This seems ridiculous for someone who's paid into a pension since they were 22.

Comes as a shock that there's no such thing as a free lunch. As with life in general. You get back what you put in. How you manage your money while you are working will determine how comfortable your retirement will be. 

Albermarle

sevenhills said:

BSW89 said:

I'm also confused that despite having paid into a pension since age 22, initially at 10% but then increasing to 20% a couple of years ago, and based on an assumption of continuing to pay in 20% until I retire

I am guessing that different companies will have different ways of giving estimates. I have a local government pension and I believe their estimates are for what have been paid in already, and continute to age 65.

Maybe some will give both figures?

In 2011 my estimate was £4,119

In 2020 my estimate was £6,233

Both estimates retiring at 65, in same job.

You  have a guaranteed income from a DB scheme . So the calculation is a lot easier and your employer is pouring a lot more funds into the scheme than a typical private employer would.
The OP has a DC pension ( like most private sector workers) which is invested in financial markets , so projections of retirement income in 30 years time are much more difficult to make .

dunstonh

sevenhills said:

BSW89 said:

I'm also confused that despite having paid into a pension since age 22, initially at 10% but then increasing to 20% a couple of years ago, and based on an assumption of continuing to pay in 20% until I retire

I am guessing that different companies will have different ways of giving estimates. I have a local government pension and I believe their estimates are for what have been paid in already, and continute to age 65.

Maybe some will give both figures?

In 2011 my estimate was £4,119

In 2020 my estimate was £6,233

Both estimates retiring at 65, in same job.

The regulator sets the rules on projections.   They are not even estimates. They are synthetic projections on a range of assumptions that are almost certainly going to be wrong.  

Where the projections will vary with providers is how the investments are.  Cash and fixed interest securities have to have a lower projection rate than equities.   It is not uncommon to see the low projection rate as a negative. Sometimes even the middle projection rate is too.   The highlighted growth rate is actually gross of charges.  not net.  And then gets 2% p.a. deducted from it as well to give today's spending power.

So, if you see a mid rate projection saying 4% pa. it doesn't mean 4% p.a. It means it is reduced by the AMC.  So, that could bring it to 3%. Then it has a reduction of 2% for inflation. So, it really ends up around 1% p.a. despite saying 4%.   
And the typical balanced managed/mixed equity 40-85% fund has been doing over 6% p.a.after charges.

thickasabrick

BSW89 said:

Hi all, 
I'm really confused about how much I need to be saving into my pension and whether I'm on track. I'm in my early 30s and have a pot of about £45k so far across several DC schemes. I currently put 20% (including the employer contribution) salary into my pension - which I'd have assumed would put me in a good place. 
However when I log into my pension accounts, the 'estimated pot at retirement' figures seem very low. For example, my last annual statement for one pot (relating to a job I had years ago, no contributions made since) says the pension value as at August 2020 was £5,400, and that the estimated pot at retirement (35 years away) is £6,800, which could give me a lump sum of £1,700 + annual pension of £118! I don't understand why they think the pot will only increase by £1,000 (albeit adjusted for inflation) between now and retirement. 
Another pension pot currently has £15,000 in it, which has doubled in the five years since I stopped paying money into it, and yet the estimated value on retirement in 35 years time is only £30,000. Much better growth than the other example above, but I don't understand how so far its doubled in 5 years but they think in the next 35 years it will only double again?
Thanks!

As explained by a few others on here the projections are based on how the pension providers interpret government rules to create these "projections".

I was inspired to start tracking my net worth after coming across an article titled "What gets measured gets managed" by the Escape Artist. Sadly no longer visible on his blog but the principles of tracking your investments and more importantly their costs will make a massive difference to your own "projections".

Every month I log into my company pension portal and make a note of the number of units purchased and the cost for each unit.

I then add this to my net worth spreadsheet. Also keep the same info in the free portfolio trackers on Trustnet and Morningstar as they have up to date info on the current price of each unit invested.

For old pensions you might be able locate a contribution history you can use. Otherwise just note the total number of units and the current price on the day you look to start tracking.

That way I have a running total of all the investments across different pension providers. 

For defined benefit pensions I use the latest projected pension at age 55 and multiply by 20 for a rough estimate of it's value for comparison against my defined contribution pensions.

Once I had those totals I was able to compare it against typical figures for someone of my age to see if I was on track.

The Which article "How much will you need to retire?" contains some figures but bear in mind these are for a couple retiring at normal retirement age of 67 so include state pension. If you are aiming earlier or are single the figures will be different.

The other advantage of starting the net worth tracker or pension contribution tracker was identifying costs. Immediately identified were I could save 1% on the costs of one of them. Another advantage is visibility of exactly where your pension funds are invested which allows you to track performance.

Good luck and I hope you find a method to keep track of your assets that works for you as it will help to put into perspective the "guess work" that goes into these projections.