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.

@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

Hear hear!

Glad to see @DadDadDad is already here (I'm an actuary too).

One of the biggest challenge is estimating long term factors which impact on your drawdown. It's easy to say "I won't live past 85" for example. But what if you do? "Inflation will be 2%" - but what if it's 6%?

Annuities look expensive - but that doesn't make people who buy them idiots. It means that they have a different attitude to risk and would rather pay the premium for certainty.

Couple of points:
Pension age... the state pension age has been rising to be in line with men. it is rising further for both Men & women as both are living much longer than when the retirement ages were first set after the second world war.

Your private pension is not (currently) linked to the state pension age. You may be able to start to access it from age 55 depending on your scheme. The yearly amount you can access will depend on your scheme too.

In terms of money you put in vs money you get out:
Any money you put in should gain tax relief. That means for example:
You go to work and earn £100
Tax Man takes £20 in income tax
You put that £80 into your pension
You get tax relief, so you end up with £100 of pension

Lastly, pensions are invested in one way or another. These investments over the long period beat the hell out of cash in a bank by a huge margin. This includes periods of time where inflation and interest rates were in double digits and major crashes such as in 2007-8, the great depression, the cold war, World War 2 and most recently the pandemic. For a time, investments do drop below their starting value but stay the course and you win.

Let me put it this way, everyone who has real wealth invests. They invest because their wealth increases over time. If you want to, you can get this too. A pension should do this for you.

I'm kicking myself for not putting money into stocks and shares ISAs over the last 15 years (I'm 60). I've had money sitting in cash ISAs that are actually losing money because of inflation.

Thanks to the informed posters for the useful info in this thread.

Thank you Amima for making this thread so amusing.

Its great to see some sense being written on a pensions thread rather than the ill informed garbage that often litters these threads. "Pensions are a con, I put my money into a buy-to-let, you should do the same" etc. etc. These folk can miss out on tax reliefs and take all sorts of risks if they know it all, but its when they try convince others...Grr!

Also to pp's don't forget it's not all "your" money in your pension pot. Your employer will have contributed at least the same amount, and the government additionally gives you tax relief. If you don't have a pension at all, you don't get these extra benefits.

@Everanewbie

Its great to see some sense being written on a pensions thread rather than the ill informed garbage that often litters these threads. "Pensions are a con, I put my money into a buy-to-let, you should do the same" etc. etc. These folk can miss out on tax reliefs and take all sorts of risks if they know it all, but its when they try convince others...Grr!

Whole heartedly agree. Nice work, actuary mumsnetters.

Just wanted to add a comment for people thinking annuities are terrible value - keeping your funds invested and/or drawing down is not free. Various types of fees are payable whatever the performance on the underlying funds, and actively managed funds can be very expensive. The "best" decisions can only be assessed retrospectively. It is important however to make well informed decisions to maximise the chance of a good outcome.

Mostly here to wave at the fellow life actuarial mumsnetters! There are quite a few here if you look in the right corners.

Just a small thing to add, but you can take 25% of your pension as a tax free cash sum, so in your example it would be 62.5k not 25k as a lump sum.

@Herhereherhere

Mostly here to wave at the fellow life actuarial mumsnetters! There are quite a few here if you look in the right corners.

Just a small thing to add, but you can take 25% of your pension as a tax free cash sum, so in your example it would be 62.5k not 25k as a lump sum.

Start a thread about excel functions and we all come crawling out of the woodwork

Start a thread about excel functions and we all come crawling out of the wood workbook

Statistically is not kidding - our profession's magazine (imaginatively titled The Actuary) used to have one of those columns where they would fire personal questions at a member of the profession ("who would be your top five dinner party guests?" - that sort of thing). One of the questions was: "Favourite Excel function?"

(in case your wondering, so many to choose but for me SUMIFS is pretty useful).

*you're not your - can't believe I made that mistake

@DadDadDad it isn't just you actuaries who are partial to a SUMIFS. My fellow research folk and I love it too!

Is there anyway of looking at your forecast if you have different pension pots? I have a local authority pension from 2004 - 2020 (approx 12 years contributions in total because of Mat Leave) and will have an NHS pension from 2020-retirement at 65 hopefully (24 years contributions in total ). Is there a generic calculator to let me look at what financial shape I will be in when I retire? Thanks all. Fascinating thread.

I think I'd have to go with the humble VLOOKUP. It's like a gateway function, once you get your head around it then a whole world of data manipulation opens up.

@SafeMove. I am guessing that both your pensions will be defined benefit schemes (as they are public sector) rather than defined contribution or money purchase which is what the OP refers to. They work very differently so it is important to know what type you have. Do you have a deferment statement or annual statement from either of the pension schemes?

I like an (IFERROR,"")myself - makes everything look neat and tidy!

@Herhereherhere yes, they are defined benefit. Tge annual statements are very hard to fathom. The last ones stated about 4k per year each? I have two LA ones as I worked in two LA. So actually 3 pension pots but I lump the LA ones together...

Safemove you should get a statement from the LGPS pension (local authority one) which shows what you should get in today's terms.

The NHS pension is more difficult, as you will be in the 2015 scheme which is calculated on CARE i.e. career average pay, so if you get promoted that will up your average pay. Have a look at the scheme booklet which gives you the calculations. Basically you get 1/54 of your average pay per year of service, allowing for inflation.

You may want to remember that your NHS pension can NOT be transferred, but your LGPS one can. However you should see a pensions specialist qualified in DB (defined benefits) pensions for advice regarding this - a bog standard pensions adviser won't particularly know all the relevant nuances of DB pension transfers!

Ah just seen your latest post. May be worth contacting the LGPS and asking if they will transfer the earlier pension into the later scheme.

As an aside, even non tax payers should save in a SIPP, if they can afford to, you pay in the max allowed £240 per month and it gets made up to £300 with tax relief. You can do that up to the age of 75 - so £750 free cash every year, you can leave it in cash if you are totally risk averse. Obviously investing it is better long term.
If you are not clued up on investing then put it into something like Vanguard lifestrategy funds. I started late at the age of 50 ( I do have a very smal LG pension that will pay £2000-ish a year from age 67)
In less than 5 years, my pot has doubled my contrubutions but I do invest in higher risk/reward things like global tech funds.

@Allergictoironing thank you! That is so helpful. Once I have completed my Level 8 qual I will automatically go onto a band 8a (within next 4 years hopefully). Doubt I will go much beyond that as my brain needs a rest. So I am hoping my NHS pension will be wasy enough to work out with your 1/54 calculation. The future looks a bit less worrying now

*easy