The Lemon Fool

Posted: **August 26th, 2020, 5:19 pm**

‘The use of wealth in retirement’ (link below) is a fascinating document produced by the Economic and Social Research Council which reviews how individuals use their wealth once in retirement.

I was particularly interested to read how people manage their resources through retirement, and the observation that the average rate of wealth drawdown is much slower than the decline in remaining life expectancy.

The use of housing wealth and bequests at the end of life are also discussed.

It’s 2 years old but as its subject is observed human behaviour - rather than the current markets – it hasn’t dated.

https://www.ifs.org.uk/uploads/publicat ... /BN237.pdf

I came across the document via a link from the blog Simple Living in Somerset, which I would also highly recommend for those with a reflective nature. (https://simplelivingsomerset.wordpress.com/)

Posted: **August 26th, 2020, 5:35 pm**

I have glanced through it but rather lost interest when it started by saying it ignored pension wealth! I mean, honestly, that devalues the whole thing.

The wealth represented by a person's pension entitlement is often huge and if included would substantially change the picture. It also changes the decisions people are able to make. If you know you are secure with a 50k public sector index linked pension, you can be far more relaxed about what you do with your private assets.

I recall some years ago Denis Skinner (aka the beast of Bolsover) complaining about some fat cat's large pension fund. Even he was silenced when another MP pointed out that the market value of Denis's MP pension rights was much higher than the fat cat's he was complaining about.

For this report to have much use it should included the capitalised market value of everyones' pension rights (state, DB, DC etc)

Posted: **August 26th, 2020, 5:54 pm**

scrumpyjack wrote:I have glanced through it but rather lost interest when it started by saying it ignored pension wealth! I mean, honestly, that devalues the whole thing.

For this report to have much use it should included the capitalised market value of everyones' pension rights (state, DB, DC etc)

Agreed. It would make more sense to leave out your primary home in my view.

But how do you capitalise the market value of a pension?

For instance my state pension statement says I will get £175 a week. Call that £9,100 a year. How do you capitalise that and do you allow for the promised future increases?

Another pension I have is promising me £21,230 a year.

The third one actually gives me the capital sum but not the payout rate, so that is easier. It is £331,000.

Posted: **August 26th, 2020, 7:01 pm**

Lootman wrote:
scrumpyjack wrote:I have glanced through it but rather lost interest when it started by saying it ignored pension wealth! I mean, honestly, that devalues the whole thing.

For this report to have much use it should included the capitalised market value of everyones' pension rights (state, DB, DC etc)

Agreed. It would make more sense to leave out your primary home in my view.

But how do you capitalise the market value of a pension?

For instance my state pension statement says I will get £175 a week. Call that £9,100 a year. How do you capitalise that and do you allow for the promised future increases?

Another pension I have is promising me £21,230 a year.

The third one actually gives me the capital sum but not the payout rate, so that is easier. It is £331,000.

Just because an accurate estimate may be difficult is not a reason to omit it. The state pension could easily have an approximate value estimated based on the cost of purchasing an indexed linked pension of that amount for someone of that age with average life expectancy. Same goes for a DB pension.

It may only give a ballpark figure but that is a lot better than pretending it has no value.

Posted: **August 29th, 2020, 2:27 pm**

scrumpyjack wrote:I have glanced through it but rather lost interest when it started by saying it ignored pension wealth! I mean, honestly, that devalues the whole thing.

The wealth represented by a person's pension entitlement is often huge and if included would substantially change the picture. It also changes the decisions people are able to make. If you know you are secure with a 50k public sector index linked pension, you can be far more relaxed about what you do with your private assets.

For this report to have much use it should included the capitalised market value of everyones' pension rights (state, DB, DC etc)

I think that a factor that might be worthy of consideration is the level of benefit entitlement if one has no personal wealth and how that might be valued, then perhaps we might get better decisions made by governments and by individuals. I have a vague recollection that to receive any reward beyond state benefits would require a pot in excess of six figures -- and that was several years ago

Posted: **August 30th, 2020, 12:22 am**

But how do you capitalise the market value of a pension?

You don't need to. If you've £9K of state pension, £21K of occupational pension, inflation linked and live a £30K spend lifestyle there's no need to capitalise that value, its good enough as-is. Whatever liquid asset wealth you hold above-and-beyond that can be invested however one likes, makes no difference.

I'm not due the £9K/year state pension for another 7 years or so, but will have a occupational pension being paid soon, so to cover those years 9K x 7 years (63K) drawdown fills that hole. The rest can be invested however I like.

Main risks as I see it are of ill health. A relatively young neighbour for instance due to the onset of dementia is now in a £2K/week (£8K/month) care home. Similar to uni student accumulating £60K of debts at inflation + 3% interest rates the state is moving progressively towards 'self funding' over former 'collective insurance', with all the lottery factors that induces. Figure a 30+ year lifetime cost of £2K/week potential lottery care costs and for many/most that is simply a risk that cannot be mitigated. Such factors is IMO a reason why we'll see perhaps 3 consecutive Labour governments to come, as a means to reinstate collective insurance de-risking. But in so doing they'll be other costs involved, such as private home ownership and private savings/investments. As I see it the Tories would do well to limit/cap both student debt and care costs. Instead however they seem intent on going in the opposite direction and making things even worse (decline of NHS etc.). Cutting their own throats in the process.

