Pension basics
Discussion
I’ve just had a pension statement through. Can someone please explain the basics of how it works though.
So it says my fund might be worth £91,200 or I can buy a yearly pension worth £2,200 well that’s 41 years and I’m clearly not going to be pulling a pension 41 years after I retire.
So how do you end up getting all of your fund? And if you did happen to live longer than expected I assume it just stops paying when you run out of funds.
So it says my fund might be worth £91,200 or I can buy a yearly pension worth £2,200 well that’s 41 years and I’m clearly not going to be pulling a pension 41 years after I retire.
So how do you end up getting all of your fund? And if you did happen to live longer than expected I assume it just stops paying when you run out of funds.
Supernova190188 said:
I’ve just had a pension statement through. Can someone please explain the basics of how it works though.
So it says my fund might be worth £91,200 or I can buy a yearly pension worth £2,200 well that’s 41 years and I’m clearly not going to be pulling a pension 41 years after I retire.
So how do you end up getting all of your fund? And if you did happen to live longer than expected I assume it just stops paying when you run out of funds.
The comparison with 41 years is not valid without knowing what's included in the £2200 pa.So it says my fund might be worth £91,200 or I can buy a yearly pension worth £2,200 well that’s 41 years and I’m clearly not going to be pulling a pension 41 years after I retire.
So how do you end up getting all of your fund? And if you did happen to live longer than expected I assume it just stops paying when you run out of funds.
- Is the £2000 inflation proofed in any way? If so, how, and at what rate?
- What happens on death? What benefits are paid to the survivors, and how long? What survivors are covered? Are these benefits inflation proofed too?
- What guarantee period is the annuity paid for?
R.
Supernova190188 said:
I’ve just had a pension statement through. Can someone please explain the basics of how it works though.
So it says my fund might be worth £91,200 or I can buy a yearly pension worth £2,200 well that’s 41 years and I’m clearly not going to be pulling a pension 41 years after I retire.
So how do you end up getting all of your fund? And if you did happen to live longer than expected I assume it just stops paying when you run out of funds.
So this sounds like a money purchase pension (mpp) or defined contribution of some sort, likely set up by an employer and as the commentator above said it sounds like it is speaking of an annuity, which most insurers do as they have a better chance of getting a return from you. So it says my fund might be worth £91,200 or I can buy a yearly pension worth £2,200 well that’s 41 years and I’m clearly not going to be pulling a pension 41 years after I retire.
So how do you end up getting all of your fund? And if you did happen to live longer than expected I assume it just stops paying when you run out of funds.
So in an MPP/defined contribution you put £x away a month during your employment, usually made up of yours and your employers contributions, so as an example with my employer if i commit to putting in 6% they will match it and add another 0.1% for ever % i have put in. So at 6% from me. i get 6.6% from them. Meaning i contribute 12.6% of my top line.
In your scenario those contributions + current and predicted investment growth mean the insurer who provides your MPP thinks it will hit £91,200 by your Normal Retirement Age or in layman's, your retirement date. They likely assume that your contributions will grow at a modest rate and that the funds where your cash is invested will grow at a similarly modest rate.
If, and that's an "if" as we don't know for sure because you haven't supplied enough info, your insurer is telling you that in return for cashing in the £91,200 for them they will give you £2200 a year then its VERY unlikely as you note that you will last 41 years from 65 but the good news is if its an annuity then if you did they would keep paying you so you would get MORE than your fund was worth. This is how the insurance companies work. They assume a few of us will die the day we retire, some into our later 60s, 70s and 80s and less into our 90s and very few into our 100s. The problem is if you think of survival as a bell curve then we are lasting longer than the last few generations impacting the profitability of these types of vehicles (Annuities) hence where previously they seemed quite generous you are being offered a piffling 2.4%/yr return.
The good news is you can say, "Get lost Aviva/L&G/Scottish Widows/etc, I am not a moron i will manage my own money!". You DON'T have to take the Annuity. You can manage the fund yourself BUT you will need some advice before you make any life impacting decisions and not just of some d!cks on the internet!
