Public sector pensions: you should be so lucky

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.

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 the latter, 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 the size of the actual sums involved.

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 (, 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 is worth 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.