Pensions....Why Bother?

sid34 · 14 June 2017 at 6:15PM

I consider myself pretty savvy when it comes to general finance but when it comes to pensions I'm pretty clueless.
My wife and I have numerous pensions from different jobs and the annual statements/projections are starting to come in. None of them are worth a much but the examples I've had this week are these:

My wife has £38K in a pension that might pay her £490 a year pension (£9.42 a week)

I have £16K in a pension that might pay me £310 a year in a pension (£5.96 a week)

So assuming my wife took her £490 a year she would be gambling that she would live another 77 years (to the age of 142) to just break even on her £38K

If I took my £310 pension I would be gambling that I would live 51 years (to the age of 116) to break even on mine.

My question is am I missing something here? Who would do this? Surely the everyday man in the street will draw every penny possible out of their pot ?

JoeCrystal · 14 June 2017 at 6:18PM

I think that buying an annuity is more rarer as more people decide to use drawdown now. That is what this forum seems to suggest?

dunstonh · 14 June 2017 at 6:24PM

My wife has £38K in a pension that might pay her £490 a year pension (£9.42 a week)

Forget the projected income as that is a figure that is based on assumptions that assume virtually worst case scenario. A scenario that nobody ever uses.

So assuming my wife took her £490 a year she would be gambling that she would live another 77 years (to the age of 142) to just break even on her £38K

Not correct I'm afraid. The projections have an assumption of 2.5% p.a. for inflation. You are not taking that into account. The annuity assumption will also be indexed. You are not taking that into account.

My question is am I missing something here?

yes. Inflation primarily but also using pretty naff assumptions and growth rates that are lower than typical (indeed, I am not sure you are even factoring in a growth rate).

Surely the everyday man in the street will draw every penny possible out of their pot ?

And if they did that, they would be pretty daft for doing so.

If you take your wife's pension at £38k, a more realistic income figure is 4%. That is £1520 a year. And that ignores any growth you may have between now and then.

The current projection method is highly flawed and your views are something that we see often with people that don't read the assumptions or don't understand the assumptions. I would go as far to say that current statement projections are more damaging than beneficial. IFAs can use different assumptions and give more realistic figures. Pension providers cannot as they have to use those fixed assumptions. I am sure there are plenty of people making bad decisions based on bad assumptions.

AnotherJoe · 14 June 2017 at 6:31PM

sid34 wrote: »

My question is am I missing something here?

Yes, a lot. Read dunstonh's post.

sid34 wrote: »

Surely the everyday man in the street will draw every penny possible out of their pot ?

A complete mug might. Whether thats the man in the street, i cant say though depressingly it probably is.

sid34 · 14 June 2017 at 10:53PM

Thanks for the replies. Just to make one thing clear though, these aren't my assumptions. These are assumptions presented to me by the company(ies) where my money is invested. So the problem seems to be with the way this is presented and the rules these companies have to adhere to when producing the projections?

OldMusicGuy · 14 June 2017 at 11:14PM

Pensions - why bother? Because unless you want to carry on working for the rest of your life and then have no provision for your care home or whatever, you had better bother. If you want the option to give up work at some point of your own choosing, you need to pay some attention to this stuff as soon as possible. It's not that difficult to understand, there are a lot of good resources on here.

First thing to do is to understand what pensions you have. If you have lots of different defined contribution pots from various jobs, think about combining them together onto a single platform so you can manage them easier. I did this a couple of years ago, moved six separate pensions into a single pot on the Hargreaves Lansdown platform (because that is what my current employer uses). Educate yourself on how to manage your investments (you can find a lot of good info on this forum and in the Savings & Investments forum) and if you don't want to do that, see an IFA and get professional help.

If you have defined benefit pensions, make sure you understand what they will pay and when they pay out. Also get a state pension forecast if you haven;t done so already to see what state pension you and your wife will get (you can do this all online).

Finally, like dusntonh said, those projections are just that - some very basic projections and certainly nothing you can base retirement planning on. My projections from 25 years ago are completely divorced from reality. If they were true, I would be able to retire now with a very generous pension. This is definitely not the case!

dunstonh · 14 June 2017 at 11:34PM

Just to make one thing clear though, these aren't my assumptions. These are assumptions presented to me by the company(ies) where my money is invested

Which is what we are saying. They are using default worst case scenario figures with inflation factored in. You need to use assumptions that fit your scenario.

So the problem seems to be with the way this is presented and the rules these companies have to adhere to when producing the projections?

Exactly.

bostonerimus · 15 June 2017 at 12:21AM

I suggest you research these pensions, find out how they are invested and understand the way these projections are calculated. Then look into some consolidation so you can be in better control of your asset allocation and drawdown amount.

atush · 15 June 2017 at 11:14AM

They may seem you shouldnt have bothered, but maybe you just need to pay more into them?

Pensions....Why Bother?

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