Or have I completely misunderstood how pensions work

[supersuds]

Just reading my annual pension statement. Appreciate I am lucky to have one.

It gives a figure which I could expect to have annually if I keep saving and retire at 60 as an annuity. When I look at how this is calculated it's based on a statutory definition from the financial reporting counsel.

The problem is the amount it says I could have in an annuity, is less than the actual amount ie if I divide the amount it says I could have as an annual annuity by my projected total savings, just drawing down the amount from the total savings, would last until I was well over 100

Ie if I have a projected pot of 250k, it says I can have an annuity if 5k a year. Even if I took the 25k tax free it would last until I was 105 if I just drew down the same amount annually from the pot.

Are these calculations/ annuities a crock of shit? Or have I misunderstood.

@Amima

Honestly I don’t understand how pensions work. Unless you live for a ridiculously long time you end up getting less out than you put in!

Because the purpose isn't to give you back everything you put in.

If you buy an annuity, that works like insurance - if you're "lucky" the Insurer has to pay you more than you put in - but they balance that by using the funds from the "unlucky" who die younger.

Since you no longer have to buy an annuity, you can get back everything you put in by withdrawing it - or if you die before you manage that, the remainder will go to your heirs.

This might be a stupid question, what with nobody having a crystal ball, but does anyone have any idea if the rules are likely to change back again and in the future everyone would be forced to buy an annuity from the funds, like before?

They are a crock of shit. Just ignore them. Produced to keep the FCA happy.

Christ! Misread thread title as '....how PENISES work'

Must get new glasses.

if you take a representative sample of 60-year old women in the UK
Why would you retire at 60? I thought the retirement age was going up to 70? My grandparents died at 76 so wouldn’t have got their moneys worth.

Because the purpose isn't to give you back everything you put in
Well what’s the point of it then? You’re basically giving away money! In that case you’d be better off with your money in a savings account because at least you and your descendants get all of it.

According to ONS data for recent mortality rates (pre-pandemic), if you take a representative sample of 60-year old women in the UK, more than one-third of them will live to the age of 90
So for me as an an individual there’s a 33% chance I’ll get my moneys worth and be better off, and a 66% chance that I’ll lose out and get back less than I put in. Those are not good odds!

I agree this has been a useful thread. I'm embarrassingly clueless when it comes to pensions and I'm in the kind of situation where that is a big issue.

@Amima

Honestly I don’t understand how pensions work. Unless you live for a ridiculously long time you end up getting less out than you put in!

No you don’t. Only if you take an annuity, which no one does these days generally. Go to your free pension-wise appointment that the government pays for you to attend. Listen to what they tell you about how pensions work and how your situation could pan out. And stop putting your head in the sand- you will regret it

@Amima - I picked 60 because that was in the OP. I agree it's a judgement we all need to make, but for some of us having the peace of mind that our savings won't run out when we are very old is worth it. I think you are right that maybe it's better to defer an annuity purchase to a later age when the risk / reward looks more attractive.

Use the Which Drawdown Calculator to work out how much you might be able to draw down annually and how long it might last:

www.which.co.uk/money/pensions-and-retirement/options-for-cashing-in-your-pensions/income-drawdown/income-drawdown-calculator-making-your-money-last-awvp49g8uq6l

I just ran a quick calculation for you and if you were to invest the money at medium level of risk and take £10,000 a year, with a 2% increase each year to allow for inflation, you'd have money left if you died after 40 years. Take £15,000 and you'll run out after 24 years.

Obviously investing on the stock market is always likely to be risky and by the time you've factored in fees for independent financial advice and charges it will eat into your income. That's why annuity rates are so low, They offer rock-solid certainty, but that comes at a high price.

Because the purpose isn't to give you back everything you put in Well what’s the point of it then? You’re basically giving away money! In that case you’d be better off with your money in a savings account because at least you and your descendants get all of it.

An annuity is not a government run/funded scheme to help retired people. An annuity is insurance. The point of any insurance company isn't to provide a public service out of the kindness of their hearts. The point of an insurance company is to make a profit for the bosses and shareholders with own the company. If the company paid out collectively an amount which is more than or equal to what everyone put in, they'd be bankrupt.

I honestly can't imagine a worse situation than getting to the point where I actually want to die, because my pension pot is running out and at 80/85 I'm too old to work to top it up. I'm very risk averse I admit, but I'd rather buy the annuity and then continue to hope to live as long as possible, safe in the knowledge I have a guaranteed income. If I die earlier - well, whether I've achieved best value from my pension pot will be the least of my worries

Also "giving away money" is relative. If you go to a shop selling food you "give away money" in exchange for food. If you buy an annuity, you "give away money" in exchange for a garanteed income for the rest of your life.

You could choose to keep your money and grow your own food in your garden. You could choose to keep your pension pot and invest it yourself and live off the income generated (or just spend the capital with wild abandon until it's all gone), but neither of these choices is guaranteed to provide you with an income for the rest of your life.

The choice you make depends on your own personal attitude to risk and on how much effort you want to/are capable of putting in. Most people like eating, not everyone is up for wielding a spade and not everyone can afford a garden in the first place. It's all very well saying you'll invest your own money with the help of a financial advisor, that might not be so easy 20yrs after you've retired and perhaps find yourself in the grip of dementia.

@Amima

if you take a representative sample of 60-year old women in the UK Why would you retire at 60? I thought the retirement age was going up to 70? My grandparents died at 76 so wouldn’t have got their moneys worth.

