Case Study - Meet John
John is 55 years old and has four pensions with different pension providers. John doesn’t understand his pensions or what income they will provide in retirement. John has never really seen the point to pensions, as the paperwork he receives from his provider suggests that he will not receive very much.
Pension providers are legally obliged to provide illustrations in a prescribed format. The calculations assume you will buy an annuity at retirement and annuity rates are linked to interest rates, which are historically low.
John has an occupational final salary pension scheme, a paid up personal pension worth £77,000, a paid-up group personal pension from a previous employment worth £58,000, and his current group personal pension in which he only invests the minimum amount.
Having obtained information from all the pension providers as well as a state pension forecast, we explained all the features of his various pensions.
John’s final salary pension is payable from age 65, however if he accesses it early he will incur financial penalties, like most schemes of this type. We explained that final salary pension schemes provide a guaranteed income in retirement, in John’s case of £6,000 per annum. This when added his projected state pension of £8,000 per annum gave John a guaranteed income of £14,000 per annum. Given the guarantees of the scheme, John was advised to leave his final salary pension alone.
John however ideally wanted an income of £25,000 per annum in retirement, leaving him £11,000 short of his retirement ambitions.
Next we reviewed John’s two paid up pensions, John was surprised to learn that these pensions had changed provider several times. The first one was invested in a ‘with-profits’ fund and after analysing its performance, we identified that it had only grown by 0.5% per annum for the last 6 years. The second was invested in a default fund, mainly invested in cash and fixed interest, so the returns had also been low.
We advised John to transfer these two pensions into a new cheaper contract, which was expected to generate greater returns and provided the option of flexi-access income drawdown to provide him with income in retirement, something the previous pension contracts did not facilitate.