Personal pensions, should I be panicking?
Discussion
A bit worried I don't have enough pension provision, or am I missing something? My situation:
I'm 36, was basically a student until 10 years ago. I've worked for a medium sized company for about a year, and paid into their pension scheme, think I got up to about £300 of value in it. Last 10 years I've been running my own small business, taking a modest salary and living fairly frugally. I started a SIPP (Best Invest) a couple of years ago, and paid in about £100/month, so there's now about £2k in there. I haven't done any investing within the SIPP yet, which I know I should, but so every time I've looked at it the choices blow my mind and I never make a decision.
Using the Best Invest calculator, if I carry on saving at £100 pcm until I reach 65, it suggests a projected fund value of £39k. This includes a £13k lump sum and a projected annual income of £1000. Is that realistic? It doesn't seem to add on anything for any growth/divdends/yields from the actual cash I've paid in?
If I carry on with the status quo am I really going to be left with an annual pension income of £1k to live on? Have I missed something crucial, am I going to even have a retirement or will I be working til I die??
What sort of pension contributions are other employees (and their employers) making, relative to your incomes?
I'm 36, was basically a student until 10 years ago. I've worked for a medium sized company for about a year, and paid into their pension scheme, think I got up to about £300 of value in it. Last 10 years I've been running my own small business, taking a modest salary and living fairly frugally. I started a SIPP (Best Invest) a couple of years ago, and paid in about £100/month, so there's now about £2k in there. I haven't done any investing within the SIPP yet, which I know I should, but so every time I've looked at it the choices blow my mind and I never make a decision.
Using the Best Invest calculator, if I carry on saving at £100 pcm until I reach 65, it suggests a projected fund value of £39k. This includes a £13k lump sum and a projected annual income of £1000. Is that realistic? It doesn't seem to add on anything for any growth/divdends/yields from the actual cash I've paid in?
If I carry on with the status quo am I really going to be left with an annual pension income of £1k to live on? Have I missed something crucial, am I going to even have a retirement or will I be working til I die??
What sort of pension contributions are other employees (and their employers) making, relative to your incomes?
If you pay higher rate tax a pension makes sense. Otherwise I'm not convinced, because regardless of fund growth there are many strings attached, they change with every budget as the country gets poorer. You must save money for your future, but a pension is just one way to do it. A complicated, restrictive, expensive, unpredictable way.
There is some useful info and tools on this site.
I say to anyone now, as I get closer to retirement, pensions are all or nothing. If you earn a lot and can afford to put a large % away each year, they are worth it.
https://www.hl.co.uk/pensions/interactive-calculat...
I say to anyone now, as I get closer to retirement, pensions are all or nothing. If you earn a lot and can afford to put a large % away each year, they are worth it.
https://www.hl.co.uk/pensions/interactive-calculat...
Yes, you probably should panic, BUT
I have paid in stupid amounts of money since I was 22. About £6000 per year on average. The pension firm's projection is that if I keep on paying in £6000 (+ an increase of inflation + 1%) per year for the next thirty years (so a total of, um, 46 years of payments) then I will get a pension of about £7000 a year in today's money.
Yep, 46 years of payments at a NPV of £6000 and I can have £7000 per year back. Just to get back what I put in I would have to get past 100 years old!
Stuff that. Am going to start smoking and drinking and die young (ish).
I have paid in stupid amounts of money since I was 22. About £6000 per year on average. The pension firm's projection is that if I keep on paying in £6000 (+ an increase of inflation + 1%) per year for the next thirty years (so a total of, um, 46 years of payments) then I will get a pension of about £7000 a year in today's money.
Yep, 46 years of payments at a NPV of £6000 and I can have £7000 per year back. Just to get back what I put in I would have to get past 100 years old!
Stuff that. Am going to start smoking and drinking and die young (ish).
You say you haven't 'done any investing' in your SIPP yet, so I assume its all sitting in some cash account earning nothing... so don't be surprised if the projections don't seem to indicate there is any growth.
