FS Pension Indexed Linked

pacemaker1000

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

Tom99

You don't say how much pa the pension options are for?
How old are you and when will the pension start?

bigadaj

pacemaker1000 wrote: »

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

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

2% isn’t a BoE expectation, it’s a target set by the government to guide the Bank in it’s use of the limited powers it has been given. Both external events and government policies can have major inflationary effects which are outside the BoE’s 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 OP’s 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 one’s 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.

pacemaker1000

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

pacemaker1000 wrote: »

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

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.

sandsy

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

kidmugsy wrote: »

....
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.

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

kidmugsy wrote: »

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.

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

pacemaker1000 wrote: »

Suppose it all boils down to CPI

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?

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