Pension Statement concerns

Namby

My wife has just received her pension statement. Neither of us are particularly pension savy so I'd appreciate some advice as to whether she should continue the pension or look at some other option.

My wife is 35, there is currently 9K in the fund, she currently pays £122 and this steps up by 8% each year. Her retirement age is set at 65. The statement currently predicts a yearly pension of £6800 and estimates there will be £173,000 in the fund at retirement after management deductions etc.

Using a basic spreadsheet and calculating what she will put in over the next 30 years totals considerably more than this, but I'm not sure I trust my maths

This does not seem good to say the least.

Am I missing something? Can anyone offer any comments. Should we think about paying into an ISA or something instead?

TIA

Curious_Moose

This sounds like a SMPI (Statutory Money Purchase Illustration) statement.

Basically, it's just a guestimate of the pension your wife can expect at retirement but no more than that. I'd guess there's something on the statement that gives some details behind the estimates (investement return for equities, gilts and cash).

I would imagine the 8% "step up" each year refers to the investment return and not the actual increase in contribution. For an SMPI statement, it's more usual to assume a salary increase of 2.5% each year (on which the contributions are based).

The figure may be lower than you are expecting, as the pension for the illustration is usually reduced by RPI from retirement to the present day to give you a better idea of the purchasing power in "todays" money. The RPI assumed is usually 2.5% p.a. but again, this can differ.

The illustration would base the fund at NRD on current fund plus future contributions. It's not clear from your post what the future contributions are (e.g. a percentage of salary that increases each year, of if the contributions are "tiered" i.e. they increase with certain age bands, or if they are AVCs which are assumed not to increase each year)

If it is a SMPI statement, it should be 6-8 pages long with more info on the last couple of pages about the assumptions used in the calculation.

To answer your question, I wouldn't base any pension decision on this statement. It's simply a best guess as to what the pension may be worth.

Retired_I.F.A.

I presume you have just glanced at the statememt summary and not read the assumptions used to get to those figures. Look again.

£122 p/m escalating at 8% pa over 30 years = £165,846 in future contributions alone.

Should they yield say 8% p/a the fund would from future contributions alone would be worth £ 409,214 and the curent 9k a further £90,563

Half a million is a teeny bit better than 173k.

Namby

Thanks for the response, I'll have to do some reading as I need to understand it all a lot better. The statement is SMPI, my wife did choose to increase her payments by 8% each year to try and graudally boost her contributions.

The estimated growth is 7% for the illustration.

Would I be correct in assuming their illustration assumes she continues to pay in at the current rate of £122 a month? I.e. as she is increasing her contribution by 8% each year then the illustration will go up each year also.

If so is there any way we could estimate what the annual pension would be at retirement age?

TIA (again )

Namby

PS I was typing before the 2nd response, so thanks to both this makes more sense now and make me feel somewhat happier

Retired_I.F.A.

The 7% figure they illustrate is gross of charges so for example lets assume it's got a 1% annual management charge and no other. Therefore it's an illustrative yield of 6% Also lets assume your wife is 35 today giving an exact term till retirement of 30 years.

Then the total fund at 65 would be £367,854. Assuming the illustration tries to put that into todays terms it reduces that fund value by an assumed rate of inflation lets say at 2.5% bringing it down to a fund of £175,371

Pretty close eh?

Curious_Moose

I would be very surprised if the illustration assumed your wife's contributions were to increase by 8% p.a. (I am not referring to the investment return here). Most statements assume the same increases for all members and this usually means a salary increase of 2.5% each year. If contributions are linked to salary, then the contribution amounts too will increase by 2.5% each year.

There is also the possibility that the £122 per month stays at that amount until retirement (at least for the purpose of this illustration). That is commonly done where Additional Voluntary Contributions (AVCs) are made (though those too can be a percentage of salary).

If we assume a starting fund of £9,000 and contributions of £122 per month that do not increase each year and an investment returm of 7% p.a. Then we get a fund in 30 years time of £212,000 and a pension in today's terms of £3,970

If we assume the contributions go up by 2.5% each year then we get a fund at NRD of £255,000 and a pension (in todays terms) of £4780

If we assume the contributions go up by 8% each year (very unrealistic imho) then we get a fund at NRD of £442,000 and a pension (in todays terms) of £8280. I doubt very much that this is what the statement is based on.

That is without any charges being applied.

