When will my wife die? and ......
Discussion
...... what will inflation be? 
.
My wife receives a company pension which annually increases by RPI.
She has been offered a deal which will give her a 36% increase now
in exchange for giving up all future rises.
Because of the many unknown future variables, I reckon it's impossible to know the right decision.
I'm tempted to ask them if they will give her an 18% increase (half of what they are offering) now and an annual uplift of half of RPI, so hedging her bets - but I doubt they'll do that.
Or take the uplift and drip feed the monthly increase only into some tax free fund,
but we know little about that kind of thing, and the sums involved from the uplift probably don't warrant a financial advisor.
At the extremes if she lives a relatively short time and/or inflation remains low she'd be better off taking the uplift.
If she lives a relatively long time and/or inflation takes off, she'd be better off staying with the annual uplift.
We also have no way of knowing what our financial position or needs will be in say 20 years time. Oh yes, what we do know is ..... look at my username
.
.My wife receives a company pension which annually increases by RPI.
She has been offered a deal which will give her a 36% increase now
in exchange for giving up all future rises.
Because of the many unknown future variables, I reckon it's impossible to know the right decision.
I'm tempted to ask them if they will give her an 18% increase (half of what they are offering) now and an annual uplift of half of RPI, so hedging her bets - but I doubt they'll do that.
Or take the uplift and drip feed the monthly increase only into some tax free fund,
but we know little about that kind of thing, and the sums involved from the uplift probably don't warrant a financial advisor.
At the extremes if she lives a relatively short time and/or inflation remains low she'd be better off taking the uplift.
If she lives a relatively long time and/or inflation takes off, she'd be better off staying with the annual uplift.
We also have no way of knowing what our financial position or needs will be in say 20 years time. Oh yes, what we do know is ..... look at my username
.So many variables.
How far into retirement is she? i.e. how old now?
Does the pension die with her?
Does she have *any* health issues or family medical history which suggest she won't live to the average age for women?
(You don't need to answer these, just think about them)
It's only about 16 years at 2% compound and 10 years at 3%. So if she's only just 60 and her mother and grandmother both lived to 90+, she should probably say no.
How far into retirement is she? i.e. how old now?
Does the pension die with her?
Does she have *any* health issues or family medical history which suggest she won't live to the average age for women?
(You don't need to answer these, just think about them)
It's only about 16 years at 2% compound and 10 years at 3%. So if she's only just 60 and her mother and grandmother both lived to 90+, she should probably say no.
V8mate said:
It's only about 16 years at 2% compound and 10 years at 3%.
Is that to a crossover point where her uplifted monthly pension would equal the initial one off increased amount,or is that a break even point after which time she would be in profit with the total amount received over the years.
As you alluded to, a further unknown is that her pension doesn't die with her .......... When will I die - if it's after her?
Elderly said:
V8mate said:
It's only about 16 years at 2% compound and 10 years at 3%.
Is that to a crossover point where her uplifted monthly pension would equal the initial one off increased amount,or is that a break even point after which time she would be in profit with the total amount received over the years.
As you alluded to, a further unknown is that her pension doesn't die with her .......... When will I die - if it's after her?
As for you inheriting her pension, again it's all about your age now (compared to her), your current health, your family history, and the general likelihood that men live shorter lives.
V8mate said:
Elderly said:
V8mate said:
It's only about 16 years at 2% compound and 10 years at 3%.
Is that to a crossover point where her uplifted monthly pension would equal the initial one off increased amount,or is that a break even point after which time she would be in profit with the total amount received over the years.
As you alluded to, a further unknown is that her pension doesn't die with her .......... When will I die - if it's after her?
As for you inheriting her pension, again it's all about your age now (compared to her), your current health, your family history, and the general likelihood that men live shorter lives.
It's necessary to look at the overall pension received from now to death. I would guess at 3% inflation she would need to live for a further 20 years from now to break even. So if she lives less she gains if she lives more she looses.
Of course, income requirements in 20 years may not be so great as now and the foreseeable future.
