Deciphering Pension Statement

Senseicads

I am trying to understand my annual pension statement.  They estimate how much my pension will be worth when I come to my retirement age.  The criteria they have used for this as as follows. 

• Any current contributions will continue until your selected retirement date.
• Your investments grow by an average of 1.85% a year.
• A future rate of inflation of 2.50%.
• A interest rate of 2.60% below the rate of inflation to calculate your pension annuity at your retirement date

I am trying to understand whether these figures are reasonable.  They seem massively overcautious.  In particular I'd like to think the investment growth would be more than 1.85%.  I am pleased with the amount on these assumptions, I am just wondering whether the figure given is a bit low?
thanks in advance. 

eskbanker

Those growth figures do seem overcautious, but what is the money invested in and how long do you have until the projected date?

dunstonh

• I am trying to understand whether these figures are reasonable.  They seem massively overcautious.  In particular I'd like to think the investment growth would be more than 1.85%.  I am pleased with the amount on these assumptions, I am just wondering whether the figure given is a bit low?
  

They are just assumptions based on rules set by the regulator.

The investment growth of 1.85% is lower than you think as its actually 1.85% before charges.  Not after.   And with a 2.5% inflation deduction, you are getting a negative.   

However, this is the way projections are nowadays.   

1.85% suggests your investments have a higher content of fixed interest securities/cash.  That hasn't been a bad thing for the last 10 or so years but going forward, it could be.   So, being pessimistic on that front is possibly not a bad thing.

Linton

Pension estimates are actually "illustrations" - ie simply a mathematical exercise based on pure assumptions.  There should be no implication that they are a prediction of the future.  The assumptions are controlled by the regulator and would seem to be extremely cautious.   I think you should make assumptions that satisfy you and work out the results from a spreadsheet.  Perhaps use the published assumptions as a warning to avoid being excessively optimistic.

Senseicads

So its twenty years projection, although on these figures i might look to retire earlier than that. 
I'm on the default investment plan. Its equities, index tracking funds, split between, world exc uk (40%), UK(40%) and emerging markets (20%).  that breakdown is very rough but close enough. 

TVAS

For that spread of risk in the funds and they are predicting 1.85% p.a. growth is really overly cautious and does not match the growth of those types of funds.  
It is reasonable to expect 8% growth and that is on the cautious side. However you have not mentioned the total charges if they are 2% then the net growth is 6%.

dunstonh

Senseicads said:

So its twenty years projection, although on these figures i might look to retire earlier than that. 
I'm on the default investment plan. Its equities, index tracking funds, split between, world exc uk (40%), UK(40%) and emerging markets (20%).  that breakdown is very rough but close enough. 

1.85% before charges does not seem to be a reasonable rate.  Remember that 1.85% is before charges.  Not after.   So, if your charge was 1.00% p.a. then what they are projecting is 1.85% - 1.00% - 2.50%  = -1.65% p.a.

Senseicads

The charges appear to be a lot less than that.  Looks like it depends on the fund.  the emerging markets one is 0.24%, The other two are 0.10% I then have to add an annual management charge of 0.13% ontop of all of those for those funds. 

It is reasonable to expect 8% growth and that is on the cautious side. However you have not mentioned the total charges if they are 2% then the net growth is 6%.

Would it be reasonable to try to work it out myself and estimate it on say 7% growth to give me a rough target to aim at?

Linton

Senseicads said:

The charges appear to be a lot less than that.  Looks like it depends on the fund.  the emerging markets one is 0.24%, The other two are 0.10% I then have to add an annual management charge of 0.13% ontop of all of those for those funds. 

It is reasonable to expect 8% growth and that is on the cautious side. However you have not mentioned the total charges if they are 2% then the net growth is 6%.

Would it be reasonable to try to work it out myself and estimate it on say 7% growth to give me a rough target to aim at?

8% growth may be a reasonable expectation based on all the 26 years of data I can easily get but in my view it is not a reasonable assumption for retirement planning.  For a start it is only reasonable for 100% equity.  During retirement I would guess your % equity would be significantly less.  Secondly you have crashes - you need to be able to withstand them in the short and medium term without mental streess.  It will not be sufficient to say everything will be even out in 20 years time.

If your return assumptions turn out to be too optimistic you will find yourself running out of money or cutting back on your living standards when it is too late to do anything about it. Better in my view to be reasonably cautious.  You should be able to more easily handle the problem of having too much money.

My plans for retiring were based on the pessimistic assumptions of 3% inflation and 4% growth after costs (1% above inflation).  Having been retired for 16 years the planning assumptions for the rest of my life are the same.

Thrugelmir

Growth will be whatever it is. Set your personal objectives then save towards them, adjusting accordingly. Financialisation of the stock markets has led to a disconnect with the real economy when looking at the short term trends.  

Senseicads

i am looking less here at how to invest my money in retirement and more how to invest up to the point of retirement. hence the 20 yrs. I agree as I get closer to retirement point I am going to want to de-risk. maybe it's better to plan on an overall growth of say 4% then over those 20yrs until point of retirement?  I am just trying to work out how much i am likely to have at point of retirement.