Calculation of Pension Pot based on whats being paid

DE_612183

So I have about 4 pensions that are being paid into so I know the value of those pots, but I also have a Final Salary pension that pays out not at the monthly rate of about £700.

What I want to do is calculate the value of that pot - I presume there is an algorythm of some sort - ie annual value ( 700 x 12 = £8400 ) x the expected number of years left - I'm 58 so I presume they work on thee basis of average living age ( 80 ) - so 22 x 8400 = £184k

Is it that simple or am I missing something?

Thanks

Dazed_and_C0nfused

There is no pot with a final salary pension, that's the whole point really.

Instead of investment risk you have a guaranteed pension, likely inflation proofed to some degree, with no real risk attached 

Probably the closest you would get is to see what an equivalent annuity would cost, making sure you factor in things like survivor pensions and the inflation factor.

You may be surprised how much an inflation linked annuity of £8,400 would cost to buy.

GazzaBloom

If you want to assign a value to it, not sure for what reason or benefit it will be, maybe apart from calculating it as par of a total net worth summary, a final salary pension has a value calculated for allocation against the Lifetime Allowance, which you could use. I believe it is 20 x annual starting benefit plus any pension commencement lump sum? (I may be wrong)

Albermarle

Dave46049 said:

So I have about 4 pensions that are being paid into so I know the value of those pots, but I also have a Final Salary pension that pays out not at the monthly rate of about £700.

What I want to do is calculate the value of that pot - I presume there is an algorythm of some sort - ie annual value ( 700 x 12 = £8400 ) x the expected number of years left - I'm 58 so I presume they work on thee basis of average living age ( 80 ) - so 22 x 8400 = £184k

Is it that simple or am I missing something?

Thanks

Firstly it is not clear why you want to calculate this figure ? Whatever the figure you come up with , it does not change the fact that the pension pays £700 a month . Anyway in your calculation, what you are missing is that most likely the pension will increase in line with inflation each year ( up to a limit usually ) - this increases its value a lot .

If you just want a theoretical value out of interest, then there are three ways to look at it.

For Lifetime Allowance purposes the pension is valued at 20X the first years pension income. This is acknowledged as a significant underestimate of its real value.

As mentioned above , an equivalent annuity would cost at least 50X, maybe more if you bought it at 58 , assuming again an inflation link. Annuities are poor value at the moment so this probably exaggerates the value of your scheme.

You can request a CETV (cash equivalent transfer value ) where you can theoretically transfer out of the DB pension into a DC one ( although in practice it is difficult to do and normally not a good idea anyway ) . A typical value here would be x33 the annual pension . Personally I would go with this one. 

eskbanker

Dave46049 said:

I'm 58 so I presume they work on thee basis of average living age ( 80 )

Good news - according to the ONS life expectancy calculator, a male who's made it to 58 now has a life expectancy of 84 rather than 80!

DE_612183

Albermarle said:

Dave46049 said:

So I have about 4 pensions that are being paid into so I know the value of those pots, but I also have a Final Salary pension that pays out not at the monthly rate of about £700.

What I want to do is calculate the value of that pot - I presume there is an algorythm of some sort - ie annual value ( 700 x 12 = £8400 ) x the expected number of years left - I'm 58 so I presume they work on thee basis of average living age ( 80 ) - so 22 x 8400 = £184k

Is it that simple or am I missing something?

Thanks

Firstly it is not clear why you want to calculate this figure ? Whatever the figure you come up with , it does not change the fact that the pension pays £700 a month . Anyway in your calculation, what you are missing is that most likely the pension will increase in line with inflation each year ( up to a limit usually ) - this increases its value a lot .

If you just want a theoretical value out of interest, then there are three ways to look at it.

For Lifetime Allowance purposes the pension is valued at 20X the first years pension income. This is acknowledged as a significant underestimate of its real value.

As mentioned above , an equivalent annuity would cost at least 50X, maybe more if you bought it at 58 , assuming again an inflation link. Annuities are poor value at the moment so this probably exaggerates the value of your scheme.

You can request a CETV (cash equivalent transfer value ) where you can theoretically transfer out of the DB pension into a DC one ( although in practice it is difficult to do and normally not a good idea anyway ) . A typical value here would be x33 the annual pension . Personally I would go with this one. 

So the reason for doing this is to establish a overall pot value as of today - A study I saw said you need about £450k @ 65.
When I add up all my pensions ( apart from the Final Salary one ) I come up with about £200k as of now, add on a bit of inflation and growth could take that to about £250k.

So if my Final Salary one is worth about £200k now - I'm looking ok.

If I just look at "what you may expect to get" the figures quoted vary wildly - I had two estimates from one provider and even though the pot figure was essentially the same - the monthly payment was about 50% less with one forecast!

JoeCrystal

Which study is that? It is most likely referring to DC pension pots.

Albermarle

A study I saw said you need about £450k @ 65.

All sorts of figures about what you need to retire with reasonable comfort get bandied about . The minimum you usually see is £250K but it is often said you need a Million . There are posters on this forum who have more than a Million, and are still not comfortable about retiring.

More sensibly what you should do is draw up a list of your expected expenditure in retirement . Regular spending and one offs, like new cars. holidays etc.

Subtract your DB pension from that, and at age 67 your state pension . As a rule of thumb your other DC pensions should be able to safely  produce an income of 3.5% pa without running out . You could maybe take more before the state pension, and less afterwards. Then you should have a better idea of what you need.

When I add up all my pensions ( apart from the Final Salary one ) I come up with about £200k as of now, add on a bit of inflation and growth could take that to about £250k.

The problem is that the £250K will not buy you then, what £250K does today . You should work in todays money and not add inflation on . So £200K + say 1% pa growth after inflation .

For example the study you read says you need £450 K if you were retiring at 65 today . If it is another 10 years before you reach 65 then the figure will have increased by then by ten years inflation.

eskbanker

Dave46049 said:
So the reason for doing this is to establish a overall pot value as of today - A study I saw said you need about £450k @ 65.

When I add up all my pensions ( apart from the Final Salary one ) I come up with about £200k as of now, add on a bit of inflation and growth could take that to about £250k.

So if my Final Salary one is worth about £200k now - I'm looking ok.

If I just look at "what you may expect to get" the figures quoted vary wildly - I had two estimates from one provider and even though the pot figure was essentially the same - the monthly payment was about 50% less with one forecast!

As above, it'll make more sense to do your calculations the other way round, i.e. work out a realistic income from your DC pots rather than trying to reverse engineer a notional 'pot' value of your DB one.

Likewise, modelling likely requirements in terms of anticipated expenditure is an important part of the equation, as everyone will have different lifestyles and associated costs - there are plenty of articles about this but one such is the Which? one at https://www.which.co.uk/money/pensions-and-retirement/starting-to-plan-your-retirement/how-much-will-you-need-to-retire-atu0z9k0lw3p and there is also a large thread on here about working out your 'number': https://forums.moneysavingexpert.com/discussion/2146737/pensions-planning-the-number/p1

bostonerimus

You are asking an actuarial question and it will depend on any index linking, an average lifespan, and an assumed interest rate.

Here's a concrete example. I bought into a DB plan using a DC lump sum - it was a one off negotiated by my state employees union and required legislation to be passed. At age 52 I paid $281k into the DB pension fund from my DC balance that included my and my employer's contributions, and at age 55 I started an index linked pension of $18k. Assuming living to age 83 and 2% interest that implies an interest rate on the principal of 6.2%. Of course if you die early, live longer than average or inflation continues at 8% the numbers will change.