The Retirement Newsletter: Why are my pension pots so small?

Issue Number: -9 — Reflecting on my pension — why is it so complicated?

Nick

Nov 26, 2023

Photo by Author — when I was a millionaire

Welcome

Welcome to issue -9 — 18 weeks to go until my retirement.

This week, I ask — why are my pension pots so small, and why is it so complicated?

My pension journey

OK, first off, I would like to say that I am not a financial advisor. I am writing about what I have read over the years about money and preparing to retire. This is not financial advice.

My pension journey will be like many people’s in the UK — it started well, was easy to understand, and then became very complex. And I get suspicious of complex things, as I often think someone is trying to hide things.

Like all good stories or journeys, there is a beginning, a middle, and an end.

My pension journey — the beginning

Growing up in the UK in the 60s and 70s, I looked at my grandparents and was amazed that the government ‘gave’ them money — their pensions. It seemed odd that they were given so much ‘free’ money.

As I got older and started to understand the concept of a pension and the value of money, my amazement at the government pension turned to horror when I realised how little money they were receiving. How did they manage?

When I was at university, my dad took early retirement, and it was clear he had a good pension. He wasn’t drawing a State pension (that happened later), and yet he had a good lifestyle. He explained the concept of the ‘final salary pension’ — it sounded fantastic. I wanted one!

When I took my first job after completing my degree, I was delighted to find it had a final salary pension, and I was shocked at how much I was paying into the scheme. I mentioned this to my dad — he said it would be worth it.

The scheme was easy to understand. Your pension would be the years you paid in, divided by 80 and multiplied by your final salary. Work for 40 years, and you retire on the maximum benefit, half pay. You also got a lump sum of three times your final salary. Amazing! And the maths was simple.

I paid into the scheme for four years and then took an eight-year break while I did my PhD and worked in the States.

My pension journey — the middle

When I returned from the States, I knew I had lost eight years and decided I needed to play catch-up. That is, I need to pay as much as I could into the pension.

The pension was still a final salary pension, and luckily, they were running two schemes to top up. One was to buy additional years; the other was Additional Voluntary Contributions (AVCs). The AVC could be converted into an annuity to give you a regular payment or taken as a lump sum.

I paid into both the additional years and the AVC. I paid in as much as I could afford.

After doing that for 12 years, I felt I was making progress. My pots were growing. I was making up for those lost eight years.

And then the wheels came off.

Around 2011, the final salary scheme stopped, and we went to a weird new pension scheme. Gone were the days of so many 80th of your final salary, and in came Retirement Income Builder and Investment Builder. The AVC was stopped around 2016 after some further changes.

So, what are the Retirement Income Builder and the Investment Builder?

The Retirement Income Builder is a defined benefit (DB), and the Investment Builder is a defined contribution (DC). Does that clear it up? It doesn’t for me.

As I understand it, the Retirement Income Builder is a defined benefit (DB), which is the old pension bit — the remains of the final salary pension.

The Investment Builder is a defined contribution (DC) savings account. Depending on your circumstances, you can convert this pot into a defined benefit — a set income.

But there is a catch.

While the DB part gives you a guaranteed income, it is not based on your final salary but a maximum salary of £41,000. So, no more final salary.

And it gets more confusing. Any pension you pay on salary above a threshold goes into DC (the savings), not the DB (pension). Also, if you wish, you can pay extra into the DC.

Clear as mud.

But it gets more confusing.

My pension journey — the end

I started with a simple final salary 40/80 pension, and I have ended up with something that has at least four pots:

Retirement Income Builder — this is a defined benefit (DB) and is like the old final salary pension, but isn’t.
Investment Builder is a defined contribution (DC) — a glorified savings account, some, all or none of which can be converted into a defined income.
The AVC — this can be taken as a lump sum, converted into an annuity to give an income, or converted to the DC, which then can be converted to a defined income.
A lump sum — and I have no idea how that is being calculated.

However, it gets more complicated.

My Retirement Income Builder (DB) has two pots within it. One pot holds all my pension contributions before the change in 2011, and the other holds my pension contributions post-2011. And guess what? The two pots are not treated the same for actuary adjustments (adjustments made for taking your pension early) or increases due to “pay rises” based on inflation. And these two pots also seem to feed into the lump sum calculation.

So, what is that now, six pots? No wonder I am confused.

Why are my pension pots so small?

Finally, why my pension pots are so small is a difficult question to answer.

Based on my calculations under the old scheme, when I returned from the States, and considering my AVC and extra payments, my pension is less than I expected. But what I will have is better than what I estimated in 2011 after the changes.

So, the answer to the question is yes and no.

My pension will be smaller than I was expecting when I joined the scheme in the 1980s, but it is better than I was expecting when the pension changed in 2011.

Am I happy about my loss? No… but I am relieved that it is not as bad as I once feared.

Please note I am not a financial advisor. I am writing about what I have read over the years about money and preparing to retire. This is not financial advice.

Travel — Nostalgia Corner

More stories from my trip to Singapore, this week:

Singapore — Fort Siloso, Sentosa (Pulau Blakang Mati), Singapore — A look around Fort Siloso, Singapore. This was an interesting visit as I learned much about the Japanese invasion of Singapore in World War II.
Singapore — Siloso Beach, Singapore, by night — The beach at night. This was an odd visit to an artificial beach at night — a very Singapore experience.
Singapore — Kampong Lorong Buangkok, Singapore — Kampong Lorong Buangkok is one of the last surviving parts of ‘old’ Singapore, and it was not what I was expecting.
Singapore — Singapore Zoo Night Safari, Singapore — This was a huge disappointment. I had heard good things about the Singapore Zoo Night Safari, and it was a big letdown, particularly at the price. My advice is to avoid it.

Next week, some stories from around Johor Bahru (JB), Malaysia.

Next week

Next week in issue -8.5 — owning a dog — hobby or side-hustle?

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Until next time,