This has been a hot question after week 2 of the Rebel Finance School which is all about net-worth.  The challenge comes because there are two types of pensions.  Defined Contribution (DC) and Defined Benefit (DB).

A defined contribution pension means you know what you are putting into it (contribution) on a monthly basis.  e.g. you are putting in £300 a month.  What we don’t know is how much that is going to grow to at the other end when you retire.  This is easy to take a snap shot of; you just look up the current valuation in your paperwork or online and put that in your tracker.

Defined Benefit pensions are harder to work out.  This is because they sometimes don’t give you a current valuation they give you an annual amount that you will get in retirement. This annual amount you will get in retirement in the defined benefit.   If you look in your paperwork they should give you a figure for; if I stop working now and then retire at retirement age I will get £XXX or £$$$.

DB Pensions are far more common for government employees.  They aren’t really used in the private sector anymore as they are seen as more costly.  Katie and I have friends that work for the NHS and as Teachers and they both have DB pensions.

Our advice to them is to take the amount they would get when retiring if they stopped working currently; multiply that number by 25 and put that in your net-worth tracker.

Let’s take an example: if you were 35 years old and on your pension paperwork they predict if you stop working now then you will get £3000 annually in retirement at age 68.  Then take the £3000 and multiply it by 25 (this is the inverse of the 4% rule which if you want to know more about read “How much do I need to retire”).   £3000 * 25 = £75,000.

This simple sum gives you an estimate of the size of pot you would need to have in index funds to be able to have £3000 a year in retirement.   The idea is that this gives you a snap shot value of your pension right now and how much it might be worth and gives us some numbers to be able to work out if you have enough to retire, if you need separate pensions or how much you need to cover the gap till retirement age if you retire early!

This is a lot more information behind this valuation.  If you are on the course Rebel Finance School then keep coming and we will unpack this as we go.  If you aren’t on the course read “How much do I need to retire” and that will give you an idea of the maths behind our reasoning.