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Trouble understanding projected figures on pension statement(12 Posts)
Am not as well informed as I should be about a private pension that I've had since my twenties, and at 45 it's time that I was.
Annual statement arrived and I decided to actually look at it instead of stuffing in a drawer. It has a projected figure of how much annual income my fund could provide on retirement.
Pension pot is currently around £50K. They estimate that on my retirement date, it will be £100K. I understand that this makes assumptions, e.g. that I keep paying in the same monthly amount, and that the growth rate will be x%. Therefore, the final value could turn out to be lower.
Where I start to lose it is on their estimates of how much annual income this projected £100K could provide on retirement. I dug out the statements for some previous years.
- A few years ago the projected income was about £2,200 a year.
- A couple of years after that, projected income was about £2,000 a year.
- This year, projected income is about £1,900 a year.
First of all, since the figure is dropping, I assume that this predicted annual income is based on their projected final value of the pot, not on the amount that's currently in it. So it could be more or less, depending on whether the final pot is more or less. Fair enough. But I'd really appreciate it if someone wiser could explain:
- Why is the projected annual income dropping over time? Is it because their projected final amount in the pot is dropping (poorer than expected fund returns)? Or is it because it assumes I'll buy an annuity, and annuity rates are dropping?
- Is a predicted annual income of £2Kish from an £100K pension pot a typical amount? It seems a bit low to me, but maybe I'm naive. I looked at some online articles about what to do with different sizes of pot, and one said: "Annuities give a poor return. With an £100K pot, even the best deal on the market will only give about £5K a year."
I understand they were talking about the best on the market, and presumably that article assumes retirement in late 60s, whilst my current assumed retirement date (which I plan to change) is 55. But that's still over twice what my provider is projecting. And if I did retire at 55 and invested the £100K, drawing £2K out every year, it would take me fifty years to run out of money. I understand that inflation would come into play, though. Is the projected £2K a year accounting for inflation (so in real life when I'm 95 I'd be getting much more than that in pounds per year? Or is it a fixed figure whose value will dwindle over time?
Sorry for all the questions! I know that you don't need to buy an annuity, or stay with your existing provider. I'm just embarrassingly under-informed, and making a first attempt to get my head round it all.
I'm not very well inform either, hence recently employing the services of a financial adviser to help with my pension and finances.
However, that figure seems very low. My pension fund is £33k with an estimated pension of £6k per year.
(I'm 45 and that's assuming a retirement date of 2032.)
Following this thread with interest!
A rough rule of thumb is 100k = about 6 grand a year. It varies according to where its invested and his well they are doing.
Thank you! That's a relief I did think it seemed low. As I don't have to buy an annuity or stay with that provider (which I won't, if that's what they're estimating!), I suppose the bottom line is the size of the pot when I retire. Perhaps they're assuming I'll retire at 55 and immediately take an annuity, neither of which I actually intend to do.
Reckon I'm headed for a financial advisor, as JeanSeberg has done.
It was worth every penny, round. If you're in the north west, I'd happily recommend him.
A little more north and west than would really work, Jean (N. Ireland), but thank you! Will start speccing them out.
Assumptions on life expectancy can also affect the pension amount.
As Julie says, life expectancy will alter the likely annuity stream.
It may also be considering the broader economic environment - many financial analysts consider that we are entering a period of low-returns across most major asset classes, as a result of a lot of factors but principally due to slowing growth in a lot of the major economies, but also as the ultra-loose monetary policy of the last few years starts to unwind.
We're basically in uncharted territory - rates have never been so low for so long, we are still waiting to see whether the economic data shows enough strength to support any rate rise, nobody really knows what will happen when they do etc etc. It is possible that the income projection is taking into account a 'worst case' scenario to avoid the whole 'over-promised, under-delivered' scenario?
In terms of whether it takes into account inflation, there should be something on the statement which refers to "in today's dollars" or similar?
Generally the pot is described in todays money, whilst the annual amount is described in future money and assumes annual increases with inflation. Also remember that the life expectancy of a 65 year old is currently over 80 - so if you do get to retirement age, you are expected to live longer than average life expectancy.
Ahh, thank you. With a bit of head-scratching I can make some sense of that - as I said, I've just been letting it tick away for years.
The statement does indeed say that the pot is described in today's terms but the annual amount is not. However it doesn't say what terms the annual amount is described in. I did a calculator thing on MoneySavingExpert, which estimated a higher annual return from £100K, but said that the annual value would diminish over time due to inflation.
No idea how long they think I'm going to live, although that would have been interesting information .
At 45 today, you are expected to live to 89, so pension is assumed payable for 34 years. Assuming 3% inflation, £2,000 today would be £2,609 at retirement in 10 years. Assuming you live to 89 and the pension goes up with inflation, then they would be paying you £7,342 by the time you are 89 and would have paid you a total of £165k over your retirement.
If you did not get an inflation adjusted amount, then you could get c.£4,600 from the outset - fixed for life and would be the same total payout.
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