Plummeting pension prediction

[Labracadabra]

Hi all
I have a workplace pension - I contribute 12% of my salary and my employer puts in 18% so a total of 30% of my salary going in. I'm 39 and have been paying in for 5 years (had 6 years on a final salary pension before that at my previous place of work). I am on a good salary (around £65k pensionable pay) so felt fairly happy with my contributions. However, we get an annual statement which predicts what my annual pension benefit will be if I retire at 60. For the past three years it has been going down by over £2000 a year - in 2015 it predicted I would get £19583 a year, in 2016 it predicted £17302 a year and this year it predicts £15280 a year. Obviously this is depressing but should I also be alarmed!? If it carries on like this in 7 years it will be almost zero and yet I'm still putting in a massive chunk of my salary for the next 20 years! Or would it be very unlikely to keep dropping like that?
It seems stupid that over £20k a year is going in for 25 years and I'd eventually get back a lot less each year (even if I lived to be 90 that's still only 5 years more than the period in which I paid in?) surely compound interest should be working it's magic here? I'm confused! If I take a lump sum it drops even more. I'm usually quite clued up about money but right now I'm panicking a bit!

Meant to say, I know it's a DC not a DB pension and therefore the benefit isn't fixed, it's just the rate at which it's dropping that seems excessive!

It's linked to share prices. Over the long term it will be expected to rise so short term isn't a very accurate indicator of what will happen. Have you got lifestyle plan? It should move a proportion of your pension from high risk shared to low rush cash as you near retirement.

Be grateful you're still getting a massive pension pot compared to 99% of the population and don't have to rely on a state pension that's looking even more distant as the years go by.

Hard to say definitively without knowing what the assumptions are in your statement but the main reason pensions look lower in recent years is falling gilt yields. These are used to convert the fund at retirement to pension. Because gilt yields and hence annuity rates are much lower you get less pension for your money when you convert the fund. Annual statements will use current gilt yields to produce the expected pension.

This was exacerbated by brexit, however your fund may have done well returns wise this year partly for the same reason.

At retirement you can use your fund to take income you don't have to "buy" a pension anymore so don't worry too much.

You could speak to an ifa if you need some reassurance.

I'd get ifa advice - it's too important to leave it to chance.

As PP said it's linked to investment performance - both actual performance in the past and that assumed for the future (both to grow your fund balance and determine the annuity rate). I would be focussing on the actual investment performance - how has your fund balance been growing from year to year?

Changing assumptions about the future may have a big impact on the projected pension, but no-one actually knows how your fund will grow and what annuity rates will be when you retire. And you don't have to buy an annuity anyway if they don't seem like good value to you when you do retire.

30% of your salary is more than most people can dream about so I wouldn't worry too much either. An IFA can help advise on appropriate investment options, particularly as you get closer to retirement, to make sure you're not adversely affected by any market downfalls at that point. Many schemes have a lifestyle option which will take care of this for you.

30% of £65k per year is ~20k. 30 years of 20k is 600k. I was always told to work on 100k would buy you an income of 3k per year in retirement - so your prediction is about right. Obviously market rates may help get you more, but it's a good base.

Thanks everyone, I will talk to my IFA to see what he advises. I do realise it's a lot more than many people will get, but on the other hand my contributions are pretty large too so I don't think I should stop worrying and just "feel grateful". The thing I do feel lucky about is my employers contributions, as they are very generous. Thanks again for all the advice.

As others have said, it is likely because of falling gilt yields. If interest rates go up, gilt yields will follow and you will find you can buy more pension for the same size pot.

There's not much you can do about annuity rates now. When you come to retire you can shop around on the open market, or not buy an annuity at all. So aside from giving you a ball park pension figure I wouldn't worry about the projected pension too much for now.

Concentrate on the investment performance of your pot instead. Is it increasing each year? If, say, you have chosen to invest in equities, is the performance in line with equity markets? Are you happy with the level of risk you're taking with your pot? This is something to be particularly aware of as you approach retirement. Are the expenses reasonable, or are you losing too much to fees?

If you want some help with this you could speak to an IFA, which would probably be a good idea as you have a large pot that's only going to keep growing.

Don't worry about the predictions, they are general rubbish! (I'm a chartered IFA). They give general info on assumptions that can't happen, using out comes that are now out of date due to legislative changes in 2015. See and IFA and have a quick review.

Oh and you won't be taking an annuity unless you're (almost) mad. Total rubbish

Your pension illustration makes certain assumptions about how well your investments will perform. A few years ago, the regulations that govern how these figures are worked out changed and pension providers had to be a lot more circumspect in their investment return 'predictions'. At the time, in my line of work, we sent out notes with people's statements to explain that their projected pension figures would probably be lower. Combined with the fact that the cost of buying an annuity is higher than ever, this might have caused the double whammy. But seeing an IFA is a good idea - you should check that your pot size is growing. If it isn't you might be stuck in an overly cautious lifestyle fund instead of investing for growth while you are still young.

If it isn't you might be stuck in an overly cautious lifestyle fund instead of investing for growth while you are still young.

A very good point to. Lifestyling is also out of date. A fund your size can warrant (and get value from) a review

Thanks everyone for the sound advice. I've stopped panicking and will talk to my IFA!