Because the purpose isn't to give you back everything you put in
Well what’s the point of it then? You’re basically giving away money! In that case you’d be better off with your money in a savings account because at least you and your descendants get all of it.

When you buy an annuity you pay a premium for the insurance company to take on the longevity and investment risks associated with guaranteeing an income for life.

When you choose to drawdown instead you risk all your money being wiped out in a market crash as an extreme example. You also take the risk that you live a lot longer than assumed in your calculations.

If the company paid out collectively an amount which is more than or equal to what everyone put in, they'd be bankrupt.
Exactly. The system relies on some dummies getting out less than they put in. I don’t know why you’d do that. If you keep your money in the bank you’re guaranteed to get ALL of it.

No you don’t. Only if you take an annuity, which no one does these days generally.
But I don’t see how a drawdown pension is any better than just having the money in the bank?

You also take the risk that you live a lot longer than assumed in your calculations
Not likely though is it. Retirement age is going up to 70 and I only know about two people who have lived past 85.

Every year, I phone up the company that insures my house and say "it didn't burn down - can I have my money back as I've clearly put more in to my policy than I got out?" And they just laugh...

A little pensions factoid for anyone who doesn't work or have any income.

Everyone is entitled to put up to £2,880 into a personal pension every year and the government will make it up to £3,600 as a form of "tax relief" on their contributions, even if they don't pay any tax. Worth remembering eg if you are a SAHM or D. You can do this up to age 75 under current legislation.

You could even do it for children, and it would have decades to grow. Google it.

Yeah but losing a few hundred on house insurance isn’t the same as losing a quarter of a million pounds on a pension is it? I’m not bothered about losing £500 but I’d be hugely bothered about losing £250k.

@edwinbear

I honestly can't imagine a worse situation than getting to the point where I actually want to die, because my pension pot is running out and at 80/85 I'm too old to work to top it up. I'm very risk averse I admit, but I'd rather buy the annuity and then continue to hope to live as long as possible, safe in the knowledge I have a guaranteed income. If I die earlier - well, whether I've achieved best value from my pension pot will be the least of my worries

If you run out of money (and many people do) then you will have the benefits system to fall back on and may actually be better off that way than spending the last 30 years of your life surviving on a very small annuity. When I last checked the average life expectancy for women was something like 84. So would you prefer 24 years at £15k-ish a year plus 18 years of your state pension (currently £9k-ish) or 24 years on a £5k annuity plus your £9k state pension when it kicks in at 67, 68, 69 or whenever?

You don't have to spend all your pension fund on an annuity or drawdown or whatever. You can spend a chunk on an annuity to cover your basics and put the rest into a fund from which you can draw down as you need it. Things like Equity Release can also come into play too, if you own your own property.

Of course if there's a devastating global crash or a global catastrophe, there's no absolute guarantee that your 'safe' annuity will still be in a position to pay out. But as the advisors say, if things are that bad then you will probably have something even worse to worry about.

@Amima

You also take the risk that you live a lot longer than assumed in your calculations Not likely though is it. Retirement age is going up to 70 and I only know about two people who have lived past 85.

Hey, this could save the Office for National Statistics some money - rather than collecting data across the country to get an accurate picture of life expectancy (over 87 for women currently aged 70), they should just contact Amima and ask her if any more of her acquaintances have made it to 85. "About two, you say? Shall I put down two or three? It's nice to be fairly precise about these things..."

@Amima

You also take the risk that you live a lot longer than assumed in your calculations Not likely though is it. Retirement age is going up to 70 and I only know about two people who have lived past 85.

Let's just ignore all the statistics and evidence about life expectancy increasing because you don't know many people that have lived past 85. Ooooookay..🤔

I know I just posted about it a few messages back but anyone can play with the drawdown calculator and gain a lot of useful info about how much they might need to provide a decent income in retirement. You don't have to sign up, pay a penny or give an email address or anything and Which? should be about as realistic as it's possible to be. Honestly, once you start playing with it you'll learn a lot:

www.which.co.uk/money/pensions-and-retirement/options-for-cashing-in-your-pensions/income-drawdown/income-drawdown-calculator-making-your-money-last-awvp49g8uq6l

Sorry to repeat myself but I think it's a really useful resource. It certainly changed the way I thought about my pension fund.

@Amima

If the company paid out collectively an amount which is more than or equal to what everyone put in, they'd be bankrupt. Exactly. The system relies on some dummies getting out less than they put in. I don’t know why you’d do that. If you keep your money in the bank you’re guaranteed to get ALL of it.

No you don’t. Only if you take an annuity, which no one does these days generally.
But I don’t see how a drawdown pension is any better than just having the money in the bank?

Because it’s building a pension is a much more tax efficient way to save money than simply putting it in a bank.

Agree that annuities are not a good buy but you’re throwing away free money from the government if you’re working and you don’t put some into a pension.

www.which.co.uk/money/pensions-and-retirement/personal-pensions/contributing-to-a-private-pension-explained/tax-relief-on-pension-contributions-explained-a27f53z7qg3f

@Amima

Honestly I don’t understand how pensions work. Unless you live for a ridiculously long time you end up getting less out than you put in!

They’re terrific if you do live a long time, though! My dad had a non contributory RAF pension from 55, an occupational pension with eleven years’ contributions from 65 and a state pension from 65. When he died, aged 99, he’d been a pensioner for almost as long as he worked!