I think the 20% of income outlined above is about right (at least its the best estimate anyone's got tbh) and you need to bite the bullet and invest.
Also have a look at the new lifetime ISAs announced in the budget - if you save £4000 a year, tax payers will give you another £1000...
I think the 20% of income outlined above is about right (at least its the best estimate anyone's got tbh) and you need to bite the bullet and invest.
Also have a look at the new lifetime ISAs announced in the budget - if you save £4000 a year, tax payers will give you another £1000...
Flooble said:
Yes, you probably should panic, BUT
I have paid in stupid amounts of money since I was 22. About £6000 per year on average. The pension firm's projection is that if I keep on paying in £6000 (+ an increase of inflation + 1%) per year for the next thirty years (so a total of, um, 46 years of payments) then I will get a pension of about £7000 a year in today's money.
Yep, 46 years of payments at a NPV of £6000 and I can have £7000 per year back. Just to get back what I put in I would have to get past 100 years old!
Stuff that. Am going to start smoking and drinking and die young (ish).
That is a very low projected value, based on a fund of (by my calculation) about £350k after 46 years. Current annuity rates/rules would get you a lump sum of £70k and a level pension (i.e. not index linked) of around £14.5k. The rate they are quoting you is theirs (I suspect) rather than best of market and is for an index linked pension, which might not be the best option.I have paid in stupid amounts of money since I was 22. About £6000 per year on average. The pension firm's projection is that if I keep on paying in £6000 (+ an increase of inflation + 1%) per year for the next thirty years (so a total of, um, 46 years of payments) then I will get a pension of about £7000 a year in today's money.
Yep, 46 years of payments at a NPV of £6000 and I can have £7000 per year back. Just to get back what I put in I would have to get past 100 years old!
Stuff that. Am going to start smoking and drinking and die young (ish).
Best advice is do your own research and projections!
£115K in the fund (told you it hadn't grown)
It was 2%, 5% and 8% as the "growth".
Choosing 2% instead of 5% (on the basis that it hasn't grown so far, so why expect them to suddenly start making gains) and asking them to guarantee the pension gives me:
Estimated value of your pension: £162,000
Tax-free cash: £0
Estimated income per year: £6,430
It was 2%, 5% and 8% as the "growth".
Choosing 2% instead of 5% (on the basis that it hasn't grown so far, so why expect them to suddenly start making gains) and asking them to guarantee the pension gives me:
Estimated value of your pension: £162,000
Tax-free cash: £0
Estimated income per year: £6,430
Flooble said:
£115K in the fund (told you it hadn't grown)
It was 2%, 5% and 8% as the "growth".
Choosing 2% instead of 5% (on the basis that it hasn't grown so far, so why expect them to suddenly start making gains) and asking them to guarantee the pension gives me:
Estimated value of your pension: £162,000
Tax-free cash: £0
Estimated income per year: £6,430
I don't understand the pension value? What am I missing? Current value of £115k plus another 30 years of £6k per year is £295k and that assumes there is no growth and you don't index your contributions.It was 2%, 5% and 8% as the "growth".
Choosing 2% instead of 5% (on the basis that it hasn't grown so far, so why expect them to suddenly start making gains) and asking them to guarantee the pension gives me:
Estimated value of your pension: £162,000
Tax-free cash: £0
Estimated income per year: £6,430
They seem to be using an annuity rate of around 3.9% (i.e. the fund of £162000 generates 3.9% return each year - £6430) which sounds like an indexed pension... so don't forget that amount will go up with inflation and is paid however long you live.
timbo999 said:
I don't understand the pension value? What am I missing? Current value of £115k plus another 30 years of £6k per year is £295k and that assumes there is no growth and you don't index your contributions.
They seem to be using an annuity rate of around 3.9% (i.e. the fund of £162000 generates 3.9% return each year - £6430) which sounds like an indexed pension... so don't forget that amount will go up with inflation and is paid however long you live.