Actually, yes, sorry, ignore my projections. They fail to include an estimate for the RPI growth of the base pension if she says no.
So, asking yourself some of the questions remains pertinent, but the sums need re-doing. Lots of online inflation calculators out there through which you can run the opposing scenarios though. I'll leave Excel closed now in case I cause any more trouble
So, asking yourself some of the questions remains pertinent, but the sums need re-doing. Lots of online inflation calculators out there through which you can run the opposing scenarios though. I'll leave Excel closed now in case I cause any more trouble
The 36% uplift will likely be 2/3ds of the difference in value between the non-increasing pension and the increasing pension. The scheme shares the "saving" and keeps the remaining 1/3rd of the value difference.
The Actuary carrying out the calculations would have made assumptions as to how long members are expected to live, what RPI/CPI will be in the future and what interest rates/investment returns will be. These would be on an aggregate level rather than an individual level.
Certainly, the break-even point matters: the time when the accumulated payments of the (higher) level pension reach the accumulated payments for the increasing pension but as you say, when will this be? You'll be making your own set of assumptions, relative to the Actuary's. As you're only receiving a share of the saving made by the scheme, unless you are significantly different from the 'average' e.g. lower life expectancy, or market conditions change compared to expected (of course they will) then you probably won't be able to realistically make a choice based on these factors.
The size of pension matters too: a 36% uplift on a £50k pension means quite a lot nominally but on £2k, depending on circumstances, not so much.
They've probably suggested you speak with an IFA to get some proper advice :-)
The Actuary carrying out the calculations would have made assumptions as to how long members are expected to live, what RPI/CPI will be in the future and what interest rates/investment returns will be. These would be on an aggregate level rather than an individual level.
Certainly, the break-even point matters: the time when the accumulated payments of the (higher) level pension reach the accumulated payments for the increasing pension but as you say, when will this be? You'll be making your own set of assumptions, relative to the Actuary's. As you're only receiving a share of the saving made by the scheme, unless you are significantly different from the 'average' e.g. lower life expectancy, or market conditions change compared to expected (of course they will) then you probably won't be able to realistically make a choice based on these factors.
The size of pension matters too: a 36% uplift on a £50k pension means quite a lot nominally but on £2k, depending on circumstances, not so much.
They've probably suggested you speak with an IFA to get some proper advice :-)
Elderly said:
...... what will inflation be? .
My wife receives a company pension which annually increases by RPI.
She has been offered a deal which will give her a 36% increase now
in exchange for giving up all future rises.
Because of the many unknown future variables, I reckon it's impossible to know the right decision.
I'm tempted to ask them if they will give her an 18% increase (half of what they are offering) now and an annual uplift of half of RPI, so hedging her bets - but I doubt they'll do that.
Or take the uplift and drip feed the monthly increase only into some tax free fund,
but we know little about that kind of thing, and the sums involved from the uplift probably don't warrant a financial advisor.
At the extremes if she lives a relatively short time and/or inflation remains low she'd be better off taking the uplift.
If she lives a relatively long time and/or inflation takes off, she'd be better off staying with the annual uplift.
We also have no way of knowing what our financial position or needs will be in say 20 years time. Oh yes, what we do know is ..... look at my username.
One way of choosing between your two options is to calculate the value of them to you. This is a complex calculation, but there is an easy way to approximate this..My wife receives a company pension which annually increases by RPI.
She has been offered a deal which will give her a 36% increase now
in exchange for giving up all future rises.
Because of the many unknown future variables, I reckon it's impossible to know the right decision.
I'm tempted to ask them if they will give her an 18% increase (half of what they are offering) now and an annual uplift of half of RPI, so hedging her bets - but I doubt they'll do that.
Or take the uplift and drip feed the monthly increase only into some tax free fund,
but we know little about that kind of thing, and the sums involved from the uplift probably don't warrant a financial advisor.
At the extremes if she lives a relatively short time and/or inflation remains low she'd be better off taking the uplift.
If she lives a relatively long time and/or inflation takes off, she'd be better off staying with the annual uplift.
