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.

@GenderApostatemk2

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.

I've seen Vanguard recommended by Which? and I've started doing the SIPP. Too late, probably, but once you get your head around it it makes sense. I know Which? isn't the be-all-and-end-all, but with so many dodgy financial advisors around it can be useful.

Is it worth having a SIPP for my DH (non tax payer)? I put a lot into my pension as a higher rate tax payer, and he’s a named beneficiary on it, so I assume it wouldn’t be worth having a separate SIPP.

All good points but you can mix pension approaches. It doesn’t have to be 100% annuity or 100% drawdown.

If you have multiple pension pots, you can purchase an annuity with one to give you a base guarenteed income for life and then do drawdowns on other pension pot(s). That’s what I plan to do. Not put all my eggs in one basket.

This is a slightly different, but related enough (I hope), question .....

If I wanted to get advice on pensions and long term investment of significant inherited capital, who should I be looking to talk to?

I feel educated enough to know I need advice but not educated enough to find it I am fairly financially astute, and can wield a spreadsheet in anger to model inflation and interest, but I really would like to talk to someone well regarded who can offer proper advice.

Thank you Amima for making this thread so amusing
You find it amusing that there are people who don’t know how pensions work? If anything you should be concerned that this information isn’t readily available. It should be being taught in schools.

Sorry Amima I thought you were deliberately misunderstanding DadDadDad’s very clear explanations.

I agree it should be taught as part of PHSE or whatever it’s called these days.

I'm also an actuary. although I do some work with annuities and our legacy life book I work in GI.

Waves back at @Rainbowshit

@HappyAsASandboy

This is a slightly different, but related enough (I hope), question .....

If I wanted to get advice on pensions and long term investment of significant inherited capital, who should I be looking to talk to?

I feel educated enough to know I need advice but not educated enough to find it I am fairly financially astute, and can wield a spreadsheet in anger to model inflation and interest, but I really would like to talk to someone well regarded who can offer proper advice.

Have a look at Citizen's Advice for guidance on finding a good Financial Advisor, or ask friends and family if they have used a good one.

Always ensure they are registered with the FCA!

Look for one who offers you the option of paying a fee for their advice. Don't know if it still goes on but there was one where I used to live who offered people free advice and took a percentage of every penny they made — which could be many thousands over several years.

Thank you so much for this thread - extremely informative and a bit scary but good to get thinking about planning properly.

And my favourite Excel function is INDEX(MATCH) but also love a bog-standard VLOOKUP wrapped with an IFERROR.

I do love a good Index(match) too. I think I'm sentimental about vlookup, probably the first proper excel function I learned

Stop living in the past everyone, XLOOKUP is the place to be now.

@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.

It’s also about quality of life too. My family don’t survive beyond 75 and I don’t know anyone in their 80s who needs a lot of money because they are out and about all of the time.

[quote SafeMove]@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.[/quote]
I have two different public sector pensions. Both have online portals where you can mess around with retirement age, lump sums etc.

You actuary types must be a right laugh down the pub with your excel functionality .

@titchy

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

Must get new glasses.

Those too produce an annuity in the form of children, whose annual cost of living rises well above inflation rate and taxes you till you die.

A typical annuity best buy table (real figures as at August 2021) looks like this:

Annual annuity income from a £100,000 pension, age 65, non-smoker.

1. £4,971 Single life, level, no guarantee

2. £4,943 Single life, level, 5 year guarantee

3. £2,724 Single life, RPI, 5 year guarantee

4. £3,285 Single life, 3% escalation, 5 year guarantee

5. £4,323 Joint life 50%, level, no guarantee

6. £2,750 Joint life 50%, 3% escalation, no guarantee

7. You get this amount each year unchanged until you die. If you die after 2 years you have paid £100,000 and receive just £9,942 back.

8. You get this amount each year unchanged until you die but are guaranteed to receive 5 years worth (£24,715) even if you die in the first year.

9. You receive this amount in the first year and it increases by RPI each year until you die (with 5 years guaranteed).

10. as (3) but it increases by 3% each year.

11. and 6) introduce "Joint Life 50%" which means your spouse will continue to receive 50% of the payments after you die until they die. (technically, these amounts are based on a spouse who is 3 years younger than you).

You can work out that with scenario 1) after 20 years, when you are 85 you will have been paid £99,420 and will be about to "break even"

@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!

You get tax relief while you are paying into it.

Essentially for every £100 I save in my pension, I get £20 in tax relief, which I could have now in my pay packet, or add it to my pension pot for later.

So if I save £100k in a pension, I could have £120k, with the extra £20k being 'free'. Plus whatever % interest it made while it was invested in stocks and shares, usually around 5% growth a year. If you take off 2% for inflation that's still 3% growth a year which beats other savings accounts.

Having a mix of money in a pension and equity in property is good. You can always move somewhere cheaper to free up cash.

You can work out that with scenario 1) after 20 years, when you are 85 you will have been paid £99,420 and will be about to "break even"

I can't help noticing that if you had invested £100,000 for 20 years (like the Life Office did) then you would have amassed considerably more, even allowing for the income dribbled out of it.

There is an Aviva Pension Planner tool that lets you play around with 2 pensions.

Thought I understood pensions fairly well.

Read this thread.

Am now confused to fuck. 😂

@jcyclops

A typical annuity best buy table (real figures as at August 2021) looks like this:

Annual annuity income from a £100,000 pension, age 65, non-smoker.

1. £4,971 Single life, level, no guarantee

2. £4,943 Single life, level, 5 year guarantee

3. £2,724 Single life, RPI, 5 year guarantee

4. £3,285 Single life, 3% escalation, 5 year guarantee

5. £4,323 Joint life 50%, level, no guarantee

6. £2,750 Joint life 50%, 3% escalation, no guarantee

7. You get this amount each year unchanged until you die. If you die after 2 years you have paid £100,000 and receive just £9,942 back.

8. You get this amount each year unchanged until you die but are guaranteed to receive 5 years worth (£24,715) even if you die in the first year.

9. You receive this amount in the first year and it increases by RPI each year until you die (with 5 years guaranteed).

10. as (3) but it increases by 3% each year.

11. and 6) introduce "Joint Life 50%" which means your spouse will continue to receive 50% of the payments after you die until they die. (technically, these amounts are based on a spouse who is 3 years younger than you).

You can work out that with scenario 1) after 20 years, when you are 85 you will have been paid £99,420 and will be about to "break even"

Thank you for this, I know a bit about pensions but I’ve never seen annuity rates laid out like this before. Makes perfect sense.

Good examples above but you also need to bear in mind that after 20 years your annual payment of £4971 in 1) is likely only to be worth £2000-2,500ish. That's because of inflation. Prices go up and up, your annuity payment stays the same.