Knowing the answer to what pension will I get? Is crucial in understanding what sort of lifestyle you will have in retirement.
Will your pension produce enough so you will be comfortable with financial security and flexibility or will you just get by? Maybe you will be comfortable, financially free and able to enjoy lots of life’s luxuries.
In this article we’ll give you an idea of what pension you might get and how to find out.
What pension will I get will depend on what pension I have
When we talk about what pension will I get? We mean the income you will get in retirement from your pension.
The first step to knowing what pension you will get is to understand what type of pension you have.
There are essentially three different types of pension:
- State Pension
- Defined benefit pension
- Defined contribution pension
The State Pension is provided by the government and will be paid from your State Pension age unless you choose to defer it.
The amount you receive will depend on your National Insurance contribution record and the payment rates used by government at the time.
If you go online you can find out your State Pension Age and get a State Pension Forecast which will tell your everything you need to know about your National Insurance contribution record, whether you have any gaps and what it will cost you to make up the difference.
If you have paid National Insurance contributions for 35 years then you should have a full record and the basic State Pension is around £175 per week, making it around £9,000 per year.
So for a couple with full records you could expect to receive around £18,000 in total per year from State Pensions alone.
Defined benefit pension
A defined benefit pension is also commonly known as a final salary pension.
These types of pension schemes were mainly offered by the public sector and larger employers.
Most of these types of schemes are closed now to new members and no longer build up further benefits for older members, but older members will still be due a pension.
What pension will I get from a defined benefit pension?
This can be complex to work out.
It will depend on the following factors:
- Your salary either at date of retirement or an average over a number of years.
- How long you have worked for the company providing the pension.
- Something called an accrual rate which is used in the formula to work out your pension benefits.
For example, a defined benefit pension member who has a salary at date of retirement of £90,000, has worked for the company for 25 years and the company uses an accrual rate of 1/80ths, the annual pension income will be:
£90,000 x 25/80 = £28,125
You should be able to get an indication on what you pension will be by writing to the scheme administrator and asking for a projection.
If it’s a private sector defined benefit pension scheme then you should also have the option of requesting a transfer value which means you could transfer the value of your pension to a defined contribution pension. This may give you more options but would mean you giving up very valuable guarantees.
Defined contribution pension
Most people today will be paying into a defined contribution pension. You pay in, your employer pays in and the government gives you tax relief which also helps top up your contributions.
For someone who is low risk and wants certainty for their retirement then the default option to turn your defined contribution pension pot into income is to go for an annuity.
Essentially an annuity is where you give over your pension pot to an annuity provider and they will pay you an income for the rest of your life.
Whilst annuities do provide that certainty, the problem over the last few years now is that the income offered has been getting lower and lower.
This is because the rate of income you can expect to receive from your pension pot is linked to interest rates. The higher the interest rate the higher the income you will be offered at the start.
But what’s happened to interest rates over the last 15 years? They have gone down, down and down.
Here is a snapshot of the UK’s 15 year GILT rate which can be a good indication of annuity rates.
Looking at some sample annuity quotes, if you had a pension pot of £300,000 at retirement, you wanted to purchase a single life annuity at age 65 and you wanted this to increase with inflation every year, here are the results:
|Provider||Annuity Income (Per Year)||Term||Increasing||Guaranteed|
|Provider A||£8,283||For life||By RPI||5 years|
|Provider B||£8,003||For life||By RPI||5 years|
|Provider C||£7,602||For life||By RPI||5 years|
Quotes from 02/08/2021
The above options only provide an income for the rest of your life. The annuity then dies with you leaving nothing for your loved ones.
An alternative option if you are married or in a civil partnership is to add your partner to the deal.
In the below quotes we are looking at the same details as above but this time including a partner who is also 65 and requires an income of half of what the original annuity income gives once the main applicant dies:
|Provider||Annuity Income (Per Year)||Term||Increasing||Guaranteed|
|Provider A||£7,446||For life||By RPI||5 years|
|Provider B||£7,105||For life||By RPI||5 years|
Quotes from 02/08/2021
If you take an annuity income of £7,446 and two State Pensions then your total annual income in retirement could be £25,666 before tax is taken off.
This would put you above the ‘minimum’ retirement income standard but below the ‘moderate’ income level according to the Retirement Living Standards data.
In order to find out your likely annuity income options your pension provider will write to you and automatically quote you at the age you have selected as your retirement. Never take this option without looking at the whole of the market. It’s essential you get the best deal you can as once you’ve decided there is no turning back. You can’t change your mind.
There are plenty of annuity calculators out there who will be willing to quote you anytime you want.
But should you even go for an annuity? If you are someone that wants a bit more flexibility in your retirement you could go for an option that could give you even more income.
What pension will I get? Can be asked at different stages of your retirement
If you have a defined contribution pension, rather than going for an annuity to secure your retirement income you could go for the alternative option, pension drawdown.
Using pension drawdown means you don’t secure an income. Instead you keep the pot and make withdrawals from it when and how you like (subject to minimum pension age rules).
The downside to this approach is that you need to be mindful of:
- Inflation, prices rising over time meaning you need to increase the withdrawals you take from the pot to keep up.
- Investment volatility, in order to maintain purchasing power you will need to keep your pot invested which will mean times of stock market volatility.
- The more you take from the pot, the more chance of it running out before you do!
The drawdown option is great for those that plan to spend different amounts in different phases of their retirement.
For example, perhaps you want to go on lots of holidays when you first retire, then slow down as you get older. Then in your later years gift money to the children.
What’s essential to know is what is a sustainable income you can produce from your pension drawdown pot.
Here at RTS Financial Planning we use over 100 years of real life historic market and inflation data and produce rolling monthly 35 year periods going all the way back to January 1915.
We then use your portfolio and test it against each rolling period (around 1000 different scenarios) to see what the minimum sustainable income would have been over a 35 year period.
The below example shows this in action for a £300,000 portfolio using a 60% equity / 40% bonds investment strategy and two full State Pensions:
In the above example the minimum sustainable income is £27,900 per year. This was the worst 35 year period from the past, starting in November 1968 and ending in November 2003. This period saw double digit inflation, UK bailout by the IMF, Black Wednesday, Dotcom bubble and the September 11th attacks.
What’s interesting though is that in 98% of all scenarios tested the portfolio and State Pensions could sustain an income of £29,100 per year (increasing with inflation) which just so happens to be a ‘moderate’ income level according to the Retirement Living Standards data.
A ‘moderate’ income level means:
- Paying for some help with maintenance and decorating each year.
- A £74 weekly food shop.
- 3 year old car replaced every 10 years.
- 2 weeks in Europe holiday and a long weekend in the UK every year.
- £750 per person for clothing and footwear each year.
So in the annuity and drawdown examples used with the same starting pension pot of £300,000, the pension drawdown option produces an extra income of £3,434 per year.
What’s more if you died at any point your loved ones are able to inherit what’s left over in the pot.
Which as you can see from the balance in the example below, this could be significant.
If you would like your retirement plans stress-tested and find out the answer to what pension will I get? Please get in touch.
We will be able to tell you if you have enough and if not what you need to do to get there and have the lifestyle you desire in retirement.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.