Pension panic

[Pinkelephantintheroom]

If anyone can offer some advice I would really appreciate it.

I have two pension pots - one that has a few thousand in (probably about 3k), and a main one I have been contributing to since I was 25 (I'm 41 now) is at 70k. 13% of my salary has been contributed for the last 16 years (combination of me and employer) and the amount contributed has increased in line with wage increases since that time. I think I started on roughly 21k pa and I am now on just under 40k a year, plus bonus etc. For an example, I contributed just over 5k into the pot in the last 12 months.

I had a statement through this week to say that my predicted yearly income will be £4,900. This seems so little. So my question is, when the pension company make the estimate on how much the yearly income would be, do they assume the contributions will continue to be the same (e.g. if I pay in 5k a year until retirement at 67, that would be another 130k in pot, plus any growth the original 70k and these contributions would make)?

Or does the statement mean that if I don't continue to contribute and leave this pot as it is, when I come to retire, the estimated annual income on it would be approx. £4,900?

Even if it stayed at 70k plus 130k and didn't grow any further, that will still be a pension pot of 200k. I read somewhere that an annuity would pay roughly 5k per year per 100k - are these figures completely outdated now?

Also as a guide I was told that you should halve your current age when you start to make contributions and that is a good % to pay in each month. I started paying into the larger pot at 26 (13% would seem right for this theory).

I know in a few years (10+) I will be able to hopefully up the contributions as the mortgage will be paid off but right now with 3 kids I don't think I will be able to up it much.

In this situation would you advise me to pay for some financial advice? Or try to up the contribution to 20.5%? The £4,900 might just be liveable if the state pension is still around but I keep reading that the money for that will run out by the time I come to retire so I guess I shouldn't factor that in??

Any advice wise ones?

Thank you!!

I would ask your employer

It is likely that will tell you to contact the pension provider which is the obvious thing to do. Free, too!

I think it is inconceivable that the state pension will be abolished

They normally provide a paid up and ongoing projection of income that has been adjsuted for inflation.

So they will provide both options if you request them, the default would be the same contributions you are currently paying will be assumed to continue.

I would first try a pensions calculator. I’ve used this one before

www.pensionbee.com/pension-calculator

Putting in your figures, you should have about £300k if you retire at age 67

I have just turned 60 and one pension has reached the point where I can take a lump sum and put the rest in an annuity for life. Its worth around £30,000 and if I take a quarter, the balance would give me £62 per month, or £88 if I don’t take the quarter cash. I knew it wasn’t great, but I expected more than this. My DH had a similar pension, similar amount and it pays £200 per month. They also said if I wanted to take out an annuity there would be a cost of £500. I am going to leave it for a couple of years and see if it improves.

@AnotherOldGeezer - thank you, yes that would be the sensible thing to do and you are right, I will contact them. It was just a disappointment to read the statement and I panicked a bit. Good to hear you don't think the state pension won't go as if the projected amounts are correct I am going to need it. I do wonder what will happen though, maybe it will become means tested.

@fromdownwest - thanks for responding, I will speak to my pension provider and ask for clarification.

@SuperSecretSquirrels - thank you and yes, this is another thing, I have run my figures through other calculators in the past which all give pretty good projections and I wonder if they are over optimistic or whether the pension provider knows that where I have money invested won't grow so well (during different times of life e.g. as I get closer to retirement, the money is put into more cautious funds - I don't get to choose these). I just don't know, but I would be happy with the projected amount Pension Bee outlines.

Thanks all

@Mindymomo - I am sorry. When do you hope to retire? As much as the lump sum would be nice, if you don't desperately need it and are a few years off retirement then it might be better to wait and see if it will grow a bit in the next couple of years. Wishing you the best of luck

Do you have to take an annuity? Have you looked at drawdown to see if that is a better option assuming your pension is one that can do that?

With annuity rates so poor I plan to take my DC pension as flexible drawdown.

Does the statement tell you what the assumptions behind the forecast are? Does it assume you'll be buying at annuity.

If you don't mind saying which provider it is then there might be more information on their website as to what their assumptions are. They are often very pessimistic!

NB I have read (but am not completely sure) that the regulator imposes very conservative assumptions on the annual statements. That tends to panic people as often the statement assumes that your investments will be growing at less than inflation e.g. here is a recent thread from moneysavingexpert forums.moneysavingexpert.com/discussion/6265400/deciphering-pension-statement/p1

@Stuffin thank you for responding. No I'm not obligated to take an annuity and would consider a drawdown. I like the idea of a guaranteed payment for life so I don't run out but that might not be the most cost effective option.

@Mia85 thanks for the link, I'll have a read through of that but a lot of this goes over my head. The statement is very basic. All it says is "we have shown below an example of the yearly income you might receive before tax. We have adjusted the amount to take into account inflation, assuming it will be 2.5%. We have assumed an annuity rate of 0.9%" and the estimate is £4,900 per year. I need to get myself a more clued up. I have no idea if an annuity interest rate of 0.9% is good or bad!

