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  • FIRST POST
    • pacemaker1000
    • By pacemaker1000 14th Nov 17, 12:36 AM
    • 8Posts
    • 0Thanks
    pacemaker1000
    FS Pension Indexed Linked
    • #1
    • 14th Nov 17, 12:36 AM
    FS Pension Indexed Linked 14th Nov 17 at 12:36 AM
    I have two options.

    1. Gives a fully indexed linked pension with lump sum
    2. Gives a 2/3 indexed linked (1/3 frozen) with a lump sum increase of £6k and initial pension of £1k a year more (this narrows as the fully indexed linked 1/3 increases with CPI)

    If BOE expectations are to be believed then CPI is set to fix at 2% forever, so with interest rates on bonds about 2.5% then '2' looks more appealing. Even at a CPI of 3% it could be 20 years before '2' starts to lose out.

    Opinions please as I am undecided which way to go.

    Many thanks
Page 1
    • Tom99
    • By Tom99 14th Nov 17, 1:41 AM
    • 572 Posts
    • 335 Thanks
    Tom99
    • #2
    • 14th Nov 17, 1:41 AM
    • #2
    • 14th Nov 17, 1:41 AM
    You don't say how much pa the pension options are for?
    How old are you and when will the pension start?
    • bigadaj
    • By bigadaj 14th Nov 17, 6:24 AM
    • 10,725 Posts
    • 7,012 Thanks
    bigadaj
    • #3
    • 14th Nov 17, 6:24 AM
    • #3
    • 14th Nov 17, 6:24 AM
    I have two options.

    1. Gives a fully indexed linked pension with lump sum
    2. Gives a 2/3 indexed linked (1/3 frozen) with a lump sum increase of £6k and initial pension of £1k a year more (this narrows as the fully indexed linked 1/3 increases with CPI)

    If BOE expectations are to be believed then CPI is set to fix at 2% forever, so with interest rates on bonds about 2.5% then '2' looks more appealing. Even at a CPI of 3% it could be 20 years before '2' starts to lose out.

    Opinions please as I am undecided which way to go.

    Many thanks
    Originally posted by pacemaker1000
    BOE mandate has been 2% for several years now, actually well over a decade, how often have they hit it?

    Where are these bonds paying 2.5%?
    • Linton
    • By Linton 14th Nov 17, 8:06 AM
    • 8,496 Posts
    • 8,445 Thanks
    Linton
    • #4
    • 14th Nov 17, 8:06 AM
    • #4
    • 14th Nov 17, 8:06 AM
    2% isnít a BoE expectation, itís a target set by the government to guide the Bank in itís use of the limited powers it has been given. Both external events and government policies can have major inflationary effects which are outside the BoEís control.

    So an assumiption of 2% long term inflation may be over-optimistic.

    If inflation was 2% and you wanted to absolutely ensure sustainable inflation matching drawdown at a rate of say 3.5% per year you would need bonds that guaranteed a 5.5% return. Sadly these are not available.

    To work out which of the OPís options is better we need to know the size of the pension. The £1k per year and £6k lump sum may be significant or may be trivially small.

    The 20 years break even time given by the OP is roughly oneís life expectancy and so has a 50% chance of being exceeded.

    Assuming the break even time is acceptably high The criterion I suggest is that of whether a 2/3 inflation matching pension together with SP and any other income is sufficient for an acceptable though perhaps not extravagant standard of living. If it is, then sacrificing the inflation guarantee on the other 1/3 may be an acceptable risk. Otherwise, otherwise.
    Last edited by Linton; 14-11-2017 at 8:08 AM.
    • pacemaker1000
    • By pacemaker1000 14th Nov 17, 10:21 AM
    • 8 Posts
    • 0 Thanks
    pacemaker1000
    • #5
    • 14th Nov 17, 10:21 AM
    • #5
    • 14th Nov 17, 10:21 AM
    Thanks guys
    The two lumps are 98k and 106k
    Pension 14700 and 15700
    I’m 55 and intend to use 96k of lumps to draw down at 8k a year for 12 years to reach oap at 67 when that will take over
    Cheers
    • kidmugsy
    • By kidmugsy 14th Nov 17, 3:48 PM
    • 9,851 Posts
    • 6,644 Thanks
    kidmugsy
    • #6
    • 14th Nov 17, 3:48 PM
    • #6
    • 14th Nov 17, 3:48 PM
    The two lumps are 98k and 106k
    Pension 14700 and 15700
    I’m 55 and intend to use 96k of lumps to draw down at 8k a year for 12 years to reach oap at 67 when that will take over
    Cheers
    Originally posted by pacemaker1000
    Are you keen on reaching 67 with some capital left over? Are you keen on full inflation protection on what is effectively longevity insurance?

