Private pension question

[LMW1990]

This sounds like a really simple question however I cannot find the answer!

My DM in law has just retired. She has a private pension. How long will this pension payout for? Is it a set period of time/ a certain age?

She has two lump sum versus monthly income options to choose from but it does not say how long either would go on for?

Is there a simple answer?

She should ask the Pension Administrators - no-one on here will be able to tell her.

As above. She needs to make enquiries as pensions vary widely.

If she uses her pension pot to buy an annuity, then she’ll receive that amount every year for life (split into monthly payments). Lump sums are a one off payment. She can take part of the pot as a lump sum, and use the rest to buy an annuity. There are other options available too. She should get proper advice before making a decision.

www.pensionwise.gov.uk/en

She can book a free appointment with the government advisory service.

the point of a pension is that no one knows how long they will live for after their energies and capabilities start to deteriorate with the onset of old age.

financial products like insurance and pensions are essentially a large scale gambling system. a central organisation gathers in funds from large number of people and sets rates for how payouts will happen which should statistically mean that over the whole customer base they pay out less than they receive and they make a profit. intrinsic to the system is that some customers get out more than others but noone can predict accurately who that will be.

a private pension consists of a pot of capital that might be a 6 or 7 figure sum.

an annuity will take that lump sum and effectively place a bet on how long they reckon the person will live - they will commit to paying out either a fixed sum or an inflation-linked gradually increasing sum for the rest of the person's life. if the person lives longer than expected the pension provider loses the bet and pays out more, if the person dies sooner than that the provider wins the bet and makes a profit. rates are set such that statistically they win more often than they lose.

other non-annuity based plans let the individual person take the risk of the gamble themselves. instead of an annuity commitment the individual takes a guess as to how long they might live and draws their income from the capital sum they have build up, which then gradually reduces. the risk is that if they guess wrong, they may fund themselves still stubbornly alive at the age of 90 having used up their private pension pot and now reliant solely on the state pension.

no one can tell you what the options being offered to your DMIL are. there will be lots of documents full of small print.

@YinuCeatleAyru

the point of a pension is that no one knows how long they will live for after their energies and capabilities start to deteriorate with the onset of old age.

financial products like insurance and pensions are essentially a large scale gambling system. a central organisation gathers in funds from large number of people and sets rates for how payouts will happen which should statistically mean that over the whole customer base they pay out less than they receive and they make a profit. intrinsic to the system is that some customers get out more than others but noone can predict accurately who that will be.

a private pension consists of a pot of capital that might be a 6 or 7 figure sum.

an annuity will take that lump sum and effectively place a bet on how long they reckon the person will live - they will commit to paying out either a fixed sum or an inflation-linked gradually increasing sum for the rest of the person's life. if the person lives longer than expected the pension provider loses the bet and pays out more, if the person dies sooner than that the provider wins the bet and makes a profit. rates are set such that statistically they win more often than they lose.

other non-annuity based plans let the individual person take the risk of the gamble themselves. instead of an annuity commitment the individual takes a guess as to how long they might live and draws their income from the capital sum they have build up, which then gradually reduces. the risk is that if they guess wrong, they may fund themselves still stubbornly alive at the age of 90 having used up their private pension pot and now reliant solely on the state pension.

no one can tell you what the options being offered to your DMIL are. there will be lots of documents full of small print.

This is a brilliant explanation, @YinuCeatleAyru, I think I'll screenshot it! 👍👍👍

Einsteinsgogo: I wonder just how annuities are actually calculated. Do the providers estimate investment returns and factor in using up your capital based on life expectancy? Or are they basing annuity rates on investment returns and just ‘inherit’ your fund when you die.

For those who are prudent with money and want to pass on some of the money should they die sooner than expected, annuities would be a bad choice.

yes annuity rates are calculated on the basis of the life expectancy of the individual as well as an estimate of expected market growth. individuals who have risk factors like smoking and obesity might actually be offered a better income for the same lump sum than a healthier individual who might last a lot longer. buying an annuity with a lump sum certainly gets a higher income than you would get if you had the same capital lump sum invested across the market in an average-performance fund, if you are just drawing the annual income. certainly if the pension fund is big enough then leaving it invested and just drawing the income, leaving the capital in tact, is an option. however for most people that income wouldn't be enough to live on so they need to either buy an annuity or spend down the capital in order to make ends meet. there is also the risk of a market crash to consider if you are intending to live solely on the income earned from capital. during a recession you might have very little to live on.