Why will my pension returns be so low?
Discussion
OK finance gurus.
Firstly, this is not a "should I pay more into my pension?" question. I know I probably should, but can't afford to.
This is a question of where the hell is my pension money going to go when I retire?
Pension company reckons that my pension pot will be worth £142,000 when I reach age 65. From this, it estimates it will be able to pay me £3760 per year in pension.
Now I'm no mathematician, but £142,000/£3760 = 37.8 years before the "pot" runs out. Which means the pension co. will be quids-in if I don't live to over 102 years old, which i fancy is unlikely.
That is without the fact that the pot would be able to earn interest over the nigh-on 40 year period so would have a greater value over the period that £142k anyway.
So why is the return so low? What am I missing?
Firstly, this is not a "should I pay more into my pension?" question. I know I probably should, but can't afford to.
This is a question of where the hell is my pension money going to go when I retire?
Pension company reckons that my pension pot will be worth £142,000 when I reach age 65. From this, it estimates it will be able to pay me £3760 per year in pension.
Now I'm no mathematician, but £142,000/£3760 = 37.8 years before the "pot" runs out. Which means the pension co. will be quids-in if I don't live to over 102 years old, which i fancy is unlikely.
That is without the fact that the pot would be able to earn interest over the nigh-on 40 year period so would have a greater value over the period that £142k anyway.
So why is the return so low? What am I missing?
TooLateForAName said:
What are you missing? their profit.
Well, yes, but if i had the £142,000 in cash I'd only have to get 2.65% interest and I could pay the £3760 out of the interest and keep the lump sum untouched! I know its a capitalist society and all that, but in effect it means that Standard life will get to keep my entire pension pot 
At the moment it seems to make absolutely no sense to me to keep paying int a pension that won't even pay back 1p of my investment. But millions of people are doing it, and IFAs advise taking out pensions, so it's not so much that I feel hoodwinked but more that I fancy I'm missing something somewhere.
boyse7en said:
OK finance gurus.
Firstly, this is not a "should I pay more into my pension?" question. I know I probably should, but can't afford to.
This is a question of where the hell is my pension money going to go when I retire?
Pension company reckons that my pension pot will be worth £142,000 when I reach age 65. From this, it estimates it will be able to pay me £3760 per year in pension.
Now I'm no mathematician, but £142,000/£3760 = 37.8 years before the "pot" runs out. Which means the pension co. will be quids-in if I don't live to over 102 years old, which i fancy is unlikely.
That is without the fact that the pot would be able to earn interest over the nigh-on 40 year period so would have a greater value over the period that £142k anyway.
So why is the return so low? What am I missing?
Is it just £3,760 or is that escalating at a fixed amount or with inflation?Firstly, this is not a "should I pay more into my pension?" question. I know I probably should, but can't afford to.
This is a question of where the hell is my pension money going to go when I retire?
Pension company reckons that my pension pot will be worth £142,000 when I reach age 65. From this, it estimates it will be able to pay me £3760 per year in pension.
Now I'm no mathematician, but £142,000/£3760 = 37.8 years before the "pot" runs out. Which means the pension co. will be quids-in if I don't live to over 102 years old, which i fancy is unlikely.
That is without the fact that the pot would be able to earn interest over the nigh-on 40 year period so would have a greater value over the period that £142k anyway.
So why is the return so low? What am I missing?
Does that include a spouse's benefit and if so at what rate?
Is there a guaranteed period?
In addition to any or all of the above, the chances are that the insurance company that you have your money invested with is not actively seeking longevity risk, but legally has to offer you an annuity.
For this reason they are deliberately providing a low quote to encourage you to take the open market option and seek out the best available market annuity quote.
Currently a fund of £142k would get you a single life, fixed annuity of £8,200 p.a.
That's probably an annuity and it may well increase in payment and carry a widows pension.
Annuities are based on Government Gilts, the net yield of which as been 2.0% - 2.5% pa for several years with no sign of increasing.
Annuities are rarely good value though which is partly why the Government introduced significant changes earlier in the year.
Annuities are based on Government Gilts, the net yield of which as been 2.0% - 2.5% pa for several years with no sign of increasing.
Annuities are rarely good value though which is partly why the Government introduced significant changes earlier in the year.