All the figures are in today's money, seemed logical to me!They seem to be using an annuity rate of around 3.9% (i.e. the fund of £162000 generates 3.9% return each year - £6430) which sounds like an indexed pension... so don't forget that amount will go up with inflation and is paid however long you live.
timbo999 said:
Flooble said:
£115K in the fund (told you it hadn't grown)
It was 2%, 5% and 8% as the "growth".
Choosing 2% instead of 5% (on the basis that it hasn't grown so far, so why expect them to suddenly start making gains) and asking them to guarantee the pension gives me:
Estimated value of your pension: £162,000
Tax-free cash: £0
Estimated income per year: £6,430
I don't understand the pension value? What am I missing? Current value of £115k plus another 30 years of £6k per year is £295k and that assumes there is no growth and you don't index your contributions.It was 2%, 5% and 8% as the "growth".
Choosing 2% instead of 5% (on the basis that it hasn't grown so far, so why expect them to suddenly start making gains) and asking them to guarantee the pension gives me:
Estimated value of your pension: £162,000
Tax-free cash: £0
Estimated income per year: £6,430
They seem to be using an annuity rate of around 3.9% (i.e. the fund of £162000 generates 3.9% return each year - £6430) which sounds like an indexed pension... so don't forget that amount will go up with inflation and is paid however long you live.
Flooble said:
All the figures are in today's money, seemed logical to me!
I'm not sure 46 years times £6k a year only resulting in a pension fund of £162k is logical!I think the £162k is the £115k indexed over the next 30 years - i.e. it doesn't include any future contributions. As I said, do your own projections, or at least make sure you understand theirs before condemning pensions!
timbo999 said:
some stuff and................, do your own projections, or at least make sure you understand theirs before condemning pensions!
You should get some 'Independent Advice'. You will pay for that, but at least you will have a better picture of where you are now, and what your projected plans can be.Its all about time. Start now, and it will grow, but you have to pay in, to gat a decent figure back. You need to invest carefully and be tax efficient- Get advice !!
timbo999 said:
I'm not sure 46 years times £6k a year only resulting in a pension fund of £162k is logical!
I think the £162k is the £115k indexed over the next 30 years - i.e. it doesn't include any future contributions. As I said, do your own projections, or at least make sure you understand theirs before condemning pensions!
Nope, had I set contributions to zero it would have come out as £65000 for the fund value (I just checked). The reason it appears so low is because I picked 2% per year as the investment growth but the inflation assumption to get the figures in today's money was 2.5%. However, the increase in contributions each year is assumed to only be 0.5% when using 2% as growth (which again, is logical - low inflation means low wage growth). Hence inflation for the "today's money" illustration destroys the value of the fund as you are slipping behind each year.I think the £162k is the £115k indexed over the next 30 years - i.e. it doesn't include any future contributions. As I said, do your own projections, or at least make sure you understand theirs before condemning pensions!
From the assumptions page:
"Inflation: the calculator allows for annual investment growth of 2%, 5% or 8%. When calculating how regular contributions might increase, inflation is assumed to be 2.5% if investment growth is 5%. For 2% growth, inflation is 0.5% and for 8% growth it is 4.5%. When converting the final fund value and income to today’s money, inflation is always assumed to be 2.5% per year. These assumptions are set down by the Financial Conduct Authority for pension projections. The default setting is 5% and can be changed in advanced options."
It is a very good illustration of what can happen if you don't pick the right funds and/or our current low inflation environment proves to be temporary.
I apologise, you clearly do understand the projection, and I guess its logical, just absurd!
Why would you leave money in a pension that is losing money in real terms (i.e. falling behind inflation) - as others have said a better investment strategy is required to get some growth. Worth noting that, in the long term, equities have grown faster than inflation erodes them (no future guarantees)so a good investment strategy is the key.
Why would you leave money in a pension that is losing money in real terms (i.e. falling behind inflation) - as others have said a better investment strategy is required to get some growth. Worth noting that, in the long term, equities have grown faster than inflation erodes them (no future guarantees)so a good investment strategy is the key.
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