Pension annual payments question
Discussion
I’ve just had a pension statement through where it gives the “your pension could be worth this....” and “you could buy an annual payment of this...”
Maybe a very basic question but for what reason is the projected value of the pension 41 times the projected annual payment? As I’m definitely not going to live for 41 years after retiring!
Maybe a very basic question but for what reason is the projected value of the pension 41 times the projected annual payment? As I’m definitely not going to live for 41 years after retiring!
Because they are having to guess what returns they will get from your money when you give it to them to invest in 10/20/30 years time, whenever it is you retire. They are guarannteeing that payout but they don't know exactly how long they will be paying out for, just on average how long you will live.
You've spotted the flaw though, which is why many investors wouldn't touch an annuity with a barge pole & take the transfer value & invest it to give a higher return & of course have something to leave to heirs when they pop off, which you can't do with an annuity (other than maybe a spouse's reduced pension).
Of course the risk is also transferred; take out too much or get poor investment returns & you'll run out of money before you die.
You've spotted the flaw though, which is why many investors wouldn't touch an annuity with a barge pole & take the transfer value & invest it to give a higher return & of course have something to leave to heirs when they pop off, which you can't do with an annuity (other than maybe a spouse's reduced pension).
Of course the risk is also transferred; take out too much or get poor investment returns & you'll run out of money before you die.
Also, don’t forget that the pension quotes probably includes some bells and whistles such as a reversionary pension to a spouse and annual increases.
Annual increases is very important - at about 3% pa inflation, the amount of pension doubles in about 20 years. So a £10k pa pension at 60 is more like £20k pa by the time you hit 80.
A further problem for annuities at the moment is that, broadly speaking, they have to invest in very low risk investments such as government bonds. Yields on 10 year bonds are about 0.8% at the moment so investment returns are minimal.
Annual increases is very important - at about 3% pa inflation, the amount of pension doubles in about 20 years. So a £10k pa pension at 60 is more like £20k pa by the time you hit 80.
A further problem for annuities at the moment is that, broadly speaking, they have to invest in very low risk investments such as government bonds. Yields on 10 year bonds are about 0.8% at the moment so investment returns are minimal.
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