Can someone explain pensions like I'm 5?

Haidee_Hammond

Hi boards people. I am a fully grown adult that has gotten to the wise old age of 40 clearly not fully understanding pensions (or vital parts of them it seems). I am aware of details, like, tax benefits and such, but, for the life of me I seem to be missing out the most basic stuff. Hence my plea. I do have a pension plan, been contributing for about 7 years now (company matching), it seems outrageous to me how much money the simulator wants me to add. I have 20%, my employer does 8% matching. It STILL WANTS MORE MONEY. It might be that I am Spanish and used to a public pension plan system, but a-uch.

So I go and look at it again. Do the roughest math on earth, such as the amount of money I have put into it (incl my company), estimate the same level of contributions until retirement. For starters the pension fund calculator seems to assume no increase on that money via investment (I thought that was the whole point of the pensions, or at least it is in Spain for private pensions should you bother with one). That alone puzzles me, are they investing the money and keeping ALL the profit? or is the calculator wrong? Then I take them at their word and assume, ok, at retirement the fund would be x. Now, I understand the pension fund will keep some profit, but I am roughly assuming, if I had x amount of cash money when I retired and not invested it (silly, but whatever), and split it on monthly payments for the average 20 years left of life (I know, you could die earlier or later, I figure the risk for them balances out), how much cash would I have, versus how much cash do they estimate they'll give me, and again, it comes short (like if I were to have that uninvested money on a bank I would have 43k a year for 20 years versus 30k they say they would give me). Again, I expect them to keep some profit, of course, but I expected that to be a part of the investment, if my pension calculator and rough math are right it kinda sounds like they keep all the investment returns and then SOME. Anyone can explain to me what am I not seeing? Is the calculator just broken, is this the actual system where they ALL the profits, some of your money and IF you save something is purely due to the tax break?

A more even basic math drives me crazy: I am contributing aprox 30k a year for about 30 years (less the first few years, I would hope it ends up being more in the future though) to get back the same amount of money (which will be peanuts with inflation) for 20 approx. Makes no sense to me, so I must be looking at it wrong.

Someone help this very confused soul?

Data to make sense if anyone cares:

pension fund provider: Irish Life

pension contributions to date 100k, current total yearly contributions 30k

estimate yearly income after retirement not counting state pension: 30k

Geuze

https://www.zurich.ie/pensions-retirement/calculators/pension-calculator/

I plugged your data into Zurich, and it suggests contributions of 1264 pm will deliver a fund that that produce 2500 income per month at age 66

IMPORTANT ASSUMPTIONS

• For the purpose of determining the term over which pension contributions are made, we have assumed your birthday was exactly six months ago.
• If your target retirement age is lower than the age at which the Social Welfare pension commences (age 68 if you are born on/after 01/01/1961, age 67 if born before this date but on/after 01/01/1955 and age 66 if born before 01/01/1955) the calculations allow for funding for this gap, in addition to the cost of the annuity.
• You are entitled to a full Social Welfare pension of €277.30 per week as at January 2024 which is assumed to increase by 3% per year.
• You are saving for the difference between the Social Welfare pension and your target monthly income in retirement.
• We have allowed for inflation of your target monthly income of 3% per annum between now and your retirement date.
• Any other private pension provision you may have in place has not been taken into account.
• Your monthly pension contribution increases by 3% each year up until your retirement age and is invested in a pension plan with an annual management charge of 1% and a 5% charge on each contribution, in line with the Standard PRSA fees and charges maximum limit.
• A Gross Investment Return of 4.6% per annum on your savings. This is not a forecast because the value of your investment may grow at a faster or slower rate than assumed and the value of your investment may be expected to fall from time to time as well as rise.
• On retirement you purchase an annuity which escalates at 2% each year, has a 5-year guarantee and is payable monthly in advance. The annuity rate assumes a post retirement interest rate of 2% per annum and no spouse's pension. The actual annuity rate will depend on the selection of dependant's pension, guaranteed period and the escalation rate, as well as interest rates prevailing when the annuity is purchased.

naughtysmurf

As a very simple rough guide, when you get to retirement age you will have a final pension pot of money that both you & your employer will have contributed to,

You will be entitled to take a portion of this pension pot tax free, the remainder of the pot is then used to buy an annuity (monthly payment), this will be in the region of 5% annually of the remainder of the pot

Basically & very roughly, for every €100,000 in your pot after you have taken your tax free lump sum, you will get €5000 / year

To have a pension of €30,000 per year, you will have to have a pension pot of €600,000

If you don’t wanted an annuity, you can opt for an ARF, there are risks associated with this as your fund is invested & may decrease in size, smaller fund = smaller income

They are currently projecting that you will have a final pension pot of +€600,000

The J Stands for Jay

Those pension calculators are pretty bad. The final pension value you see is in 'todays prices', so it shows the value adjusted for inflation. If the projected inflation rate and fund growth rates are similar, they will show little growth, as inflation reduces the growth.

For the income, they use annuity rates, which may not be relevant for all pension scheme members.

All in all, the calculators can be a bit misleading for most people.