Some unsolicited advice/rules of thumb that i have adhered to in a working career of 23 years. I am still mid 40s and with a cavalier attitude to risk.
- always contributethe max you can to an employee pension that gets the max contribution from the employer - see my example above, my employer gives nothing extra if i give 7%, previous employers were more generous.
- pick the lowest cost funds you can find within the options provided by your insurer.
- DO NOT STAY ON THE LIFESTYLE OPTION
Ok, yeah it is just the annuity on the statement. So I can use the value of the fund and buy a drawdown with it, so for instance I could have it out for 20 years and once that money runs out then that’s it.
Regarding dependants I just have my wife down at the moment, so if I add my kids to that and something happens then they get the remaining fund?
Regarding dependants I just have my wife down at the moment, so if I add my kids to that and something happens then they get the remaining fund?
Supernova190188 said:
Ok, yeah it is just the annuity on the statement. So I can use the value of the fund and buy a drawdown with it, so for instance I could have it out for 20 years and once that money runs out then that’s it.
Regarding dependants I just have my wife down at the moment, so if I add my kids to that and something happens then they get the remaining fund?
No you buy an annuity - secure income usually for lifeRegarding dependants I just have my wife down at the moment, so if I add my kids to that and something happens then they get the remaining fund?
Or
You utilise a drawdown strategy offer more control and flex but leaving you open to market risk etc.
Under the former there are options available to do various clauses (at a cost) to provide a provision of sort for your family.
Under the latter the fund could pass to your loved ones.
Make sure you are up to date on your nominations on the current scheme. You may wish to add the kids even if only nominally.
Sounds as though you need some help in understanding your pension
https://www.moneyhelper.org.uk/en/pensions-and-ret...
https://www.moneyhelper.org.uk/en/pensions-and-ret...
That annuity rate will definitely be an escalating one so you can't just divide the figure into the pot. Probably 3%pa escalation or LPI (RPI capped at 5%pa).
Also probably includes a 50% spouse's pension on death.
Should be in today's terms too so the growth after inflation and charges will be small. Works better when explaining projections to the layman as they forget the savage effects of inflation on the buying power of a sum today decades in the future.
Also probably includes a 50% spouse's pension on death.
Should be in today's terms too so the growth after inflation and charges will be small. Works better when explaining projections to the layman as they forget the savage effects of inflation on the buying power of a sum today decades in the future.
Supernova190188 said:
I’ve just had a pension statement through. Can someone please explain the basics of how it works though.
So it says my fund might be worth £91,200 or I can buy a yearly pension worth £2,200 well that’s 41 years and I’m clearly not going to be pulling a pension 41 years after I retire.
So how do you end up getting all of your fund? And if you did happen to live longer than expected I assume it just stops paying when you run out of funds.
When you get to a predetermined age various options will open up depending on the type of pension.So it says my fund might be worth £91,200 or I can buy a yearly pension worth £2,200 well that’s 41 years and I’m clearly not going to be pulling a pension 41 years after I retire.
So how do you end up getting all of your fund? And if you did happen to live longer than expected I assume it just stops paying when you run out of funds.
Traditionally the fund (big pile of money in various investments) bought a product called an annuity which paid you a fixed amount until you died. Obviously if you don't get all of it you lose. These days you can also - when you get to that age - take up to 25% tax free, and/or start taking the rest in whatever size chunks you wish BUT it's subject to income tax. If you empty the fund then that's it. If there's some dosh left in the fund when you die then you can leave it to a beneficiary so it's not lost.
That is my personal understanding of it. If you want it to be made really complicated, and pay a few K for the privilege, ask an IFA. But there are people here who know just as much. You can always talk to the pension provider and ask them for information about the product. They can't give you 'financial advice', but they will know everything about their product, and armed with that you can make informed decisions.
