Is the state pension really that generous?

[ayshfm1]

So I've always had the view that it was a steal, it's worth circa 220K and no one pays that much in NI do they?

Just totted up my NI record and I've paid a little short of 100K in NI over my working life.

So for me it still looks a good deal (as long as it actually happens and numerous think tanks are angling to ensure it doesn't). One of the reasons I've done my utmost to contribute as little as possible to the state is because I fully expect means testing to be implemented an d I'd therefore get nothing.)

But

I've been contracted out
Salary sacrificed/maximised pension contributions as much as possible over the last 5-10 years
Stopped working just before 55, so no more NI from me
Meanwhile that 100K would in my hands have generated a pretty good return over 40 years.

Still I'm likely to come out ahead.

However someone who does none of the above seems more than likely to have paid for their state pension and then some. With no actual guarantee they'll get a penny.

[scotview]

However someone who does none of the above....... period

Will get a guaranteed full OAP, especially if it is means tested.

[JohnB]

Its good value if you pay the minimum required, hence its a good idea to add missing years, but yes many people on higher salaries overpay NI compared with that.

[ursaminortaur]

Its good value if you pay the minimum required, hence its a good idea to add missing years, but yes many people on higher salaries overpay NI compared with that.

And of course it depends on how long you live. A large number of people will pay NI during their working lives but then die before reaching the state pension age and receiving any state pension.

[servodude]

Its good value if you pay the minimum required, hence its a good idea to add missing years, but yes many people on higher salaries overpay NI compared with that.

And of course it depends on how long you live. A large number of people will pay NI during their working lives but then die before reaching the state pension age and receiving any state pension.

Would it really be better to watch our less productive schoolmates who failed to meet the contributions over their "working" life sitting outside the pub in penury during their twilight years?
Who are we going to play at dominos? And what will we win off them?

[Lootman]

Would it really be better to watch our less productive schoolmates who failed to meet the contributions over their "working" life sitting outside the pub in penury during their twilight years?

I am going with a big fat YES.

[servodude]

Would it really be better to watch our less productive schoolmates who failed to meet the contributions over their "working" life sitting outside the pub in penury during their twilight years?

I am going with a big fat YES.

[mark88man]

I'm not sure where OP got 220K from - it looks less than I would expect for a nearly 10K a year triple lock protected income - although the point about many dying before collecting any returns may answer that.

[1nvest]

I'm not sure where OP got 220K from - it looks less than I would expect for a nearly 10K a year triple lock protected income - although the point about many dying before collecting any returns may answer that.

That's a 4.55% SWR valuation rate (risky), I'd expect more like 3.33% for high certainty 30 years for a individual, so 10K/year inflation adjusted = 300K value. But as you say pooling and with many dying before collecting scales that down, such that 220K looks reasonable.

[vand]

So I've always had the view that it was a steal, it's worth circa 220K and no one pays that much in NI do they?

Just totted up my NI record and I've paid a little short of 100K in NI over my working life.

So for me it still looks a good deal (as long as it actually happens and numerous think tanks are angling to ensure it doesn't). One of the reasons I've done my utmost to contribute as little as possible to the state is because I fully expect means testing to be implemented an d I'd therefore get nothing.)

But

I've been contracted out
Salary sacrificed/maximised pension contributions as much as possible over the last 5-10 years
Stopped working just before 55, so no more NI from me
Meanwhile that 100K would in my hands have generated a pretty good return over 40 years.

Still I'm likely to come out ahead.

However someone who does none of the above seems more than likely to have paid for their state pension and then some. With no actual guarantee they'll get a penny.

Npv of a full sp is nowhere near 220k. A government doesn't need to plan a 30yr drawdown or worry about the 4% rule. The know that the average retiree will today will retire at 66, die at 87, and therefore draw an inflation adjusted 10.5k per year for 21yrs.

NPV of 10.5k per year * 21 using a sensible discount rate is around 120-130k.