    P.S. I suspect Linton has made an error with "The 20 years break even time given by the OP is roughly one’s life expectancy". I think the median remaining life for a 55 year old would be a good deal longer than 20 years. I don't have a UK figure but the first diagram on this link shows it for the US.

    https://retirementresearcher.com/long-can-retirees-expect-live-hit-65/

    As the writer says "For a male at sixty-five, median remaining longevity is about twenty-four years". So at age 55 it would be somewhere between 24 and 34 years, but nearer to the latter. For the UK it would presumably be about half a year or a year longer than in the US.

    Mind you, Linton had no magic way of knowing that the OP was 55 because the OP had originally decided to keep that a secret.
    Last edited by kidmugsy; 14-11-2017 at 3:56 PM.
    Free the dunston one next time too.
    • sandsy
    • By sandsy 14th Nov 17, 5:15 PM
    • 1,218 Posts
    • 715 Thanks
    sandsy
    • #7
    • 14th Nov 17, 5:15 PM
    • #7
    • 14th Nov 17, 5:15 PM
    Male 55 -> 86
    with a 1 in 4 chance of hitting 95

    https://visual.ons.gov.uk/how-long-will-my-pension-need-to-last/
    • Linton
    • By Linton 14th Nov 17, 6:01 PM
    • 8,496 Posts
    • 8,445 Thanks
    Linton
    • #8
    • 14th Nov 17, 6:01 PM
    • #8
    • 14th Nov 17, 6:01 PM
    ....
    P.S. I suspect Linton has made an error with "The 20 years break even time given by the OP is roughly oneís life expectancy". I think the median remaining life for a 55 year old would be a good deal longer than 20 years. I don't have a UK figure but the first diagram on this link shows it for the US.

    https://retirementresearcher.com/long-can-retirees-expect-live-hit-65/

    As the writer says "For a male at sixty-five, median remaining longevity is about twenty-four years". So at age 55 it would be somewhere between 24 and 34 years, but nearer to the latter. For the UK it would presumably be about half a year or a year longer than in the US.

    Mind you, Linton had no magic way of knowing that the OP was 55 because the OP had originally decided to keep that a secret.
    Originally posted by kidmugsy
    I assumed a normal DB pension retirement age. For a male aged 55 this year the latest life tables I have indicate a male life expectancy of 31 further years. For a male aged 65 its about 22.
    • pacemaker1000
    • By pacemaker1000 14th Nov 17, 6:21 PM
    • 8 Posts
    • 0 Thanks
    pacemaker1000
    • #9
    • 14th Nov 17, 6:21 PM
    • #9
    • 14th Nov 17, 6:21 PM
    Are you keen on reaching 67 with some capital left over? Are you keen on full inflation protection on what is effectively longevity insurance?

    P.S. I suspect Linton has made an error with "The 20 years break even time given by the OP is roughly one’s life expectancy". I think the median remaining life for a 55 year old would be a good deal longer than 20 years. I don't have a UK figure but the first diagram on this link shows it for the US.

    As the writer says "For a male at sixty-five, median remaining longevity is about twenty-four years". So at age 55 it would be somewhere between 24 and 34 years, but nearer to the latter. For the UK it would presumably be about half a year or a year longer than in the US.

