I’m saving £400 a month but my projected pension at 65 is still puny

I am a bank employee. I work in electrical engineering so don’t have any banking or pension knowledge. I have been contributing to the company pension scheme at my work.

In rough figures I basically put in £400 a month to my pension and after 10 years my pension pot has £40,000 in it.

If I retired at 65 my pension pot is expected to be £128,000. I would be entitled to a £32,000 lump sump and £2,340 per annum which equates to £195 a month at the end of the term when I retire.

Me and my work mates are baffled as to how we would be contributing into the pension scheme for roughly 30 years and all contributing roughly £400 a month and would be receiving such a low payout at the end.

I had always presumed my pension money would be invested and I would get a decent return on it or at least as much as I put in.

To even get back the money I will have put in from this pension scheme I would have to live to older than 105 years old.

Why does this pension scheme seem to have such a low return and should I get out of it? If I do get out of it what should I do instead.

We are being encouraged to put more money in and also encouraged to transfer all our other pensions into this scheme which on the face of it appears to be a crazy move.

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Steve Webb replies: You have raised an important question about what is a reasonable level of pension pot and final pension based on the amount you have contributed so far.

Considering first the amount you have contributed, I’m assuming that the £400 per month that you quote includes a contribution from your employer plus tax relief from the Government.

It is worth remembering that if you pulled out of the pension you would be losing the money your employer puts in.

If you have been paying £400 per month, or £4,800 per year for around 10 years, then it’s a bit surprising that you only have £40,000 in your pot.

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Although markets go up and down, the last 10 years has included some good periods for stock markets.

Charges do reduce the value of your pot, but a standard workplace pension with a household name firm should have relatively low charges. It would be worth asking your pension department for a more detailed explanation.

In terms of what you could get in retirement, a lot depends on whether the projection is based on the assumption that you contribute for another 20 years.

If so, you would have contributed another £4,800 per year or £96,000. Together with the £40,000 you already have plus two decades of investment growth, a final pot of £128,000 seems very low.

It might be worth clarifying with your pension provider the basis of their projection if it is not clear from the statement.

Obviously, if you have only paid in for 10 years and you’re expecting a pension to last you for 20 or more, then you can’t expect a fortune, but if you plan to pay in for 30 years in all, then you should certainly expect something better than this.

Assuming that the figure of £128,000 is correct, the lump sum figure is simply the standard 25 per cent that you can take tax-free.

However, the annual income figure looks very low to me. As a very rough rule of thumb, for someone at age 65, you should expect an income of roughly £1 per week for every £1,000 in your pension pot.

In your case, you would have £96,000 left after the tax-free lump sum, which would generate a weekly income of roughly £96 per week or £416 per month, which is much higher than the figure you have been given.

One possible explanation for the difference is that my rule of thumb is for what is called a ‘level annuity’ – this is a regular income which does not rise in line with inflation and does not pay out anything to a spouse if you were to die.

The lower figure you have been quoted may be for what is called an ‘index-linked’ annuity – one that rises each year in line with inflation.

Although the starting figure looks low, if you are retired for a couple of decades, that annual increase for inflation means that the true value of what you are getting is greater than it seems.

My key point would be that you are absolutely right to be asking searching questions about your pension. Make sure you understand how much your employer is contributing to your pension, as you would lose that contribution if you decided to opt out.

But by all means ask your workplace pensions department and your pension provider to give you answers about why your pot is not larger and why the retirement income figure you have been quoted looks so low.