Incidentally, I said earlier that the pension on the statement may be reduced by 2.5% p.a. to show it in todays terms. That does not seem to be the case with the figures you provided. £173,000 / 6800 gives an annuity rate of 25.44 and that is consistent with current annuity rates. I.e. the £6,800 in todays terms would be approximately £3240 allowing for an RPI reduction of 2.5% p.a.

If you have a full SMPI statement, there should be a paragraph somewhere that says what these assumptions are regarding whether current contributions stay the same to retirement or increase in some way (usually with salary increases, but sometimes age related)

I'm also assuming there's nothing on the statement about "Protected Rights" which would invlove a few more questions!

Retired_I.F.A.

Curious_Moose wrote: »

I would be very surprised if the illustration assumed your wife's contributions were to increase by 8% p.a.

SUPRISE SUPRISE It'd be bloody useless if it did not illustrate what shes paying wouldn't it?

(I am not referring to the investment return here). Most statements assume the same increases for all members and this usually means a salary increase of 2.5% each year. If contributions are linked to salary, then the contribution amounts too will increase by 2.5% each year.

You understanding of Namby's opening post is as bad as his of his wifes statement. The rest of your post is totally irrelevent.

Curious_Moose

Retired_I.F.A. wrote: »

SUPRISE SUPRISE It'd be bloody useless if it did not illustrate what shes paying wouldn't it?

Retired_I.F.A. wrote: »

You understanding of Namby's opening post is as bad as his of his wifes statement. The rest of your post is totally irrelevent.

Well it's a good job you've retired! I'll explain...

The SMPI statement will reflect the current level of contributions. Namby's wife may well have made a decision to increase contributions by 8% p.a., there is however, absolutely no guarantee whatsover that the SMPI statement will reflect this. If she is working for a company the assumptions regarding salary escalation, increases in contributions etc will be general ones specified by the company that also incorporate some current information relating to individuals.

My other figures were simply to give an indication of the funds at retirement based on different assumptions. Presumably, you've checked them and confirmed they're correct? Or don't you know how?

Incidentally, SMPI statements may allow for tiered rate contributions, lifestyling, AVC and Protected Rights (with Age Related Rebates also being thrown in the pot). The maths does get a bit tricky, but if you know what you're doing it's ok. Oh, and don't forget TM1. I'll leave you to Google that to find out what it means.

If you'd like to debate any of the figures, be my guest.

Somehow, I doubt you get much beyond !!(1+i) ^ n - 1) /i} and that approach (and the amended formula to allow for salary escalation) pretty quickly becomes unworkable with lifestyling and tiered rate contributions.

EdInvestor

The usual reasons why the projected pension on these SMPI statements is apparently so low is because they calculate the gold plated version - ie the annuity is index linked at RPI, with 100% joint life spouse pension and guarantee.This virtually halves the amount you get compared with a standard level annuity.

Play around with a few figures in the Pension Annuity section of this website and you'll see what I mean about the comparative costs:

https://www.fsa.gov.uk/tables

Retired_I.F.A.

Curious Moose..

Well it's a good job you've retired! I'll explain...
The SMPI statement will reflect the current level of contributions. Namby's wife may well have made a decision to increase contributions by 8% p.a., there is however, absolutely no guarantee whatsover that the SMPI statement will reflect this.

Rubbish! One is given the option to increase contributions by any percentage up to 10% automatically at the onset in a proposal form. If those contributions continue to escalate as such all future illustrations will assume the same future escalation.

If she is working for a company the assumptions regarding salary escalation, increases in contributions etc will be general ones specified by the company that also incorporate some current information relating to individuals.

Who said this was a company pension? I did not neither did Namby.

My other figures were simply to give an indication of the funds at retirement based on different assumptions. Presumably, you've checked them and confirmed they're correct? Or don't you know how?

No point in checking your calculations that are wrong and not even close is there?

Incidentally, SMPI statements may allow for tiered rate contributions, lifestyling, AVC and Protected Rights (with Age Related Rebates also being thrown in the pot). The maths does get a bit tricky, but if you know what you're doing it's ok. Oh, and don't forget TM1. I'll leave you to Google that to find out what it means.

Again your talking nonsense protected right are always shown separately and are irrelevant in this case.

If you'd like to debate any of the figures, be my guest.

Somehow, I doubt you get much beyond !!(1+i) ^ n - 1) /i} and that approach (and the amended formula to allow for salary escalation) pretty quickly becomes unworkable with lifestyling and tiered rate contributions.


There is no accurate formula for calculating compound interest with escalating contributions so yet again you talking through your backside.

Want to buy my spreadsheet?