    Mind you, Linton had no magic way of knowing that the OP was 55 because the OP had originally decided to keep that a secret.
    Originally posted by kidmugsy
    I want the 96k to be index linked but to run out in 12 years when the oap will replace it.
    The iextra index linked part is 4.7k which at 3% will take 7years to catch up with original higher amount in option 2.
    From there on I’m worse off but still have the extra 6.5k to start with
    Suppose it all boils down to CPI
    • kidmugsy
    • By kidmugsy 14th Nov 17, 11:36 PM
    • 9,851 Posts
    • 6,644 Thanks
    kidmugsy
    Suppose it all boils down to CPI
    Originally posted by pacemaker1000
    Yes; if we were to have two or three years like the worst of 70s one third of your pension could lose more than half its value in just that spell. Can you be confident that we won't have a spell like that in the next quarter century?

    I suppose it's fair to say that the decision is finely balanced. If you can't decide spin a penny.

    P.S. What about the widow's pension?
    Free the dunston one next time too.
    • pacemaker1000
    • By pacemaker1000 15th Nov 17, 8:47 AM
    • 8 Posts
    • 0 Thanks
    pacemaker1000
    Wow gets half
    Really can’t see interest rates raising to more than 1% or the country would be screwed. Mortgage would default, banks fold and blood on the streets...lol
    This should keep cpi in check imho
    • IanSt
    • By IanSt 15th Nov 17, 10:18 AM
    • 128 Posts
    • 82 Thanks
    IanSt
    Wow gets half
    Really can’t see interest rates raising to more than 1% or the country would be screwed. Mortgage would default, banks fold and blood on the streets...lol
    This should keep cpi in check imho
    Originally posted by pacemaker1000
    I'm not sure that I'd agree that low interest rates is what has been keeping inflation low or that inflation at the moment could be called low (if anything it's been artificially boosting asset prices for the last umpteen years). If I had that option then I personally would be inclined to tend towards a means of guaranteed inflation proofing.
    • pip895
    • By pip895 15th Nov 17, 12:19 PM
    • 430 Posts
    • 234 Thanks
    pip895
    My DB pension has a guaranteed uplift of 5% pa - I wold actually prefer it to be RPI/CPI linked as I worry about inflation - a few years of low inflation and people seem to forget what it was like!
    • pacemaker1000
    • By pacemaker1000 15th Nov 17, 2:11 PM
    • 8 Posts
    • 0 Thanks
    pacemaker1000
    My DB pension has a guaranteed uplift of 5% pa - I wold actually prefer it to be RPI/CPI linked as I worry about inflation - a few years of low inflation and people seem to forget what it was like!
    Originally posted by pip895
    Wow! Great if youíve been drawing it the last five years.
    It least Iíd still have 66% linked
    • GunJack
    • By GunJack 15th Nov 17, 2:43 PM
    • 9,839 Posts
    • 7,328 Thanks
    GunJack
    Why would you want to burn all the capital by the state pension kicks in?
    ......Gettin' There, Wherever There is......
    • pacemaker1000
    • By pacemaker1000 15th Nov 17, 3:34 PM
    • 8 Posts
    • 0 Thanks
    pacemaker1000
    Why would you want to burn all the capital by the state pension kicks in?
    Originally posted by GunJack
    To live off!
    I look at the lump sum as part and parcel of my whole lifeís benefits.
    Luckily have other assets

    Just worked out CPI for the last 11 years averages 2.36%
    As option 1 only gives me 4700 index linked more and as I get 6k more cash if I invest this in a bond currently 2.46% wouldnít they balance out? Not forgetting the initial 1k a year more?
    Or am I working this out all wrong
    • kidmugsy
    • By kidmugsy 15th Nov 17, 5:26 PM
    • 9,851 Posts
    • 6,644 Thanks
    kidmugsy
    Wow gets half
    Really canít see interest rates raising to more than 1% or the country would be screwed. Mortgage would default, banks fold and blood on the streets...lol
    This should keep cpi in check imho
    Originally posted by pacemaker1000
    Conventional macroeconomics would disagree; it says that the way to hold inflation down is to increase interest rates. That worked for Volcker in the US decades ago.

    Unfortunately macroeconomics is probably largely a heap of rubbish; but it still might be right on this.
    Free the dunston one next time too.
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