Pension projection

[Xrayrequest]

Please excuse me asking a VERY basic question…
i have a current pension pot of £25k - I am adding £280 to it every month, so does my employer so = £560 being added every month = £6,720 per year

If I retire @ 65 that’s 20 years away so I have 20 more years of contributions = £ 134,400 plus my current balance of £25,000

Total pot should be £ 159.000.

I understand these funds are invested and can fluctuate but my Aviva projection is attached and in 2 out of 3 examples the pot is less then my contributions? What am I missing?

Something doesn't seem correct, have you selected for 25% lump sum payment? Also remember fees will erode the value

Thank you for such a quick reply - I selected no lump sum - snapshot attached

Try another online calculator, there are lots if you google. Agree something doesn't look right with that projection. Over 20 years your money should increase

Using www.calculator.net/investment-calculator.html?ctype=endamount&ctargetamountv=1%2C000%2C000&cstartingprinciplev=25%2C000&cyearsv=20&cinterestratev=5&ccompound=annually&ccontributeamountv=560&cadditionat1=end&ciadditionat1=monthly&printit=0&x=Calculate#calresult

i get over £293,000 at a 5% growth rate which is quite a conservative figure. Inflation would reduce the buying power, so if you wanted you could use a 3% growth rate, which reduces it to £228k.

Pension statements show different performance rates but consider what is realistic... a 3% growth above inflation is a conservative guess. Sure it won't be linear growth as a simple calculator will do, there will be lots of ups and downs, but over 20 years, it's a reasonable guess for the total it can become.

Those figures are in real terms, ie after allowing for inflation

I don't know much about pensions but this doesn't make sense.

I took my pension out of Aviva as after annual fees it would have been at virtually zero by the time I retire. I had moved employers and my new employer uses a different scheme. Apparently the Aviva fees were quite high as pensions go.

The low rate is predicting a minus growth in real terms, i.e.the pot grows less than inflation. It's not predicting the number of pounds gets smaller, but that the buying power will be less than the money would buy you today.

Which fund is your pot invested in? This will make a big difference to your predicted returns.

I would expect Aviva to provide a decent calculator in return for the fees they charge but I will definitely investigate the other calculator & perhaps it will explain the “real terms “ aspect also

I honestly do not think the majority of our workforce would know these details. For people who have never invested in stocks, had shares or taken any financial risks - it seems crazy our old age is funded like this - I know I’m being naive but still

Charges more than the 2.1% medium growth!

I think this is the fund Investment approach - Aviva Pensions My Future Focus Growth S6

a lot of the pension projections are very low. You can get free compound interest calculators online and plug in your own parameters. It is tricky to adjust for inflation but I think the reporting puts a lot of people off/make people think what’s the point then…

From a quick Google that fund is around 75% equity (shares in many companies, which should provide growth over time, but can be volatile in the short term). The rest in bonds, commodities, cash, which is helpful if you are trying to keep the value stable when you are withdrawing from your pension, but less helpful when you are trying to grow it as they tend to grow less.

Maybe Aviva has high fees? I'm a bit surprised that the projected growth isn't a bit higher. I've assumed it's adjusted for inflation to account for the low numbers, but from what you've posted I don't know that for sure. I completely forgot to account for Aviva's fees so maybe they are producing a drag on performance.

I agree it's a bit nuts that people's old age depends on them picking sensible investment funds when so many people aren't financially literate. It's much more common for people in the US to invest in their retirement account, so I suppose that's the blueprint.

I'd have a look at Aviva's fees. You can move a pension to a different provider, although sometimes not whilst you are still contributing to the workplace pension. You can also consider if a fund with a higher equity % would be appropriate given you have 20 years till retirement.

It could be that it's after their fees and also by using their annuity. So the main beneficiary of your pension is Aviva. They're basically helping themselves to a huge chunk of your growth.

It's likely that, to benefit from employer contributions you have to join their pension scheme but you probably won't have to take the annuity, you'll have other choices.

I've googled in looking for the fees and there's a discussion here

https://moneyforums.citywire.com/yaf_postst12824_Pension-Fund-Choices.aspx

While you have to have an Aviva pension, it could be that you're allowed to choose a different fund within the pension and that possibly could be worth doing, especially if it's currently in a managed fund and you choose an index tracker (only a minority of managed funds beat index trackers after fees).