We also have no way of knowing what our financial position or needs will be in say 20 years time. Oh yes, what we do know is ..... look at my username
.Simpley get two annuity quotes, one for a level annuity, the other increasing with inflation, both specific to you and your wife circumstances like your ages, any guarantee period, any benefit that you might receive if your wife dies before you etc. Then you can easily calculate the value of your options.
These annuity quotes will assume that you're both healthier than average, so bear that in mind.
Jockman said:
I would take the uplift now.. It is a certainty, the future is not.
My dad was offered a similar deal about 4 years ago. In the end there were two factors that made him decide to stick with his current arrangement despite the "bird in the hand" argument:(1) At the time inflation was quite high (about 4% from memory). What you think inflation is or may be is a crucial element of the calculation (the actuary will have made some assumptions). I tend to think inflation will be "back" before long - having an index linked pension is a huge benefit. If inflation ends up back at 5% the cross over period will be quite short; and
(2) tax. My dad was on the cusp of paying higher rate tax. His increase was pretty much the same as your wife's, about 35%. However about 30% of this would have ended up taxed at 40% and hence it wasnt such a big benefit.
A lot of it depends i think of whether you need the money, or whether it could make a significant difference to your lifestyle. For my parents that wasnt the case - they live fine on their pensions now and dont really want for anything and so having the security of a hedge against inflation was more important. However, i also think you spending probably goes down as you get to be properly old. They are active now despite being 75 & 80 - going on lots of holidays, cruises etc but i doubt they will be when they are 90...
Is there a requirement (or an offer) for you to receive independent financial advice before deciding? If so I would take it.
Just remember that the "uplift" offered will be calculated by the pension scheme erring on the side of caution. So probably, on average, people who take the uplift will lose out.
Personally I would consider it high risk to take the view that inflation is dead, but the 36% initial uplift does provide a cushion.
IMO the only reasons inflation has remained so low are,
For what it's worth, long term inflation averages are still around these levels. And don't be fooled by CPI - it lags significantly behind the real inflation rate.
And most important of all - remember that governments LIKE inflation! Why? Because it makes their debts smaller, just like your mortgage.
Personally I would consider it high risk to take the view that inflation is dead, but the 36% initial uplift does provide a cushion.
IMO the only reasons inflation has remained so low are,
- influx of immigrant workers holding down wages - but now everyone wants a cap on immigration,
- temporarily low oil/energy prices,
- temporarily low interest rates.
For what it's worth, long term inflation averages are still around these levels. And don't be fooled by CPI - it lags significantly behind the real inflation rate.
And most important of all - remember that governments LIKE inflation! Why? Because it makes their debts smaller, just like your mortgage.
My wife has just had almost the same decision to make, she reaches 55 in March and an old, long forgotten about small pension will be available to her if she wishes to take it then, or she can wait until she is 60 when the pension and lump sum will be about 30% higher.
We considered two things, the first was do we need the extra cash now, the answer was no. The second was what age does she expect to live too. The answer was, we don't know. However, we have had several friends of our age (mid 50's) die unexpectedly in the last few years. In fact we are going to the funeral of a 54 year old friend on Friday who only 6 months ago, having led a very active, healthy life found out she had cancer.
So we are taking the cash now and will make sure we enjoy it while we can.
I should add that we are both retired anyway and the extra money won't make any significant difference to us except allowing us to take an extra decent holiday or two a year perhaps.
We considered two things, the first was do we need the extra cash now, the answer was no. The second was what age does she expect to live too. The answer was, we don't know. However, we have had several friends of our age (mid 50's) die unexpectedly in the last few years. In fact we are going to the funeral of a 54 year old friend on Friday who only 6 months ago, having led a very active, healthy life found out she had cancer.
So we are taking the cash now and will make sure we enjoy it while we can.
I should add that we are both retired anyway and the extra money won't make any significant difference to us except allowing us to take an extra decent holiday or two a year perhaps.
Ozzie Osmond said:
Just remember that the "uplift" offered will be calculated by the pension scheme erring on the side of caution. So probably, on average, people who take the uplift will lose out.
