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Original poster

Pension confusion

20 replies

kitsuneghost · 21/12/2023 11:49

I am really know nothing about pensions and wondering if anyone can tell me if I am right here.

I log into my pension account. It says my pot is 200k.
155k in old one. 40k in current. And another with a few smaller policies.
I am 48. To retire at 67.
I have 900pm going in.

When I do a pension calculator to get a rough idea it is suggesting this would give me an income (including state pension) of 37k.

Can this possibly be right or am getting fed a lie. Don't want any false sense of security but this is more than I earn now so doesn't seem right.

OP posts:
helpfulperson · 21/12/2023 11:56

Presumably that is based on you continuing to pay in 900 per month for the next 20 years. So roughly another 200,000.

TeenagersAngst · 21/12/2023 12:00

A pension calculator will take your pot, add up the contributions and add a percentage increase each year to account for the growth of the pot (depending where it is invested). It should then calculate an annuity that you will receive each year by effectively exchanging the whole of your pot for the guaranteed annual income. The larger the pot, the larger the annuity. However, inflation will also erode the pot at the same time.

If your current pot is 200k and you will double it to 400k, even with growth I'd be surprised if that buys you an annuity of 37k which is quite generous for a pension. My BIL has a 900k pension pot and isn't getting an annuity quite that large.

Bromptotoo · 21/12/2023 12:00

Max state pension now is a little over £200/week.

I don't think you can get an accurate prediction now for what either £200k or £400k will buy in 20yrs time. An estimate for sure but nobody can predict either the investment return or the likely yield from an annuity - if they're still a thing in 2043 - that far out.

abbse · 21/12/2023 12:01

TeenagersAngst · 21/12/2023 12:00

A pension calculator will take your pot, add up the contributions and add a percentage increase each year to account for the growth of the pot (depending where it is invested). It should then calculate an annuity that you will receive each year by effectively exchanging the whole of your pot for the guaranteed annual income. The larger the pot, the larger the annuity. However, inflation will also erode the pot at the same time.

If your current pot is 200k and you will double it to 400k, even with growth I'd be surprised if that buys you an annuity of 37k which is quite generous for a pension. My BIL has a 900k pension pot and isn't getting an annuity quite that large.

Read again - the £37k includes the state pension.

TeenagersAngst · 21/12/2023 12:02

Also, you don't have to take an annuity - there are various ways of accessing a private pension (if that's what this is)?

TeenagersAngst · 21/12/2023 12:02

Ah, sorry, I missed the bit about the state pension. So that's about £10k currently if you have full pension credits. So your annuity would be £27k?

thedukeofbuckinghamshire · 21/12/2023 12:05

I always take these predictions with a pinch of salt, sounds like my pension is about the same level as yours (I'm a few years younger and have about 160k in.) it's definitely based on paying in at the same level until retirement age. You're doing okay though OP.

Original poster
kitsuneghost · 21/12/2023 12:13

Actually misread my payslip. It is 700pm I seem to be paying but that still comes out at 34K (24 + 10 state)

My payslip has
536 and 178 on the main list
The it has a ERS Pension TP £953.00 down the bottom

Anyone know what the ERS Pension TP means?

OP posts:
Bromptotoo · 21/12/2023 12:37

AIUI ERS pension is the Employers contribution in that pay period.

Heatherbell1978 · 21/12/2023 14:08

Your pension forecast should state what the assumptions are. Usually it is based on you continuing to put in the same amount until pension age with a stated % increase over time. As a very rough guide, divide your pot amount by 25 (years you're expected to live post retirement) to get annual 'salary' so £200k would be £8k per year. If you draw down on your pot it's usually suggested you draw 4% of it per year (which gets you to the same figure)

CaveMum · 21/12/2023 14:39

As a very general rule of thumb, every £100,000 in your pot will equate to roughly £5k per year of income. There are other influencing factors and obviously due to things like inflation £5k will not have the same buying power I. 20 years time.

personally I’d dismiss the state pension component for now, I wouldn’t be surprised if it is means tested by the time I retire in 25 years so I don’t want to rely on it.

Original poster
kitsuneghost · 21/12/2023 14:52

Heatherbell1978 · 21/12/2023 14:08

Your pension forecast should state what the assumptions are. Usually it is based on you continuing to put in the same amount until pension age with a stated % increase over time. As a very rough guide, divide your pot amount by 25 (years you're expected to live post retirement) to get annual 'salary' so £200k would be £8k per year. If you draw down on your pot it's usually suggested you draw 4% of it per year (which gets you to the same figure)

Oh I didn't realise it worked like that
I thought you just got it as long as you lived and they made their profits on some people not using it all and some using a bit more.
I tell you, I'm hopeless.