ETA You don't 'buy a drawdown', drawdown just means you're taking money form your pension fund, as you would from any other investment.
Simpo Two said:
When you get to a predetermined age various options will open up depending on the type of pension.
Traditionally the fund (big pile of money in various investments) bought a product called an annuity which paid you a fixed amount until you died. Obviously if you don't get all of it you lose. These days you can also - when you get to that age - take up to 25% tax free, and/or start taking the rest in whatever size chunks you wish BUT it's subject to income tax. If you empty the fund then that's it. If there's some dosh left in the fund when you die then you can leave it to a beneficiary so it's not lost.
That is my personal understanding of it. If you want it to be made really complicated, and pay a few K for the privilege, ask an IFA. But there are people here who know just as much. You can always talk to the pension provider and ask them for information about the product. They can't give you 'financial advice', but they will know everything about their product, and armed with that you can make informed decisions.
ETA You don't 'buy a drawdown', drawdown just means you're taking money form your pension fund, as you would from any other investment.
When someone quite clearly has almost no idea about pensions an IFA isn’t the answer. An hours appointment with Pensionwise will set him on the right track and then asking questions on here will helpTraditionally the fund (big pile of money in various investments) bought a product called an annuity which paid you a fixed amount until you died. Obviously if you don't get all of it you lose. These days you can also - when you get to that age - take up to 25% tax free, and/or start taking the rest in whatever size chunks you wish BUT it's subject to income tax. If you empty the fund then that's it. If there's some dosh left in the fund when you die then you can leave it to a beneficiary so it's not lost.
That is my personal understanding of it. If you want it to be made really complicated, and pay a few K for the privilege, ask an IFA. But there are people here who know just as much. You can always talk to the pension provider and ask them for information about the product. They can't give you 'financial advice', but they will know everything about their product, and armed with that you can make informed decisions.
ETA You don't 'buy a drawdown', drawdown just means you're taking money form your pension fund, as you would from any other investment.
craig1912 said:
................ An hours appointment with Pensionwise will set him on the right track and then asking questions on here will help
Indeed, this is definitely a good place to start to get a basic understanding of your pension(s), whether it is putting money in or taking it out. There's new legislation coming this year to ensure that all companies who allow customers to take money from their pension now have to prove they have been given a 'nudge' to Pension Wise guidance, or have actively opted out.craig1912 said:
Simpo Two said:
When you get to a predetermined age various options will open up depending on the type of pension.
Traditionally the fund (big pile of money in various investments) bought a product called an annuity which paid you a fixed amount until you died. Obviously if you don't get all of it you lose. These days you can also - when you get to that age - take up to 25% tax free, and/or start taking the rest in whatever size chunks you wish BUT it's subject to income tax. If you empty the fund then that's it. If there's some dosh left in the fund when you die then you can leave it to a beneficiary so it's not lost.
That is my personal understanding of it. If you want it to be made really complicated, and pay a few K for the privilege, ask an IFA. But there are people here who know just as much. You can always talk to the pension provider and ask them for information about the product. They can't give you 'financial advice', but they will know everything about their product, and armed with that you can make informed decisions.
ETA You don't 'buy a drawdown', drawdown just means you're taking money form your pension fund, as you would from any other investment.
When someone quite clearly has almost no idea about pensions an IFA isn’t the answer. An hours appointment with Pensionwise will set him on the right track and then asking questions on here will helpTraditionally the fund (big pile of money in various investments) bought a product called an annuity which paid you a fixed amount until you died. Obviously if you don't get all of it you lose. These days you can also - when you get to that age - take up to 25% tax free, and/or start taking the rest in whatever size chunks you wish BUT it's subject to income tax. If you empty the fund then that's it. If there's some dosh left in the fund when you die then you can leave it to a beneficiary so it's not lost.
That is my personal understanding of it. If you want it to be made really complicated, and pay a few K for the privilege, ask an IFA. But there are people here who know just as much. You can always talk to the pension provider and ask them for information about the product. They can't give you 'financial advice', but they will know everything about their product, and armed with that you can make informed decisions.