[tjh290633]

It's worth pointing out that anyone who retired in 1998 with full and maximum record of graduated pension contributions, and never contracted out, will be receiving about £400 per week from April onwards. £20,800 per year.

Had the original SERP regime continued after 1987, that would be considerably higher.

TJH

[EthicsGradient]

So I've always had the view that it was a steal, it's worth circa 220K and no one pays that much in NI do they?

Just totted up my NI record and I've paid a little short of 100K in NI over my working life.

So for me it still looks a good deal (as long as it actually happens and numerous think tanks are angling to ensure it doesn't). One of the reasons I've done my utmost to contribute as little as possible to the state is because I fully expect means testing to be implemented an d I'd therefore get nothing.)

But

I've been contracted out
Salary sacrificed/maximised pension contributions as much as possible over the last 5-10 years
Stopped working just before 55, so no more NI from me
Meanwhile that 100K would in my hands have generated a pretty good return over 40 years.

Still I'm likely to come out ahead.

However someone who does none of the above seems more than likely to have paid for their state pension and then some. With no actual guarantee they'll get a penny.

Npv of a full sp is nowhere near 220k. A government doesn't need to plan a 30yr drawdown or worry about the 4% rule. The know that the average retiree will today will retire at 66, die at 87, and therefore draw an inflation adjusted 10.5k per year for 21yrs.

NPV of 10.5k per year * 21 using a sensible discount rate is around 120-130k.

Surely what you're working out there is the cost to the government of the pension, not the value to us as individual pensioners. The value to us is what we'd have to pay for an annuity with similar terms. This shows that the government is better placed to provide such products than the private sector.

What was your "sensible discount rate", by the way? A back-of-the-envelope calculation makes it look about 5.8% - and the government can't depend on 5.8% GDP growth (above inflation), which is what it has to base its revenue on. A more realistic value might be 1.8%, for which I reckon about 180k would be needed.

[1nvest]

Npv of a full sp is nowhere near 220k. A government doesn't need to plan a 30yr drawdown or worry about the 4% rule. The know that the average retiree will today will retire at 66, die at 87, and therefore draw an inflation adjusted 10.5k per year for 21yrs.

NPV of 10.5k per year * 21 using a sensible discount rate is around 120-130k.

That's around a 6% real sensible discount rate. Maybe a bit too tall. (Napkin) at 3% = 165K; At 2% = 180K. Strikes me that for not much more capital you can target a significantly lower real rate of return (more conservative asset allocation) - along with either a bitter pill or a ... here am I a 88 and penniless and a state burden attitude. Going by present care homes often having those paying £1K/week - those that scrimped/saved, went without - sitting alongside others paying £0 - who lived it large, and seemingly 'sensible' is to live it large whilst you can. Ha ha, look at you, all your going without got you nowhere, I'm in the same care home as you and where you're paying for me to be here.

[mark88man]

Whilst true that the care system is rife with injustices and unintended consequences it's also true that the majority don't end up in care - from a simple google albeit 6 years old and therefore without pandemic impact-

"Approximately 418,000 people live in care homes (Laing and Buisson survey 2016). This is 4% of the total population aged 65 years and over, rising to 15% of those aged 85 or more. 167,000 people are receiving specialist dementia care in care homes – around 40% of the total care home population"

I think the funding of care and the link between care and health is on of the key political challenges of this decade, but probably/definitely off topic for the monetary value of the state pension

[scrumpyjack]

Npv of a full sp is nowhere near 220k. A government doesn't need to plan a 30yr drawdown or worry about the 4% rule. The know that the average retiree will today will retire at 66, die at 87, and therefore draw an inflation adjusted 10.5k per year for 21yrs.

NPV of 10.5k per year * 21 using a sensible discount rate is around 120-130k.

Given that for many years the interest rate has been below the inflation rate, the present value of the average SP liability is at least 220k and probably more. Index linked gilts have a negative real rate of return, meaning that the market expects interest rates to be below the inflation rate, so the present value of a future index linked payment is greater than the nominal value.

