A Naive question about pension

Newway · 14 December 2019 at 1:08AM

Hello there,
I've built up a workplace pension (defined contribution) pot for many years, and for many years I 'forget' about it because that's what you should do.

Recently when I got my pension statement (Fidelity), I got curious and looked into the figures, then I was confused:
on my pension statement, it said:

Total value of your account (today): £76,580
Your estimated fund value (at 2045): £111,000*
Your estimated yearly pension (at 2045): £2570*
(*The amount is given in today's price)

If I understand correctly, that means when I retire, my pension pot as it stands, will be worth 111k (in today's price), and I will receive
a yearly pension of £2570.

But if this is true, why would anyone put money into a pension?
I am currently 39yr old, suppose I can live another 20 years after retirement (2045) , I receive
20 * 2570 = £51,400 in total, less than half of what I originally invested

Where have I got wrong?

lexington013 · 14 December 2019 at 1:20AM

Depending on whether your pension is DB (defined benefit) or DC (defined contribution) you will have some flexibility over it.
£111k isn't a huge pension pot but it is a valuable benefit you will have.
You say live 20 years after your retirement, but potentially you could live 40+ years after retirement or longer depending on your date of retirement. Depending on your scheme rules and the type of pension you have you could start taking it at 55 years of age subject to current rules. Probably best to post some more information about your personal circumstances so some more knowledgeable forum members can offer further advice.
You will presumably be on track for a state pension, subject to years of NI contributions. Worth checking what your state pension is looking to be on the government gateway website.

Marcon · 14 December 2019 at 1:37AM

Newway wrote: »

Hello there,
I've built up a workplace pension pot for many years, and for many years I 'forget' about it because that's what you should do. No - not at all what you should do! You may need to change your investment strategy (i.e. move the money around to different funds offered by the pension provider) as you get older.

Recently when I got my pension statement (Fidelity), I got curious and looked into the figures, then I was confused:
on my pension statement, it said:

Total value of your account (today): £76,580
Your estimated fund value (at retirement): £111,000*
Your estimated yearly pension (at retirement): £2570*
(*The amount is given in today's price)

If I understand correctly, no - your understanding, along with about 99% of the world, isn't right that means when I retire, my pension pot as it stands, will be worth 111k (in today's price), and I will receive
a yearly pension of £2570.

But if this is true, why would anyone put money into a pension?
suppose I can live another 20 years after retirement, I receive
20 * 2570 = £51,400 in total, less than half of what I originally invested

Where have I got wrong?

Inflation eats away at the purchasing power of the pound in your pocket, meaning that each pound you have today will be worth progressingly less as time passes and prices go up.

The projections are using 'today's prices' to try and help you understand what the purchasing power of your pension would be when you reach the retirement age specified in this particular plan (which is, as you've said in your post, a defined contribution scheme).

Newway · 14 December 2019 at 1:45AM

lexington013 wrote: »

Depending on whether your pension is DB (defined benefit) or DC (defined contribution) you will have some flexibility over it.
£111k isn't a huge pension pot but it is a valuable benefit you will have.
You say live 20 years after your retirement, but potentially you could live 40+ years after retirement or longer depending on your date of retirement. Depending on your scheme rules and the type of pension you have you could start taking it at 55 years of age subject to current rules. Probably best to post some more information about your personal circumstances so some more knowledgeable forum members can offer further advice.
You will presumably be on track for a state pension, subject to years of NI contributions. Worth checking what your state pension is looking to be on the government gateway website.

Thanks for the prompt reply. I've updated my question.
My confusion is not whether I get enough pension after retirement, but "I could have invested the workplace pension money somewhere else"
Even if I can live another 40 years after retirement (in 2045), (which is very, very unlikely), the payout is still less than the invested value.

If so, wouldn't it be much better of, for all those years, I have put the money in some fund, or bond, assuming they perform the same as the pension company would have? I can only think of the tax-saving of a pension, but is that all?

[Deleted User] · 14 December 2019 at 2:02AM

You can safely ignore all of these numbers. At this stage they are a little worse than meaningless. They are actually unhelpful.

