Pensions – Why are they so bad?

It’s that time of year when  I receive pension statements. I do wonder what the point of a pension is as every year their value may increase (a little) but their payout forecast just drops and drops each year.

This year my paid up personal pension is quoting a ‘massive’ £283 PER YEAR pension when I reach 60 – Wow that is really going to give me enough to live off! ** I did look at re-starting this pension but they want me to get a solicitor to sign off forms to prove my identity!? WTF ?! They know where I live, they have history on me and can check the DD details and ID check me electronically – I still pay contributions to them for something else – so why do I need to provide all this info, just so I can restart monthly payments as a fixed rate ( due to their rules(?) I can only pay in the amount that I was when I stopped it. Which is a pittance anyway).

I stopped it because it was a pension I took out when I first started working and my employer at the time did not have a pension scheme. I then moved job and wanted to join my new employer’s really good company scheme (it was a final salary!) – at that time you couldn’t have two pensions on the go so I had to stop this one. My final-salary pension is now deferred as I have left that employer and I know what that will pay out from 65, they currently guarantee me an annual value. Can I be sure it will still be there when I reach 65 – possibly not if BHS, Hoover, etc… are anything to go by?

The next pension statement was for my personal pension (a stakeholder) which I still contribute to, a small but regular payment. If I retire at 55 (I set the age to this when I opened it to give me flexibility to drawn from that age onwards if I wanted to), I will receive a whole £850 PER YEAR. Not even enough to pay my annual council tax never mind monthly living costs.

The next pension statement received is from my current employer pension scheme. Now, this scheme is a money-purchase – I don’t know anyone who has an active final-salary one now. It’s value is open to fluctuation and heavy interpretation anyway. If I continue to work for my present employer until I reach 65 (which I very much doubt – given the fact that I am looking to leave), I can potentially claim a pension of £3,000 PER YEAR.

I don’t get to claim my state pension until 67 due to the government changes, which could change again between now and then. I also cannot get a figure out of DWP either as due to opt-out years, my state pension value will have a deduction due to SERPs opt-out years, which they will not calculate until I actually reach state pension age. So all I know is that it will be less than £8k per year as I will have opt-out deductions.

That’s why I am so glad I am investing separately to gain some control over my future with savings via ISAs and a SIPP, I can see the value when I want to and do something about it. Well, at least try to do something about it! 🙂

 

State Pension – Update

I received my pension statement today, so I now know how many qualifying years I have accrued. The info from DWP also included a booklet explaining some of the calculations and that the quotation I have is based on the old scheme and that I will not be able to get a proper calculation until the new state pension scheme starts next year (after 6-Apr-2016). As part of the new state pension scheme, DWP will be calculating a ‘starting amount’ and this will be used as the basis for the minimum value you will receive (it acts as a threshold for those that would have received more under the old scheme and are very near retirement).

In the meantime, I know I have 25 years and need to accumulate 35 years in total to qualify for a full state pension at 67. This gives me 20 years in which to accrue the 10 years required. These figures are all based on values up to 5-Apr-2015 so I will have this year’s qualifying contributions to add. This is where the booklet was useful as it states what the minimum earnings amount is to achieve a ‘qualifying year’. There are different amounts based on whether you are employed or self-employed.

Employed – in tax year 2015/2016 the minimum amount is £5,824.

I have just managed to scrape in this tax years ‘qualifying year’ based on the earnings I received before I quit the job. For the start of the new state pension calculations I will have 26 qualifying years and another 9 years to accrue. Seeing a single digit here is a relief, it seems like an achievable target.  ** Although it also shows how close to retirement I am! 

Based on the current calculations, I would receive a pension of £96 per week under the old rules and £100 under the new one. I am not sure if this is the true value as the confusion comes in when the SERPS/contracted out element is calculated. It is unclear in the booklet how this will be work just that a deduction will be made based on the number of contracted out years you have had. I am not sure how many contracted out years I have – I know I had some due to a company scheme – so I don’t know how much will be deducted from either of these values, it is not part of the statement.

This does not seem much to live off and would just about cover my basic bills (council tax & utility bills as they stand today), it would not leave anything left for food or other living expenses? If any of these bills increase above the average earnings growth used to calculate the new State Pension then it would be impossible to live. This just illustrates how important it is to have a money pot to dip into to enable you to live a comfortable retirement. Whether looking for an FI future or not, savings are important to have.