Can you help me make sense of this pension projection?

[IfYouCantSeeMyMirrors]

I'm 45 and I intend retiring at age 65. I've got a couple of small occupational pensions, but for the last 15 years or so have been self-employed, paying into a stakeholder pension with Scottish Widows. (I also have a share of my husband's pension.)

I had a good look at all my pensions last year and decided that I needed to boost my income in retirement by 5K a year. I asked Scottish Widows to give me various projections for achieving this. What they've suggested is putting away an extra £450 a month. After tax, according to their 'middle rate' projection, that would bring me in around 5K a year in retirement, at today's prices.

But the thing is....if I simply SAVE £450 a month for 20 years, then even if the money attacts zero interest, I'd have a big pile of money at the end of it. Assuming I live for 20 years after retirement, I could simply dole out that money to myself for 20 years - and it would work out at more than their 5K-a-year projection.

So what is the point of saving it into a pension? Am I missing something?

I think the projection may use insurer annuity conversion rates. £450 x12 x20 = £108,000, plus a bit of investment return and less SWs fees, probably gives a result of whatever it would cost to buy an annuity from an insurer giving an income of £5k per year from age 65.
Insurers don’t like to take a lot of risk, so there’s a great big margin built into that cost.

This is why the government legislated to allow people to cash out their DC pots (so they don’t need to buy annuities).
The advantage of saving into a pension is that you don’t pay income tax on your contributions, whereas if you put £450 of net income into the bank you’d need to earn more than £450 to do so.
Also, any pension investment return isn’t subject to tax (unlike interest and non-ISA (or similar) investment return) and you’ll be able to take 25% of your pension pot tax free, assuming that a future government doesn’t reform that...

Personally I think pensions saving is a good thing and everyone should do it to get a minimal retirement income - especially if their employer is going to chip in as well as that is basically free money. But it makes sense to look at other forms of savings too.

I'd imagine the illustration assumes you'll receive the £5k pa as an annuity for the rest of your life, and depending on the other parameters you set may including increases when in payment to keep pace with inflation. You are assuming you will live to 85 but the mortality/morbidity assumptions might be longer based on your current age.

It's all academic anyway since you can control your income withdrawals now via drawdown. Depends really on how secure you need that extra £5k pa to be. Is it imperative to cover essential bills for the rest of your life, or is it for a bit of extra spending in early retirement while you're likely to be more active.

Thanks for the advice. I'm now unsure as to whether the 5K projection by SW is in today's prices or not. The notes say:
'This illustration shows, in today's prices, the final fund values and benefits that might be payable when you retire. This means we have allowed for price inflation to give you an indication of how much you would be able to buy with your final fund value'.
So do they mean it's 5K in 'today's prices', as they say? Or do they mean it's 5K having allowed for price inflation - as they also say?
Why isn't it simpler to understand?!

It means whatever the equivalent of £5k is when you retire. Which simply saving won't give you. Saving won't give you the tax breaks either. Or allow for the fact that you might live too over 100.

With the new rules on draw down, you should think of pensions as a tax scheme.

You can save £450, keep it in cash and withdraw over 20 years. It would be better to do that through a pension because you get tax relief on the way in.

That would not be recommended though because you would want investment growth also. Scottish Widows are offering you an investment plan and they are guessing what those investments will be worth.

Markets will do what they will do. I would concentrate on how much in fees they are charging.

OK, that's much clearer now. Thanks again....