What they are doing is making very conservative assumptions on growth, assume zero contribution and then on top of two conservatisms they make two more on withdrawals.

Specifically, they are assuming you will be taking an annuity at 65 , which is safe but very unusual. Most people can do better by staying invested. Now... The annuity rate they assumed seems low, but it depends on the type and assumptions (death benefit for the spouse, average vs best rate, inflation protection, no ailments, etc). Annuity rates won’t be anything like they are today, likely higher.

If you put conservatism on top of conservatism, multiply by conservatism and extract a conservative square root, what you get is meaningless nonsense.

In summary, keep putting money away. You are doing fine.

Albermarle · 14 December 2019 at 3:35PM

T

otal value of your account (today): £76,580
Your estimated fund value (at 2045): £111,000*
Your estimated yearly pension (at 2045): £2570*
(*The amount is given in today's price)

In the past these projections were too optimistic, so there was a clampdown and now they have swung wildly in the other direction . As Mordko explains it is worst case scenario and best ignored.

Forecasting the future is difficult but in very general terms lets say you add £2K a year to your £76K for the next 26 years and the pension grows at an average of 2% a year ( quite pessimistic) then you could reach a total of very approx. £180K . A safe withdrawal rate is 3.5% = £6,300 pa .
For sake of this very rough calculation I have ignored inflation .
In reality the total would be a lot more than £180K and the annual pension would probably be well over £10K , but things would cost more.

If so, wouldn't it be much better of, for all those years, I have put the money in some fund, or bond, assuming they perform the same as the pension company would have? I can only think of the tax-saving of a pension, but is that all?

The only result of doing this would to be lose the tax benefit .
What you could do is look at the investments in the pension to make sure you are invested in funds that suit your age /risk profile.

atush · 14 December 2019 at 3:51PM

"I could have invested the workplace pension money somewhere else"

Not really, no. If you invested somewhere else, you would not have gotten the employers contribution- worth half or more of the total contributions.

If you are not happy with the current fund choice, swap it. If you arent ahppy with current charges, swap it.

What pension are you paying into now if this is an old one?

sandsy · 14 December 2019 at 10:44PM

There's a variety of ways in which you can access the money from your pension pot when you retire. But pension providers are required to show you how much you would get if you used the funds to buy a guaranteed lifetime income.

Looking at the numbers you've provided, it appears that your company has gone somewhat further and assumed you would take an income that increases with RPI inflation each year AND one that would pay out an income of 50% of the original amount to a partner if you were the first to die. That's why the figure looks low.

You don't have to buy a guaranteed lifetime income at all, if you don't want to. But the figure is indicative of the cost of doing so, plus the extra benefits I described.

Tammer · 15 December 2019 at 10:23AM

The main reason to pay into the workplace pension is because you like free money.

If you don't like free money then don't

BelindaDido · 15 December 2019 at 11:54AM

"Your estimated fund value (at 2045): £111,000"
"suppose I can live another 20 years after retirement (2045) , I receive
20 * 2570 = £51,400 in total, less than half of what I originally invested"

I don't think this would really be 'less than half of what I originally invested'. Wouldn't the estimated fund value be made up of not only your contributions but also your employer's contributions and the tax relief provided by the government and the increase in value of the shares/units that were purchased by the pension company? It could well be that your contributions are actually less than half of the estimated fund value.

zagfles · 15 December 2019 at 12:54PM

Your estimated fund value (at 2045): £111,000*
Your estimated yearly pension (at 2045): £2570*

The important thing to understand is that the "estimated yearly pension" is based on converting your £111k pension pot into an index linked annuity (a guaranteed inflation linked income for life). But you don't have to do that.

You can consider it as £111k savings which you can draw on it as you want, once you're over 55, or whatever age the government set in the future, possibly state pension age minus 10 years.

There are various tax issues to consider, but otherwise your pension is simply a tax efficient savings pot. Don't be put off by the (currently) rubbish rates for annuities. You don't have to buy one.

A Naive question about pension

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