Level Pension Or Index-Linked?

[Bert45]

I have been quoted a level pension for my wife guaranteed for 5 years of £1532 p.a. If I want it to be index-linked it will begin at £770 p.a. She is 60, with no health problems apart from hypertension. Obviously, the index-linked one will grow at the rate of inflation (I don't know which index at the moment), So in 20 years it might be around £1540, whereas the level one will be £1532 every year but worth less every year. In 20 years it will probably be worth about £770 in today's term. A friend of mine once said, "Tell me the date you are going to die and I will tell you which one to choose." Is there another way to choose?

[ToraToraTora]

take the level pension and save £532 a month, then you'll have a grand a month. Much better than the £770 and you'll be saving the £500. if you do that in 20 years you'd have had £240000, £55200 more than you would have had with the index linked option and £127600(+interest) in the bank. Adjust as you see fit but take the flat option and you will have control of the money

[ToraToraTora]

sorry my figures where based on a per month basis! but you get the idea!

[Davemano]

I thought pension increases were in accordance with the CPI (Consumer Price Index) and how it stood in September. Each year for the past few years it has hovered around 3%.
This is for state pensions and I don't know if it is the same for the private sector.

[fiction-factory]

As the amounts are useful but not life changing I'd probably take the level option in this case as any reduction in buying power due to inflation will disappear in 6-7 years when state pension kicks in to supplement it. Moreover, your spending needs will fall in later years so a gradual drop shouldn't be a problem.
Over a lifetime it depends on life expectancy as you say. The provider has already factored that in so the amounts are probably equivalent base don life expectancy.

[fiction-factory]

My spreadsheet also indicates that if we assume inflation is around 3% pa the fixed option will lead to longer lifetime earings in real terms (at today's values) unless she lives until she's around 98.
So, coupled with earlier reasons, I'd go for level option.

The only caveat relates to tax- if she is a basic rate tax payer now she'd lose 20% in tax on the £1532pa whereas if she took the lower amount now she'd pay less tax now until she stops being a tax payer (maybe when retires)

[Old_Geezer]

I'm not in a position to draw graphs at present, but off the top of my head. If average life expectancy is about 80 years and your wife is 60 then your 20 year forecast is relevant. One only gets her £1540 at the end and was less every year before that, the other will have given £1532 every year.

But as for other ways to chose, yes, you could use a blindfold and a pin. Or toss a coin. But whatever you choose it's a gamble whether you opted for the better option, or just a decent option.

[Old_Geezer]

Isn't income tax allowance £11,500 ?
Is tax going to be a factor ?

[Bert45]

Thanks, everybody. Tax is not a problem as my wife is not a tax-payer.
It seems that the bird-in-the-hand is the better option.

[Bert45]

I have done the sums (which I was avoiding), assuming an inflation rate of 3%. The index-linked figure will always be worth £770 in today's terms, so after 20 years she will have received £15400 in today's terms. The flat rate figure will be worth £833.09 in 20 years time, but the sum of 20 terms with a common ratio of 0.97 is £23,296.90. In 30 years the figures are £23,100 and £30,588.57 respectively. It's a no-brainer.

[Hymie]

Do you have to buy an annuity with the pension, if not you would almost certainly be better with a draw-down arrangement whereby you could access your complete pension pot of money.

Remember that you can take 25% tax free, then you need to pay yourself from the pension pot in a tax efficient way (avoiding becoming a 40% tax-payer).

[fiction-factory]

Yes O_G- I did say " if she is a basic rate tax payer now ". If she has no income then clearly tax won't be an issue but there is no reason to assume she had no other income- plenty of people are still working at 60- I will be.

[TonyV]

Can only talk from personal experience when my company was trying to dispose of its its pension liabilities. Got a really good deal from this company at no cost to myself.

https://www.wearejust.co.uk