Indexation

village_life

Hi

can someone very simply advise how to reoslve this "indexation" point I hear so much about.... I've just switched jobs and will be paying in 3% of salary initially (which is £168) and my employer will match that after 6 months making a total contribution of £335pm

.... what is the headline figure I should use for annual indexation? RPI/CPI? some other measure? - I presume I'll have to account for this via AVC's as Payrises are a bit infrequent usually and tend not to cover prevailing inflation rates!

Also can anyone predict the value of that in retirement?- its currnetly invested in a GPP balanced fund, I am 30 now, and so I expect I'll be retiring ~68 years old :-/

Indexation is something I've missed in the past in previous schemes so I guess I need to catch up with it, as it is I think I've got ~£35k in two funds which are now "locked" since I left those employments, so I presume I cant do anything to resolve the indexation point there? or do I need to?

Help!

bendix

village_life wrote: »

.... what is the headline figure I should use for annual indexation? RPI/CPI? some other measure? - I presume I'll have to account for this via AVC's as Payrises are a bit infrequent usually and tend not to cover prevailing inflation rates!

Help!

I think you're getting a bit granular.

The obvious answer is to say RPI/CPI? . . well, whichever is the greater.

It stands to reason that the more you increase your pension contributions, the better off you will be.

village_life

Not sure how/why you say it's granular? From what ice interpreted on here indexation is a core issue so clearly it's important to understand what metric(s) should be used to account for the amount of growth to apply

I'll wait for someone with some real idea of the answer.......

dunstonh

Some people go with fixed indexation as well. i.e. 3% p.a. or 5% p.a. Late starters or those with a small starting amount may go with a larger indexation.

Indexation is important as the most common complaint about pensions is that they havent provided the income the person thought they would. The most common reason for that is that the person started paying an amount 20 years earlier and is still paying the same amount.

£50 was a good contribution in 1988. In 2010 is a bad level. In 1988 you could fill a car up for under £10. Now its closer to £60. A mortgage of £40,000 was considered big in 1988. Now its the minimum amount some lenders will offer. Inflation eats away at the contribution.

34 year term, £100pm level will give a future terms income of £9986. Yet it will have the spending power of £4313. So, if you start now and leave it at £100pm you think you are getting nearly £10k with that level of spending power. However, when you get there, you get your £10k but it doesnt have the same spending power.

Indexation of NAEI added to that £100pm would turn that pension into £7071 in todays terms.

CLAPTON

in general pay rises are usually higher than inflation (either CPI or RPI) ... which is why over all people are richer now than they were 20 years ago.

now at the moment pay is much constrained but one would expect the old pattern to re-emerge once the recession period is over.
once this happens, as your contributions are based on a percentage of your salary then they will automaically rise.

Its pretty difficult to estimate the eventual value of the fund, but in REAL terms I would suggest you work it out at about 1 or maybe 2% per annum

village_life

dunstonh wrote: »

Some people go with fixed indexation as well. i.e. 3% p.a. or 5% p.a. Late starters or those with a small starting amount may go with a larger indexation.

Indexation is important as the most common complaint about pensions is that they havent provided the income the person thought they would. The most common reason for that is that the person started paying an amount 20 years earlier and is still paying the same amount.

£50 was a good contribution in 1988. In 2010 is a bad level. In 1988 you could fill a car up for under £10. Now its closer to £60. A mortgage of £40,000 was considered big in 1988. Now its the minimum amount some lenders will offer. Inflation eats away at the contribution.

34 year term, £100pm level will give a future terms income of £9986. Yet it will have the spending power of £4313. So, if you start now and leave it at £100pm you think you are getting nearly £10k with that level of spending power. However, when you get there, you get your £10k but it doesnt have the same spending power.

Indexation of NAEI added to that £100pm would turn that pension into £7071 in todays terms.

Thanks dunstonh. So if my aggregate monthly contribution is £334 from both myself and my employer, if I apply a fixed 3% indexation (to keep things simple, and plus its about right for the level of inflation currently) to that annually it will be an extra £10 AVC in Jan 2011 to a total of £345, 2012 £355 and 2013 £366.....

seams reasonable I suppose... not withstanding any pay rises I get along the way which will also help.

With regards to my level of contribution, how does my total £334 stack up?? - As I said thats only 3% matched, but I can go up to 5% matched, and while i clearly see the benefit of the extra cash - do I *really* need it or is 3% enough??

Can I/Do I do anything about indexation on my "stagnant" funds? -the £35k thats left from other employer scheemes?

village_life

CLAPTON wrote: »

in general pay rises are usually higher than inflation (either CPI or RPI) ... which is why over all people are richer now than they were 20 years ago.

now at the moment pay is much constrained but one would expect the old pattern to re-emerge once the recession period is over.
once this happens, as your contributions are based on a percentage of your salary then they will automaically rise.

Its pretty difficult to estimate the eventual value of the fund, but in REAL terms I would suggest you work it out at about 1 or maybe 2% per annum

I guess this is my issue, I work in the IT industry and so the "annual pay rise" thing doesnt exist. Thankfully I've progressed quite well in the past 9 years or so, and whilst I've rarely had "annual pay rises" I've had the odd promotion giving a good rise, and made two company moves with associated big increases....

however what I am not doing annually is reviewing my contribution, it stays at about 3% of my salary at the time...... to provide the indexation growth myself would mean i am taking home less (As I am subsidising my lack of pay rise), but if its something REALLY worth doing?????

bendix

village_life wrote: »

Not sure how/why you say it's granular? From what ice interpreted on here indexation is a core issue so clearly it's important to understand what metric(s) should be used to account for the amount of growth to apply

I'll wait for someone with some real idea of the answer.......

There is no 'real idea of the answer' - it's up to you and i would have thought it stands to reason that the best figure to increase your contributions by is the bigger figure.

RPI, CPI - at the end of the day, does it matter? The important thing is to at least match inflation so to be safe I would be looking at whatever the bigger of those two is, and then doubling it.

bendix

village_life wrote: »

With regards to my level of contribution, how does my total £334 stack up?? - As I said thats only 3% matched, but I can go up to 5% matched, and while i clearly see the benefit of the extra cash - do I *really* need it or is 3% enough??

?

Your own contribution of £168 at only 3% seems very low to me. Back of the envelope calculations suggest you are earning £5600 a month, so I would be going for significantly higher contributions if you can afford it - the more money you put in early, the more powerful compounding returns will work in your favour.

Plus, if they are matching to 5%, you'd be daft not getting that extra free money.

CLAPTON

lets do a simple 'order of magnitude' calculation

base everything in real terms i.e. excluding inflation

now if 168 (pm) is 3% of your salary then presumably you earn 67,200 per annum

if your employer adds 3% then over 38 years then you will have saved
67,000 x 6% x 38 = 153,000

now lets say you buy an annunity inflation linked at about 4% per annum that would give you an annual income of 6,180 per annum
for a person used to earning 67k pa I would have thought 6k wasn't very much although you will have the state pension of say 5k and maybe the second state pension of a similar amount


frankly you are paying far to little to say get anywhere near half your salary as a retirment income ... think nearer total contribtution of 20% of your income.

CLAPTON

........ Bendix

you have posted several items that I would normally have pressed your 'Thanks ' button; however for whatever reason it is missing on your posts although it exists for other poster... I've no idea why