You may leave the list at any time by sending the commandGreat success. Thanks. Kevin Lu and Ruth Fairclough sent me the formula used in pricing annuities:
Let's say you get 100 at the end of each year at which you’re are still alive, then the amount you need to buy this annuity is
Payment quoted by an insurance company = 100*[p1*(1+i)^(-1) + p2*(1+i)^(-2) + p3*(1+i)^(-3) + .... ]
where pj = probability of surviving to the end of jth year from the age you take out the annuity, and i = interest rate.
The equation assumes no expense, no inflation, flat rate interest rate, no other policyholder options or guarantees, etc. you can also factor in the tax assumption into the above equation, and solve for j to get the number of years you are looking for.
Some p(survival) values are available at
but are not needed for an individual because pk=1 up to the year you stop taking the pension. Hence the sequence(1+i)^(-1) + (1+i)^(-2) + (1+i)^(-3) + .... gives the effective value for each length of retirement, where i is the rate of return *you* can get on the lump sum relative to the indexing provided by the company. At current interest rates, this might be negative if just stuck in a bank. The income tax on the pension however is a major factor.
The second consideration for many people is, however, that not all years of life are equal. It may make more sense to use the lump sum faster so that the early years of retirement are packed with excitement at the expense of lower income in one’s 80s and 90s. UK government policy would further encourage this, as care for the frail and elderly is paid for unless you have savings. People who have saved “for a rainy day” therefore have their savings confiscated, whereas people who blew it all while they were healthy get state support. I’m not sure what my political and moral position should be on this, just give it as statement of facts. ;-)
Trevor Lambert raised the wider issues of how to use a lump sum.
https://www.moneyadviceservice.org.uk/en/articles/should-you-take-a-pension-tax-free-cash-lump-sum
is common sense but won’t answer the question for your circumstances. One consideration (apart from speculation about life expectancy) is whether you would pay off debts with an enhanced lump sum, and thereby avoid further costs such as interest charges.
You can plan for a long retirement sitting in a care-home, or apply for a pilot’s licence. Or, as the kids in Fame put it, “I’m going to live for ever; I’m going to learn how to fly.”
Allan
From: A UK-based worldwide e-mail broadcast system mailing list [mailto:[log in to unmask]] On Behalf Of Allan Reese (Cefas)
Sent: 16 December 2013 13:50
To: [log in to unmask]
Subject: Crowd sourced advice - actuarial
I’m soon to retire, and have the option to take some money in an index-linked pension (taxable) or as a tax-free lump sum. The conversion rate is £18 cash for every £1 reduction of pension. I don’t have an immediate use for the lump sum and not inclined to invest at high risk, so for simplicity assume I can get a (net) return equivalent to the annual index on the pension.
My question to any actuaries out there is, how many years should I hope to live in order to get better value from the pension than from the lump sum? Logic suggests it should be at least 18; if the extra pension is taxed at 20%, maybe as much as 23 years. Obviously over that time scale there are many unknowns, but there must be a formula underpinning the offer of 18:1.
Reply to me please and I’ll summarize.
Allan
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