Show me where the value is in a lifetime of contributing to a private pension?

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kiabi1

Registered User
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Hi All,

After recently receiving a statement of reasonable projection from my pension provider I have started to question the true value of pensions.

The stats:
I have 24 years to retirement.
My pension is managed on my behalf.
Currently I am in a risk rating of 4 out of a maximum of 7.

Current contributions:
Currently between me and my employer the contributions each year is 25% in to pension pot this is in line with my age and the age-related percentage limit for tax relief on pension contributions .
This equates to approximately €21k between my own contributions, employers contributions and once off avc.

What my Statement of Reasonable Projection shows should I continue to contribute at the same level between now and retirement:
Projected Fund Value €738k
Projected Monthly Income for Life €2300
Projected Montly Income in today's prices assuming inflation of 2.5% €1310
Pension as % of salary 18.50%

Concern:
I think the key figure here is Projected Montly Income in today's prices assuming inflation of 2.5% which works out at €1310. It seems incredibly low considering the large amount of money I will have contributed up to my retirement date.

For example If I retire at 65 and live until 85. That would mean a pay out over 20 years of grand total of (20 x 12 x €1310) = €314k

Alternatively If I was to save €21k a year for the next €24 = €504k. (My savings figure does not take inflation into account)

Thoughts:
Over a lifetime while a pension pot can grow enormously the amount paid out montly appears to be low.

Based on the above I am now thinking of lowering my employee contribution to perhaps only contribute enough to take advantage of employer maximum contribution. My overall thoughts are that pensions are not risk free and based on the above figures the value for money is questionable.

Would love to hear your thoughts on this?

Thanks.
Kiabi1
 
To compare apples with apples (a bit);
  • Are those projections after you take out 25% tax free at retirement?
  • And increasing by inflation amount each year?
  • with a guaranteed 50% pension for spouse if you die first?
 
kiabi1

Your post is very interesting and no doubt at all you'll be answered by quite a few expert projectionists in the very near future with very few facts but many figures
 
  1. Your figures assume an annuity rate of just 3.7% and you don’t have to take the annuity option when you claim your fund.
  2. You would need to allocate €35,000 of your marginal gross income each year to save €21k outside of a pension fund whereas the €21k pension is probably only costing you a net €10,000 each year with a 5% employer contribution.
  3. You are comparing the inflation adjusted net present value of the assumed pension income (i.e. €1,310 p.a.) with the non-adjusted future value of your (now way more expensive) savings proposal of €504k. That’s not a valid comparison.
Pensions are unbeatable when it comes to value for money with the tax relief, tax free growth and employer contributions you are getting.

Kevin
www.thepensionstore.ie
 
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The 25% tax free lump sum will go, that's easy pickings when things start going belly up in the economy, someone will have to pay the state pensions for those who do not have a private pension and no doubt the state pension in the future will also undergo sime sort of means testing... aging population and all that.
 
Id probably dial up the risk.

Pensions are the best savings and investment gig in town. Problems arise when people decide what to do with the funds once in the structure!
 
Yeah but needs must, I have no doubt to believe that at some stage the 25% tax free element will go. I read there's already rumblings if it in the UK, we normally follow them..
 
I think you need to separate two things here.

Do you consider the €738k a small pot in terms of your contributions during your working life. What after tax contributions are included in that figure. Given the tax benefits it is almost certain that you could not achieve that figure based on your actual contributions without the tax benefits.

Given that you will have a pot of €738k a monthly pension of €2,300 (I think that is a more meaningful figure than the inflation adjusted figure, although you would need to give me the projected rate of return in the €738k figure to develop that argument) is in any terms pathetic. You would have to live 26 years post retirement just to get your money out, never mind any investment return during your retirement.

kevhenry says that the figures imply an annuity rate of 3.7% and I assume he is correct, it seems reasonable though I haven't done the calculation. However the annuity rate in 24 years could be anything, anyone who suggests that they can predict the rate then isn't worth listening to.
What was it 24 years ago. Much higher I suggest, whatever it was has nothing to do with the rate today, and equally the rate today 3.7% has nothing to do with the rate in 24 years time. By then it might be 1% or 13.69% or 20%.

I presume that the pension provider is obliged to give you this projection and so they must use something as an annuity rate, but it is worse than nothing because the actual rate in 24 years is completely unknowable. This is like what scientists call spurious accuracy, producing a result to so many decimal places when your instruments can only measure in units.

I have said before that the financial advice industry makes me uneasy in many of its doings, providing projections based on less than guesses is one of those things.
 
You are right cremeegg.

Statements of reasonable projection can be very misleading because many of them also assume unrealistic assumptions like the investor increasing their contributions by 2.5% each year which is not sustainable for most people.

And that’s just one.

However, the other relevant point is that committing a €738k fund to a full annuity purchase would be absolute madness for a whole host of reasons.

Annuity income projections are there to merely illustrate the expected level of income and are a legal requirement under the SERP guidelines issued by the society of actuaries in Ireland.

In 20 years time it would not be outrageous to suggest that annuity rates could be 30% lower again if mortality trends continue as they are.

This would make the annuity option practically redundant if it’s not already.

With an ARF you can manage your fund in retirement and take whatever income you wish (within the relevant parameters) so you’re not locked to one option when claiming your money just because it’s on a statement.

Kevin
www.thepensionstore.ie
 
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Thanks for all of the replies so far.

So far it is clear that a lot of the benefit being outlined is based on the perceived tax advantages and that pension won't be heavily taxed on exit.

kevhenry said:
If lump sum entitlements were scrapped it would be applied to civil service pensions too so the Government would have absolutely no chance getting that one through.
Click to expand...

