Pension Retirement Quote - effect of inflation? Confused

jumbolugs

Hello

I have an employee pension from a previous job where I worked from 1997-2005 and recently requested a retirement quote. They've given me an estimate which tells me what my pension will likely be worth (as an annual pension payment) if I retire at age 60 which is in 6 years time (2030). 
I assume this is based on calcs the they've done that estimate the performance of their funds over the next 6 years. 
What's confusing me is that I don't know if it also takes into account the effects of inflation over the next 6 years. I don't see anything in the quote or documentation that tells me the answer to this.
Any thoughts?

Thank you in advance

amanda1024

I think you’d either get fund performance (if a defined contribution pension), *or* an inflation uplift (if a defined benefit pension). But perhaps I’ve misunderstood 

dunstonh

I assume this is based on calcs the they've done that estimate the performance of their funds over the next 6 years. 

No.  Projections are a collection of assumptions put together to create the calculation.   It is not an estimate or a forecast but a projection using those assumptions.  Those assumptions are quite pessimistic for the long term but not unreasonable for the short term.   There are also assumptions on the annuity type which tend to be pessimistic as well.

What's confusing me is that I don't know if it also takes into account the effects of inflation over the next 6 years.

That has been a mandatory requirement for at least a decade.    Plus, you would expect the assumptions to be disclosed on the projection.   

My answers above assume that you are referring to a DC pension as you mention fund performance.   DB pensions are different but are not subject to fund performance.

Linton

Assuming this is a normal defined contribution pension, forecasts are based on regulator-defined historically very pessimistic assumptions and are given at today's prices. So in addition to future contributions they would be expected to rise with inflation as you approach retirement.  I believe they also are based on you taking an annuity rather than drawdown.

Generally the suggestion on this forum has been not to take too much notice of them though perhaps with the increase in annuity rates they may now be rather more useful than they have in the past.  

Pat38493

jumbolugs said:

Hello

I have an employee pension from a previous job where I worked from 1997-2005 and recently requested a retirement quote. They've given me an estimate which tells me what my pension will likely be worth (as an annual pension payment) if I retire at age 60 which is in 6 years time (2030). 
I assume this is based on calcs the they've done that estimate the performance of their funds over the next 6 years. 
What's confusing me is that I don't know if it also takes into account the effects of inflation over the next 6 years. I don't see anything in the quote or documentation that tells me the answer to this.
Any thoughts?

Thank you in advance

The answers above assume it's a DC (defined contribution) scheme. 

If, on the other hand, it's a DB (defined benefit) scheme (where you are given a guaranteed income and an optional lump sum), then I am not sure if there is a standard approach across all schemes.  For the DB scheme that I am in, if I ask for an estimate for retiring at some futuer date beyond this year, then yes it does include a forecast of inflation.

On the fund fact sheet for me it says that they assume inflation of 2.5% for unknown periods (i.e. future periods).  Therefore if I want to understand what my DB pension will be, but in today's money, I need to reverse out that inflation for the future years.

As pointed out by others, if it is a DB scheme, the performance of the invested money within the scheme is not directly relevant because your benefits in the scheme are guaranteed by the pension rules.  This only becomes a factor if the scheme became insolvent and the employer who set up the scheme has gone bust or suchlike.

sandsy

If it's a DC pension, the annual amount is given in today's money so is directly comparable with any income you currently receive, eg from earnings.

if it's a DB pension, it's unlikely to be in todays terms so even if the quoted figure turned out to be correct, it would buy less than today due to the effect of inflation over the intervening years.