Capitalising The State Pension

Capitalising The State Pension
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2 Responses

  1. Blissex says:

    I don’t understand it all, but maybe some of the calculations assume that the capital is not drawn down, but will remain intact. If that’s the case that is not comparable with the state pension making it look more valuable than it is. Also perhaps assuming that the end of retirement is at the end of the average life expectancy under-estimates the value of the insurance component of the state pension, that lasts however long life is, making it look less valuable than it is.

    Perhaps to maximize the similarity it should be assumed in every case where there is a pension fund that it both grows and is drawn down so that at the age of 86 it is exhausted, plus the cost today of a lifetime annuity from age 86 to cover the risk of living longer than 86.

    Some links:

    • Mike Rawson says:

      Hi Blissex,

      I’m not sure that I understand your comment. I don’t think that any of the methods give the right answer, or even that the average of six of them is the right answer. But I’d rather have the best answer that I can understand and explain, than no answer at all.

      The insurance component could be undervalued, but by using my average life expectancy, it’s just as likely to be over-valued. The terminal value (or otherwise) of the pension is also a bit of a red herring for me, as I’ll be dead at that point, and I have no children to pass on an inheritance to.

      For me this is primarily an asset allocation issue. I want to work out what proportion of my net worth is allocated to insured income (DB pensions). If I underestimate this, I am likely to under-allocate to riskier assets (equities).

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Capitalising The State Pension

by Mike Rawson time to read: 4 min