PurpleMoonlight said:
That's probably an annuity and it may well increase in payment and carry a widows pension.
Indeed, as above.PurpleMoonlight said:
Annuities are based on Government Gilts, the net yield of which as been 2.0% - 2.5% pa for several years with no sign of increasing.
Few providers actively seeking new annuity business will be pricing off a gilt curve.PurpleMoonlight said:
Annuities are rarely good value though which is partly why the Government introduced significant changes earlier in the year.
Rarely good value? Bit of a meaningless statement!How would you invest to provide a guaranteed payment every month for the rest of someone's life time?
sidicks said:
Is it just £3,760 or is that escalating at a fixed amount or with inflation?
Does that include a spouse's benefit and if so at what rate?
Is there a guaranteed period?
In addition to any or all of the above, the chances are that the insurance company that you have your money invested with is not actively seeking longevity risk, but legally has to offer you an annuity.
For this reason they are deliberately providing a low quote to encourage you to take the open market option and seek out the best available market annuity quote.
Currently a fund of £142k would get you a single life, fixed annuity of £8,200 p.a.
That a great help to start with, thanks.Does that include a spouse's benefit and if so at what rate?
Is there a guaranteed period?
In addition to any or all of the above, the chances are that the insurance company that you have your money invested with is not actively seeking longevity risk, but legally has to offer you an annuity.
For this reason they are deliberately providing a low quote to encourage you to take the open market option and seek out the best available market annuity quote.
Currently a fund of £142k would get you a single life, fixed annuity of £8,200 p.a.
Pension will increase by RPI each year. Guarantee to pay pension until i die, or for first five years if I die before then.
I'm not married, so assume no spouse benefit. It says it assumes i will be married, in which case my spouse would get half of my pension after i die.
Company is Standard Life, in case that helps
boyse7en said:
That a great help to start with, thanks.
Pension will increase by RPI each year. Guarantee to pay pension until i die, or for first five years if I die before then.
An RPI, 5-year guaranteed annuity costs around 80% more than a fixed annuity (for a male aged 65), so that's the biggest factor in why your initial calculations are so far off.Pension will increase by RPI each year. Guarantee to pay pension until i die, or for first five years if I die before then.
boyse7en said:
I'm not married, so assume no spouse benefit. It says it assumes i will be married, in which case my spouse would get half of my pension after i die.
Company is Standard Life, in case that helps
The spouse's benefit is broadly worth an extra 10%, depending on various factors.Company is Standard Life, in case that helps
boyse7en said:
Pension company reckons that my pension pot will be worth £142,000 when I reach age 65. From this, it estimates it will be able to pay me £3760 per year in pension.
When you say "the pension company" I think you mean the company with which you have been saving.These days there is an "open market" in annuities; you don't have to buy your annuity from that company. You can, quite literally, "shop around" to see who will offer you the best rate. In addition, as Sidicks has already pointed out, annuities come in lots of different flavours. Guarantee? Indexation? Spouse?
You anticipate having £142,000 to play with.
Go to a website such as https://annuitysupermarket.hl.co.uk/PersonalClient... and based on your information they will quote you current market rates, often significantly better than offered by the original company.
I would be interested to hear how the answer compares.
Ozzie Osmond said:
When you say "the pension company" I think you mean the company with which you have been saving.
These days there is an "open market" in annuities; you don't have to buy your annuity from that company. You can, quite literally, "shop around" to see who will offer you the best rate. In addition, as Sidicks has already pointed out, annuities come in lots of different flavours. Guarantee? Indexation? Spouse?
You anticipate having £142,000 to play with.
Go to a website such as https://annuitysupermarket.hl.co.uk/PersonalClient... and based on your information they will quote you current market rates, often significantly better than offered by the original company.
I would be interested to hear how the answer compares.
My figures above have taken into account current 'best buy' annuities.These days there is an "open market" in annuities; you don't have to buy your annuity from that company. You can, quite literally, "shop around" to see who will offer you the best rate. In addition, as Sidicks has already pointed out, annuities come in lots of different flavours. Guarantee? Indexation? Spouse?
You anticipate having £142,000 to play with.
Go to a website such as https://annuitysupermarket.hl.co.uk/PersonalClient... and based on your information they will quote you current market rates, often significantly better than offered by the original company.
I would be interested to hear how the answer compares.
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