This is likely to be something where it's worth learning more about pensions and also paying for advice from an IFA. Meaningful Money podcast is excellent for education. They had a recent episode in the 'big mistakes' season about fees.

https://meaningfulmoney.tv/2024/06/19/big-mistakes-ignoring-costs/

Another option could be to put the minimum in your workplace pension to receive the employer contribution and then if you want to top up, start a separate low cost index tracker plan elsewhere.

That must not be a great choice perhaps? I got my forecast this week and my fees were £1.49 for the year and my investment rose by 11k last year.

Just to to reiterate - I really value everyone taking the time to write, in terms I understand!! I need to educate myself and ask Aviva some questions! I work for a charity and they genuinely believe they have picked a great option for us.

I am still curious why pensions have to be done this way - there is no way people should be risking getting back less then they (and their employers) have contributed .

I keep wondering, what is a decent rate of growth per annum? Is there a target figure on average like 5%?

And if you continually get below this, is it recommended to change the funds being invested in.

I think the change is because people are living so much longer and defined benefit pensions (where the amount you receive each year is fixed however long you live) are increasingly expensive to fund.

Previously the employer's pension fund would have invested your contributions in the stock market and paid you a fixed amount for life. As people are living longer this is an increasing liability for the employer to finance.

With falling birth rates, in future there will be an increasing number of retired age people drawing from the pension fund compared to working age people contributing to the fund. It will become increasingly unaffordable.

The new model is for employees to manage their defined contribution pot themselves (as in they only receive what they can generate from investing their own defined pot). No risk to the employer if the pot performs poorly. Lots of risk for the individual though. Especially if you are unlucky enough to retire at a time the stock market has a sustained drop.

Public sector pensions can still offer defined benefit pots as the government can be the backstop if the scheme doesn't generate enough money via investments.

My workplace pension is also invested in Aviva’s MyFuture Focus Growth S6, with a fee of 0.35% (too high when I could get 0.15% with a Vanguard SIPP). Comparing the fund with others on Trustnet, it has poor growth and I’m considering changing it. Aviva have a fund called My Future Focus Long Term Growth, which is in the same investment approach but aims for 90% equities so would hopefully have better growth especially if you’re some way off retirement.

Don't forget your 520pm will also (presumably) increase over the next 20 years, if it is a % of earnings.

The reason you could get back less than the contributions is that investment returns are not guaranteed. It's possible for the stock market to have negative returns for decades at a time.
UK government bond funds have had negative returns over the last 15 years or so.
Unless you have a defined benefit pension, it all depends on what the markets return.
The only things in our control are keeping investment costs as low as possible, so Index funds are much cheaper than Actively managed funds and gradually increasing contributions over time so they keep up with inflation, more if possible.

if you’re learning more I’d highly recommend the pensions board on Monegsavingexpert and the meaningful money podcast. Both really useful.

Hi @Xrayrequest. Financial Adviser here.

It is very highly unlikely that after 20 years you would get less back than you paid in. These figures you show are not that clear as to what they are referring to. Is it your own personalised annual statement that already has the £25k on it or a new illustration ?

Looking at the middle growth figures it does suggest that the charges are more than the 2.1% growth, which is very unusual because for a group scheme there should be economies of scale & shouldn't really be more than 1%. The middle growth rate might also be after inflation (usually the blurb above will say something like " assuming inflation of 2.5%, a growth rate of 3% will give...."

Saying all that, my stock reply over the past 30 years has been that you should take all projected figures with a pinch of salt & you'll not really have any clue as to the size of your pension until you are just a few years away from retirement. Those growth figures are very low & I would say a fund that is 70% equities should average between 6% and 8% over a 20 year period.

The main thing to think about is the fund you are invested in. It seems from what you say is a fairly bland managed fund & probably the default find. If so, have a look at what else is on offer & a small bit of research using Trusnet could put you in a better fund.....or dare I say it a few funds for diversification.

Aviva workplace pensions are more complicated than say Nest. I've got both and am in the same default fund as you with Aviva.

My understanding is that with Aviva you only have access to some of their funds as it will depend upon the deal your employer has with Aviva. I'd recommend joining the meaningful money Facebook group as there are some people on there who are familiar with aviva workplace pensions and how to use the website (which is a little clumsy).

I've only been in aviva for 3 months but I'm planning on moving to a different fund (probably two funds) wiyhin the aviva range (as my employer will only pay into that provider) which have lower fees.

Also, remember with pension companies projections that it is in their interests for you to pay more in so a low estimate will likely encourage that.