OP posts:
stealthninjamum · 21/12/2023 15:03

Op I used to think pension value was partly due to other people dying - it’s not a silly thought because so many pensions were sold by insurance companies years ago. You actually are paying into a pot that your relatives will get when you die. You should’ve nominated someone to get it when you die. Anyway the main thing to realise is that you can actually spend all of your pension so it’s good to do it in a thoughtful, planned way.

you have plenty of time to learn this. I can recommend the Meaningful Money podcasts or YouTube videos to learn more.

Ilovemyshed · 21/12/2023 15:05

TeenagersAngst · 21/12/2023 12:00

A pension calculator will take your pot, add up the contributions and add a percentage increase each year to account for the growth of the pot (depending where it is invested). It should then calculate an annuity that you will receive each year by effectively exchanging the whole of your pot for the guaranteed annual income. The larger the pot, the larger the annuity. However, inflation will also erode the pot at the same time.

If your current pot is 200k and you will double it to 400k, even with growth I'd be surprised if that buys you an annuity of 37k which is quite generous for a pension. My BIL has a 900k pension pot and isn't getting an annuity quite that large.

Why an annuity. Drawdown is better as the fund keeps growing whilst you draw from it.

CaveMum · 21/12/2023 15:16

If you are really unsure about how pensions work it might be worth booking a chat with an independent financial advisor. They can talk you through your options, take a look at whether your current pension is working well for you or if you could benefit from moving it to a different fund/consolidating it etc.

You can start off by reading some basic info to help you get your head around it all: Pensions: Everything you need to know for retirement - MSE (moneysavingexpert.com)

Original poster
kitsuneghost · 21/12/2023 15:56

Thank you all
Your responses do help a lot
Can't really afford to pay more at the moment but will definitely try to learn a bit more

OP posts:
scrunchmum · 21/12/2023 16:09

stealthninjamum · 21/12/2023 15:03

Op I used to think pension value was partly due to other people dying - it’s not a silly thought because so many pensions were sold by insurance companies years ago. You actually are paying into a pot that your relatives will get when you die. You should’ve nominated someone to get it when you die. Anyway the main thing to realise is that you can actually spend all of your pension so it’s good to do it in a thoughtful, planned way.

you have plenty of time to learn this. I can recommend the Meaningful Money podcasts or YouTube videos to learn more.

It completely depends on the type of pension and how you choose to take it.

If you have a DB pension (eg x% per year of service) then there isn't a pot as such just a promise to pay. These are really valuable as the risk is with your employer not you, eg on investment returns.

If you have a DC pension (eg money purchase) which are the majority these days, you have a pot of money which could go up or down with investment returns. You can then choose to drawdown this pot, take it all in one go or buy an annuity (pension income) from an insurance company. If you buy an annuity with your pot and die after 5 years then it's tough luck, no pot left. OTOH if you drawdown from your pot and live for 40 years after retirement you may run out of money.

Chewbecca · 21/12/2023 16:17

Suggest you confirm first if they are Defined Contribution (DC) pensions, i.e. it is your pot of money that you can buy an annuity with or (more commonly now) draw on as you please (some tax free) or Defined Benefit (DC), i.e. a promise to pay a certain amount each year until you die, usually index linked to some extent.

Floofydawg · 21/12/2023 16:20

As a very general rule of thumb, every £100,000 in your pot will equate to roughly £5k per year of income. There are other influencing factors and obviously due to things like inflation £5k will not have the same buying power I. 20 years time.

That's interesting and has made me feel better. I have just over a £400k pot at the age of 54, so it feels like I'm on track to retire at 60 with at least a £20k pension plus state.

scrunchmum · 21/12/2023 16:31

TeenagersAngst · 21/12/2023 12:00

A pension calculator will take your pot, add up the contributions and add a percentage increase each year to account for the growth of the pot (depending where it is invested). It should then calculate an annuity that you will receive each year by effectively exchanging the whole of your pot for the guaranteed annual income. The larger the pot, the larger the annuity. However, inflation will also erode the pot at the same time.

If your current pot is 200k and you will double it to 400k, even with growth I'd be surprised if that buys you an annuity of 37k which is quite generous for a pension. My BIL has a 900k pension pot and isn't getting an annuity quite that large.

Wonder if your BIL also took the tax free lump sum of 25% as this will reduce the annuity value but is upfront cash.
OP any of your quoted annuity figures will be before this lump sum. You can currently take 25% of your pot completely tax free at retirement. The rest can be used to buy annuity, drawdown etc. (assuming you have a DC pension, there is a pot calculation for DB). It's a nice upfront payment and as it's tax free for most people it's a good idea to take the full tax free amount.

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