However, I disagree with kevhenry that this cannot change in the future. We have already seen in the past few years how pension qualification age changed from 65 to 68. In hindsight I would have expected uproar from every tax payer in the country. When in fact not one person protested.

The hard facts of what is coming down the track as published on the welfare.ie website. The shortfall will have to be found somewhere...


The pensioner support ratio (measured as those over 65) is projected to decline from 4.9 workers for every individual over age 66 to 2.9 workers in 2035 and to 2.0 workers by 2055

Population ‘bulge’ of individuals currently aged 30 - 45
By 2035 the pensioner support ratio is projected to reduce from 4.9 workers today to 2.9 at that stage
Fertility rates have been below ‘replacement levels’ since the 1990s and projected to remain below 2 into the long term
future
‘Levers’ within policymakers control to reverse the trend are:
• Increase the working lifetime by, for example, extending the age at which individuals stop working through increasing the
SPA or other measures to increase the ‘effective’ retirement age;
• Encourage greater labour force participation particularly amongst currently under-represented groups;
• Encourage a greater inflow of workers
• One or a combination of:
• Increasing PRSI / funding
• Changes to benefit levels / entitlement to benefit
 
I accept that changes will need to be made to sustain the model kiabi1

My earlier comment was somewhat tongue-in-cheek but was, nevertheless, based on the premise that private pension lump sum calculations are derived from those used to calculate the civil service defined benefit lump sum entitlements based on salary and service.

The state pension age hike is universally applicable to everyone regardless of means. However, drastic restrictions or scrapping of lump sums would disproportionately affect some savers more than others.

Irish Life pension claim stats (from the corporate business arm of the group) shows that 53% of all retirees availed of the ‘lump sum only’ option when exiting their company pension schemes in 2018.

That’s a significant number of people who would be disadvantaged by any proposed changes, not to mention the army of civil servants who would equally be impacted, which would make it an absolute non-runner.

Other changes may be likely in the medium term but since tax free cash is one of the biggest incentives available, no government could afford to be associated with its removal.

Kevin
www.thepensionstore.ie
 
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kiabi1 said:
So far it is clear that a lot of the benefit being outlined is based on the perceived tax advantages and that pension won't be heavily taxed on exit.
Click to expand...
Well, as a financial product, it’s benefits should be evaluated based on financial metrics.

And they are more than just perceived benefits.

You get;
  1. Tax relief on contributions of up to 40%
  2. Tax free investment growth
  3. Tax-free lump sums up to €200,000
  4. Standard rate tax on excess lump sums over €200,000 to a maximum benefit of €440,000.

Not only that, as a married individual with dependent spouse, you could amass a fund of up to €400,000 before you start paying any tax on your income in retirement.

You might live to regret making a big decision like this based on something that may or may not happen in the future.

In any case, figuring out the best way to distribute the proceeds of a €738k pension fund would a very nice problem to have.

Kevin
www.thepensionstore.ie
 
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kiabi1 said:
Thoughts:
Over a lifetime while a pension pot can grow enormously the amount paid out montly appears to be low.

Based on the above I am now thinking of lowering my employee contribution to perhaps only contribute enough to take advantage of employer maximum contribution. My overall thoughts are that pensions are not risk free and based on the above figures the value for money is questionable.

Would love to hear your thoughts on this?
Click to expand...

As always, the question should be: "compared to what?"

You could reduce your contributions, but what would you do with them? If your aim is to have more income in retirement then you need an alternative investment strategy. There are lots of things you can do, but none of them allows for tax-free growth and a large tax-free withdrawal that a traditional pension strategy allows for.

As other posters have pointed out the expected income on retirement is subject to a pile of assumptions. All we know - at a distance of 24 years - is that most of those assumptions will not come to pass, and hopefully in your favour.
 
cremeegg said:
I have said before that the financial advice industry makes me uneasy in many of its doings, providing projections based on less than guesses is one of those things.
Click to expand...

The Central Bank tells the life companies what format these projections are to take. The assumptions used will have a massive impact on the figures at the end, especially over the long term.

But to give you a real life example, a client of mine invested €30,000 24.75 years ago. It's worth just over €100,000 when I did the review for him last week. That's a return of 5% per annum over the period which includes 2 pretty bad market crashes. He's just let it run and do it's thing. And as his advisor, I've done the same (us advisors like to pretend we know better and get clients to move funds around all the time when we should just leave it where it is).

And to the OP, remember risk and return are related. If you are taking a medium risk investment strategy, don't expect any more than that in your returns.


Steven
www.bluewaterfp.ie
 
Who has the burden of proof here? It's impossible to predict the future so there won't be an answer for another 24 years on your pension.
Many posters above have outlined advantages, I haven't seen any alternative proposed. Let's say you have decided pensions are rubbish, what would you do instead OP?
 
First of all may I offer respect and thanks to Steven, for coming on here and sharing his expertise with us and under his real name.

SBarrett said:
The Central Bank tells the life companies what format these projections are to take. The assumptions used will have a massive impact on the figures at the end, especially over the long term.
Click to expand...

Just because it's mandated by the Central bank does not make it less misleading. Or the industry that produces this stuff more respectable. In 24 years time if annuity rates are 1% and the OP says to his provider "you projected 3.7% back in 2019" he will be met with a shrug of the shoulders.
 
SBarrett said:
But to give you a real life example, a client of mine invested €30,000 24.75 years ago. It's worth just over €100,000 when I did the review for him last week. That's a return of 5% per annum over the period which includes 2 pretty bad market crashes.
Click to expand...

This may seem off thread, but I suggest not.

22.5 years ago I invested €13,000 in an investment property, borrowing €115k. Since then I made repayments of €150k (it was a 15 year mortgage) and collected rent of €211k. The property today is worth €250 approx. I am still collecting rent on it.
 
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