[Urbandreamer]

A decade or so ago I read an article arguing that the state pension would be worth £500k because of the inflation guarantee.

So, how much would it cost to provide about 10K in real terms for the next 20 years assuming 10% inflation?

No I'm not going to provide answers.

However, why my figures?
Well in reverse.
10% is current inflation.
Men currently on average live to 89, hence 67-89 is close enough to 20 years for the statement.
What about 10k, well it's close to current state pension. Though given where I started we should be talking the £20k previously mentioned.

IMHO it's a good deal. IF, well there had to be an if, you can trust it will be given.
I believe I'll get it, but were I one of my children, I'd be less sure.

IMHO there would be more certainty if it the deal wasn't quite so good.

[Lootman]

IMHO it's a good deal. IF, well there had to be an if, you can trust it will be given.

It is a good deal in another sense. You have no choice but to pay NICs. And once paid that money is lost, gone and is never coming back.

And unlike income tax, you do actually get an eventual return on/of it and, with luck, you take out more than you pay in.

But it is very specific to an individual and no two people get the same deal. In my case I had 18 years of contributions and, retiring early, I bought another 9 back years. So my ROI is fairly good. But had I worked for 45 years, my ROI would probably suck.

[EthicsGradient]

FWIW, HL lists the "best rate" for a single life RPI annuity from £100,000 as £4,054 for a 65 year old non-smoker, and £4,677 for a smoker. Call it £4,200 as the weighted average. There's details about 65 v. 66, CPI v. RPI and the triple lock involved, of course; but that would mean you'd need about £250k to get £10,500 via that annuity.

[vand]

So I've always had the view that it was a steal, it's worth circa 220K and no one pays that much in NI do they?

Just totted up my NI record and I've paid a little short of 100K in NI over my working life.

So for me it still looks a good deal (as long as it actually happens and numerous think tanks are angling to ensure it doesn't). One of the reasons I've done my utmost to contribute as little as possible to the state is because I fully expect means testing to be implemented an d I'd therefore get nothing.)

But

I've been contracted out
Salary sacrificed/maximised pension contributions as much as possible over the last 5-10 years
Stopped working just before 55, so no more NI from me
Meanwhile that 100K would in my hands have generated a pretty good return over 40 years.

Still I'm likely to come out ahead.

However someone who does none of the above seems more than likely to have paid for their state pension and then some. With no actual guarantee they'll get a penny.

Npv of a full sp is nowhere near 220k. A government doesn't need to plan a 30yr drawdown or worry about the 4% rule. The know that the average retiree will today will retire at 66, die at 87, and therefore draw an inflation adjusted 10.5k per year for 21yrs.

NPV of 10.5k per year * 21 using a sensible discount rate is around 120-130k.

Surely what you're working out there is the cost to the government of the pension, not the value to us as individual pensioners. The value to us is what we'd have to pay for an annuity with similar terms. This shows that the government is better placed to provide such products than the private sector.

What was your "sensible discount rate", by the way? A back-of-the-envelope calculation makes it look about 5.8% - and the government can't depend on 5.8% GDP growth (above inflation), which is what it has to base its revenue on. A more realistic value might be 1.8%, for which I reckon about 180k would be needed.

The value to us is exactly 10.5k/y triple-lock adjusted from SP age till death

Trying to put a current value on it is somewhat backward thinking. Firstly, those years aren't gauranteed to anyone, and some will fall short on that front, and second, unlike a private pension pot it doesn't actually exist in the here and now, it's a unfunded promise that everyone who understands it understands that is impossible to continue to maintain indefinitely. A private pension is truly liquid; you do as you see fit with it. With a state pension you can't.

Yes, factor it into your plans, but like anything to do with public finances one should understand that its just redistribution of current revenues, and not put the cart before the horse.