Usually the statements are an estimate of what you'll receive, adjusted for inflation, if you continue to contribute at a similar rate until your retirement age. Are you looking at this online? Most providers have a facility where you can do that and they explain the assumptions they've made and the ranges where that would leave your pot in terms of value. You can adjust the assumptions to see how that might impact the value e.g. an earlier retirement age, increased contributions.

The annuity value is fairly meaningless. At the moment nobody in their right mind would buy an annuity and you do not have to do so. Focus on the projected total value and dividing this up by how many years you might live post-retirement, to give you an idea of annual income.

They are all just predictions though and with so much uncertainty in the global economy: gorpolitical instability, climate change, etc, it is extremely hard to predict far into the future, uncharted waters and all that. So the ranges given will be wide but hopefully give a vaguely accurate idea of adequacy of savings levels.

@Mia85 it's Scottish Widows. It does say I can view the assumptions online so I'll do that and hopefully it'll make sense! Thanks again for posting

It worrys me that not many of us understand our DC / pot of money style pensions (I include myself in this)
we contribute monthly/weekly & those of us on the very average salary will struggle to have a decent income upon retirement.

This sounds about right OP. Money purchase pension schemes are a far cry from the old days where everyone retured on final salary. I’ve been paying into a pension since I was 20. I’m predicted to take home about £6k per year when I retire. It’s bloody soul destroying. I think we’re living on a ticking timebomb and in 20 years or so there will be a lot of people newly retiring who are living in virtual poverty because their pension is worth fuck all.

I don't understand pensions at all. The pot sounds massive then you get a few grand a year. What's the point? What does that huge pot actually do? Who gets all the money?

Is there a really basic guide somewhere because I just can't get my head around amassing a multi 100k pot and being given pocket money.

@MorrisZapp

I don't understand pensions at all. The pot sounds massive then you get a few grand a year. What's the point? What does that huge pot actually do? Who gets all the money?

Is there a really basic guide somewhere because I just can't get my head around amassing a multi 100k pot and being given pocket money.

It's because it's being quoted as what you would get if you buy an annuity. Annuities these days are pointless.

If somebody has £300k saved and thinks at a push they might live for 30 years they can just choose the draw down £10k per year directly. Add in a state pension of what, £9k (if it's still at a similar inflation adjusted amount) and it won't be a rich life but it's doable if your mortgage is paid off by then.

@MorrisZapp

I don't understand pensions at all. The pot sounds massive then you get a few grand a year. What's the point? What does that huge pot actually do? Who gets all the money?

Is there a really basic guide somewhere because I just can't get my head around amassing a multi 100k pot and being given pocket money.

It's longevity insurance, where the pots of people who die early part for the ongoing income off people who live longer than predicted. Traditionally, they made great sense (when rates were better than they are now - blame QE)

The problem is that rates have tanked and there's now an antiselection issue - people who have reason to believe they'll outline their pot in drawdown want to opt in to annuities and people with compromised life expectancy don't play the game because they can leave more to dependents in other drawdown arrangements.

The thing that a lot of people who are self managing their drawdown fail to consider is their decreasing cognitive ability in age - old people just don't have the mental acuity that they had when younger (and usually don't have much self awareness of the fact).

The whole thing is a fucking mess.

At what point do I go fuck it, spend the money instead of saving & then rely on top up benifits

Thank you, that's a really helpful explanation. Mindfuck all round really!

1. You can get a current state pension amount predictor on government website. This is adjusted each year. You need 35 years NICS for a full pension. Currently a bit over £9k each year I think.

1. It is not too late to start to contribute a bit more pension each month. You will also pay a little less tax as pension contribution subtracted from net pay after pension deductions.

1. It is not worth getting an annuity. Better to put money into stocks and shares ISA.

Always take tax free lump sum as if you take it all as monthly pension it is then counted as taxible income.

I have a little over £7k from main pension which I can get when 60 layer this month. Then I have £60k in a secondary pension. I am taking lump sum from main pensions worth 3 times yearly pension in rate. I have come up with a plan to draw down about £8k each year from secondary pension. It will run out by time I am 67 but by then I will get state pension of £9k per annum. I will get £16k each year that way. I will be ok as have btl income and other investment.

starting early is the key and always put in as much as you can afford without leaving yourself short for living your life. You are right to plan early.

If you trust your kids, when you are fairly young put your property into their names, with a covenant that you'll live there until you die. If you die 7 years or more after that they'll pay no inheritance tax on the house.

Use drawdown for pensions. Be cautious in what you take out. Aim to be debt and mortgage free by retirement: this makes a BIG difference. Anything left in the pot can be left to kids when you die so isn't wasted like buying an annuity and then dying a few years later. Put power of attorney in place to at least two people jointly that you trust, before you lose your cognitive abilities.

Also start pension funds for your children while they are still children.

There is an old saying the inheritance tax is a tax paid only by those who distrust their children more than they hate the taxman, and it is so true.

I recommend a USA YouTube channel called The MoneyGuy which explains how and why to save for retirement. Ignore the technical 401K, IRA etc stuff

I’m sorry but I can’t agree with giving your house to your children. What happens if they divorce? And you have to be worth over £1m as a married couple for it to have much impact anyway