Given the possibility of some inflation spikes in the future and with inflation effectively floored at 0%, the potential distribution of inflation outcomes is significantly skewed and hence inflation protection (price of index-linked bonds / swaps) reflects that.It's therefore possible that the company can benefit from removing the inflation-linked benefit and still provide an uplift that is attractive for the member (because the cost of protection is more than the expected value of inflation).
Accepting a 30% reduction for 5 years early is IMO very poor value. Let's do the sums.
- Let's say it would be £1,000 at 60
- Less 30%, so that's £700 at age 55
- So it costs £300 a year for ever after age 60, to pocket £700 for 5 years (i.e. £3,500).
- It gives you a breakeven point of about age 70 (i.e. £700 for 15 years = £10,500 and £1,000 for 10 years = £10,000)
Defcon5 said:
Another consideration may be that if you take the cash now, you are young and well enough to spend it, (holidays etc) but in the future you may not be
This is a good point which people often miss - it's not just about equivalence of value. Is a large pension of value to you when you're 95 years old watching a lot of daytime TV (free licence too) or would you prefer to have more money when you're 65 that you are sufficiently fit and healthy still to be able to have fun with?Plus factor in that it might be something like 60%-80% of the value on the basis the scheme actuary has used (which would typically include a very low interest rate) but the equivalent value might be different on a basis you think is more appropriate to you. For example, if you had large credit card debts then you could use the higher income now to pay off that debt - a value to you that wouldn't be factored into the actuary's calculations.
Ozzie Osmond said:
Accepting a 30% reduction for 5 years early is IMO very poor value. Let's do the sums.
Your sums aren't very good.... A 30% increase is the equivalent to a 23% reduction. Might want to consider the time value of money as well.- Let's say it would be £1,000 at 60
- Less 30%, so that's £700 at age 55
- So it costs £300 a year for ever after age 60, to pocket £700 for 5 years (i.e. £3,500).
- It gives you a breakeven point of about age 70 (i.e. £700 for 15 years = £10,500 and £1,000 for 10 years = £10,000)
Although the deal is probably better value for the scheme than the member.
Thanks for the correction. I hadn't checked back for the figures and remembered the 36% headline mentioned in OP which was in fact on a different point. At 23% the ERF is less aggressive than 30% although still leans in favour of the scheme.
The oddity is to "save for a pension" and then "blow the lot" immediately upon retirement. At least, unless you're a severely overweight heavy smoker living in Glasgow! (For whom the statistics are, shall we say, less favourable.)
The oddity is to "save for a pension" and then "blow the lot" immediately upon retirement. At least, unless you're a severely overweight heavy smoker living in Glasgow! (For whom the statistics are, shall we say, less favourable.)
As others have said realistically you / we all could go on holidays and do certain things up to a certain age, after which mobility etc get in the way so you really want to enjoy those key years.
You might also want to put in a new bathroom kitchen carpets/redecorate the house which will then "see you out" what good is there in getting s new kitchen at 85yo when you've been struggling/making do with a clapped out kitchen for years & now a big meal is beans on toast(you get my point).
Who knows what the future holds
What other pensions/income do you have
What lifestyle do you want as a pensioner compared to lifestyle while in work/what income can provide what you need? If this boost is way above that then take it now the rest doesn't matter
Will income tax hammer the extra?
Will your choice make whoever survives the other partner able to carry on living a lifestyle you are both acquainted to or is it Jan today at the expense of that?
You might also want to put in a new bathroom kitchen carpets/redecorate the house which will then "see you out" what good is there in getting s new kitchen at 85yo when you've been struggling/making do with a clapped out kitchen for years & now a big meal is beans on toast(you get my point).
Who knows what the future holds
What other pensions/income do you have
What lifestyle do you want as a pensioner compared to lifestyle while in work/what income can provide what you need? If this boost is way above that then take it now the rest doesn't matter
Will income tax hammer the extra?
Will your choice make whoever survives the other partner able to carry on living a lifestyle you are both acquainted to or is it Jan today at the expense of that?
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