Merryn's Blog

Public sector pensions: you should be so lucky

We are often told that the average publiic sector worker's pension isn't very high. But it's an awful lot higher than many private sector workers could ever hope for.

There's a letter in the Sunday Times's Money section that sums up a good many of our problems when it comes to both public sector debt and financial inequality. It is from a public sector worker and it is about his pension. He recognises in it that he is one of the "lucky ones". But let's look at just how lucky he is.

He is "51, married, in good health, with no mortgage and no dependants". That's pretty good for starters. But he also appears to be on the edge of retirement (in his early 50s!). That means he has a choice with his final salary pension: he can either take a lump sum now and an annual pension, or just go for a higher annual pension payment.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

If he takes the former course, he gets £182,521 upfront (tax-free, let's not forget) and then £25,981 a year (inflation-linked forever). If he takes thelatter, he gets £34,642 a year (also inflation-linked forever). He wonders which he should go for.

The paper (represented by the lovely William Kay) suggests the latter on the basis that investing and making returns on the lump sum (should it not be needed immediately) is easier said than done. But when I read the letter, it wasn't the dilemma that interested me but thesize of the actual sums involved.

Advertisement
Advertisement - Article continues below

How much do you reckon it would cost to buy, in your 50s, an inflation-linked annuity of nearly £35,000 every year?

You won't find an instant answer to this on the internet. Most annuity calculators don't deal with pension pots of over £1m, or do any calculations involving retiring before 55. Here's the Legal & General calculator. It tells us that if you have £999,000, you are 55, and you want an inflation-linked pension payment, you will currently get a mere £21,000 off them.

Skim around the other calculators (Find.co.uk, perhaps) and you will find that, in general, every £100,000 of pension pot used from age 55 generates around £2,200 of inflation-linked income. So this lucky man's pension isworth over £1.5m. How many private sector workers will ever see that kind of money?

Annuity rates are knocking around historical lows at the moment (they will one day rise again), but even so, I'm pretty sure that most Moneyweek readers, despite being generally affluent just won't.

PS We are also often told that we shouldn't make such a fuss about public sector pensions, because the average pension payment is only around £8,000. Fine. But how big a lump sum would I need as a private sector worker to get £8,000 (inflation-linked forever from 55) at the moment? Around £365,000. Some MoneyWeek readers might get to that. But not that many. It's an awful lot of money.

Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/516758/beyond-the-brexit-talk-the-british-economy-isnt-doing-too-badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Visit/513684/companies-cut-back-on-their-pensions-bills
Personal finance

Companies cut back on their pensions bills

Britvic is the latest firm hoping a cheaper inflation index will cut pension costs. David Prosser reports.
28 Aug 2019
Visit/509683/good-news-for-savers
Pensions

Good news for pensions savers from HMRC

HMRC has withdrawn its appeal over breaches of the pensions lifetime allowance.
28 Jun 2019

Most Popular

Visit/economy/inflation/600799/federal-reserve-inflation-money-printing
Inflation

Here’s why the Federal Reserve might print more money before 2020 is out

The Federal Reserve wants to allow US inflation to run “hot” for a while. But that’s just an excuse to keep interest rates low – and possibly print mo…
10 Feb 2020
Visit/investments/investment-strategy/600804/the-secret-to-avoiding-being-panicked-out-of-your-portfolio
Investment strategy

The secret to avoiding being panicked out of your portfolio

With the coronavirus continuing to occupy headlines, investors still aren’t sure how to react. But the one thing you mustn’t do is panic. Tim Price ex…
11 Feb 2020
Visit/economy/600796/money-minute-monday-10-february-lacklustre-growth-in-the-uk-and-europe
Economy

Money Minute Monday 10 February: lacklustre growth in the UK and Europe

Today's Money Minute looks ahead to the week's GDP growth estimates for the UK and the eurozone, plus inflation figures for the USA.
10 Feb 2020
Visit/517625/tr-european-growth-trust-why-investors-shouldnt-overlook-europe
Sponsored

Why investors shouldn’t overlook Europe

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, tackles investor questions around Europe’s economic outlook and the conseq…
6 Nov 2019