ETA You don't 'buy a drawdown', drawdown just means you're taking money form your pension fund, as you would from any other investment.
Gin and Ultrasonic said:
craig1912 said:
................ An hours appointment with Pensionwise will set him on the right track and then asking questions on here will help
Indeed, this is definitely a good place to start to get a basic understanding of your pension(s), whether it is putting money in or taking it out. There's new legislation coming this year to ensure that all companies who allow customers to take money from their pension now have to prove they have been given a 'nudge' to Pension Wise guidance, or have actively opted out.omniflow said:
You do have to be over 50 to talk to Pensionwise - I'm not sure what the 41 years in the OP refers to, but it's possible he's under 50
Yes you are right for the appointment. There is a lot of useful info and articles which are easy reading (if anything can be for pensions!)I would second Pensionwise as a place to make a good start to grasp pensions without too much complexity. Or without leaving your seat, this forum and specifically the people at Intelligent Money can run over the basics without charge or obligation. Thread here: https://www.pistonheads.com/gassing/topic.asp?h=0&... However you'll then need to get specific about the exact pension you have, which is where the provider can help. It's your money so don't be afraid to ask - and with info from here you'll have a good start.
omniflow said:
Gin and Ultrasonic said:
craig1912 said:
................ An hours appointment with Pensionwise will set him on the right track and then asking questions on here will help
Indeed, this is definitely a good place to start to get a basic understanding of your pension(s), whether it is putting money in or taking it out. There's new legislation coming this year to ensure that all companies who allow customers to take money from their pension now have to prove they have been given a 'nudge' to Pension Wise guidance, or have actively opted out.Sorry to hijack this thread, but I have several small pensions dotted around from previous jobs that I haven't paid into for years totalling around £40K. Is it worth me transferring all of these into one place (assuming there are no/low transfer fees)
Secondly, I am a 40% tax payer and I have just had an epiphany that paying into my pension is the best investment I can make, and as a bonus it means less tax for Rishi to waste.
I plan to eventually take the 25% tax free and then do drawdown, is there any reason why significantly upping the percentage I put into my pension isn't a good idea compared to taking it as salary and then paying into my Vanguard account?
Secondly, I am a 40% tax payer and I have just had an epiphany that paying into my pension is the best investment I can make, and as a bonus it means less tax for Rishi to waste.
I plan to eventually take the 25% tax free and then do drawdown, is there any reason why significantly upping the percentage I put into my pension isn't a good idea compared to taking it as salary and then paying into my Vanguard account?
Joey Deacon said:
Sorry to hijack this thread, but I have several small pensions dotted around from previous jobs that I haven't paid into for years totalling around £40K. Is it worth me transferring all of these into one place (assuming there are no/low transfer fees)
Secondly, I am a 40% tax payer and I have just had an epiphany that paying into my pension is the best investment I can make, and as a bonus it means less tax for Rishi to waste.
I plan to eventually take the 25% tax free and then do drawdown, is there any reason why significantly upping the percentage I put into my pension isn't a good idea compared to taking it as salary and then paying into my Vanguard account?
It MAYBE a good idea amalgamating all your pensions if they are all of the same type and have no penalties.Secondly, I am a 40% tax payer and I have just had an epiphany that paying into my pension is the best investment I can make, and as a bonus it means less tax for Rishi to waste.
I plan to eventually take the 25% tax free and then do drawdown, is there any reason why significantly upping the percentage I put into my pension isn't a good idea compared to taking it as salary and then paying into my Vanguard account?
With tax relief, yes pensions are a decent investment but we don’t know your specific circumstances ie, married? Mortgage? Other debts? Other investments? Age? Etc.etc.
Why do you plan to take 25% tax free straight away? Not necessarily the best thing to do and many people don’t as it can be more tax efficient to spread it over months/years
Edited by craig1912 on Tuesday 22 February 12:35
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