Posted: **August 30th, 2020, 1:26 pm**

1nvest wrote:Similar to uni student accumulating £60K of debts at inflation + 3% interest rates

For most students and graduates the interest rate and size of debt are irrelevant, they'll pay 9% additional tax over the earning threshold, for 30 years. The biggest issue I have with this system (apart from people who benefitted from a free system imposing it) is that it fails to deliver a key intended result, which was to introduce a market where more prestigious universities charged more than others and where the better value (as perceived by the customers) universities expanded and lower value institutions contracted. Instead they all charge the maximum course fees, there's no incentive for students to seek out cheaper courses because that wouldn't reduce what they pay.

Posted: **August 30th, 2020, 3:21 pm**

Chronic health conditions are the biggest uncertainty for retirement spending. If society accepts the collective risk, collective treatment free at point of delivery for other parts of the NHS, then retirement and nursing homes should be provided by the state, as its all on the same spectrum. But people would need to accept that their savings became part of the government pool when they entered the system, and it seems that inheriting wealth, especially houses, from your parents without taxation is very important to the voting public, so the circle can't be squared. Otherwise providing central care would require large tax rises, which would settle heaviest on those working, as the nominal NHS funding system, NI, does not apply to pensioners.

Insurance policies to cover care for the elderly are unpopular because they smack of the American system, and are likely to be a minefield of different rates due to existing conditions, with lots of money wasted running the system.

Extending NI to cover pensions and unearned income might cover the costs, but the grey vote won't accept that.

But fundamentally dementia==coma.

Posted: **August 30th, 2020, 3:25 pm**

JohnB wrote:the nominal NHS funding system, NI, does not apply to pensioners.

Why do you believe that it is the national insurance system that funds the NHS?

Isn't it just funded from general taxation? In fact I'm not even sure that NI contributions are segregated in any meaningful way from other tax revenues.

Posted: **August 30th, 2020, 3:33 pm**

Hence my use of the work 'nominal'. There is a fund that NI goes into, but its not ringfenced to pay for pensions and the NHS. It has long been proposed to merge NI and income tax as one 30% tax applicable to all, starting at the same threshold, but unravelling 50 years of NI muddle is just too hard, look at the endless discussions here about old/new state pensions. No-one can grasp that political nettle.

Posted: **August 30th, 2020, 4:10 pm**

I'm not even sure that NI contributions are segregated in any meaningful way from other tax revenues

Isn't it where money is created via lending, destroyed by taxation, but where NI money/revenues aren't destroyed and as such are 'different'.

Posted: **August 31st, 2020, 1:20 pm**

scrumpyjack wrote:I have glanced through it but rather lost interest when it started by saying it ignored pension wealth! I mean, honestly, that devalues the whole thing.

The wealth represented by a person's pension entitlement is often huge and if included would substantially change the picture.

Indeed.

The state pension entitlement alone represents a level of personal wealth that puts you round about the borderline of the global top 1%.

According to Oxfam's figures - which inexplicably exclude redistributive state actions such as pensions and other benefits.

Posted: **August 31st, 2020, 2:20 pm**

Well not 'inexplicably'. It is part of the leftwing mindset that always wants to criticise 'inequality', exaggerating it wherever and however possible.

(That's my grumpy explanation anyway!)

Posted: **August 31st, 2020, 4:01 pm**

UncleEbenezer wrote:
scrumpyjack wrote:I have glanced through it but rather lost interest when it started by saying it ignored pension wealth! I mean, honestly, that devalues the whole thing.

The wealth represented by a person's pension entitlement is often huge and if included would substantially change the picture.

Indeed. The state pension entitlement alone represents a level of personal wealth that puts you round about the borderline of the global top 1%.

According to Oxfam's figures - which inexplicably exclude redistributive state actions such as pensions and other benefits.

One way to value a pension entitlement is to reverse engineer the computation you might do to determine the income from a lump sum using the 4% safe withdrawal rate rule. On that basis your state pension is worth 25 times your current annual pension payout estimate.

In my case that is £175 a week, or £9,100 a year. That values my pension at £9,100 times 25, or £227,500. A tidy sum but I'm not sure that would make me a one-percenter if there was nothing else.

I'm not sure I'd trust Oxfam on this topic. It always seems to be banging the drum of inequality rather than helping to alleviate famine. And whilst there are pockets of poverty and hunger in the UK, I don't think anyone believes we suffer from famine. Historically Oxfam looked overseas for its good-doing. I am with Jack here in that, if you focus on alleged inequality then you end up opposing a class of people and seeing them as the problem, AKA "the rich". So Oxfam has become political, straying from its core focus on charitable work.

Posted: **August 31st, 2020, 4:44 pm**

Many of these '1%' calculations handle education and secured debt badly. So a junior doctor aged 28 with a lot of student debt and a hefty mortgage is viewed as having net wealth well below zero, though their earning potential is much greater than some aged 60 in Africa who has $100 in savings.

Comparing wealth across countries can be very misleading, given how much of that country's wealth will be redistributed during a person's lifetime.

Within a country inequality is more relevant, though earning potential and future taxation/benefits makes comparisons across different ages unhelpful. Inheritance is one of the biggest distorters of the figures, as very few track possible windfalls like inheritances.

Posted: **August 31st, 2020, 5:09 pm**

Lootman wrote:
UncleEbenezer wrote:
scrumpyjack wrote:I have glanced through it but rather lost interest when it started by saying it ignored pension wealth! I mean, honestly, that devalues the whole thing.

The wealth represented by a person's pension entitlement is often huge and if included would substantially change the picture.

Indeed. The state pension entitlement alone represents a level of personal wealth that puts you round about the borderline of the global top 1%.

According to Oxfam's figures - which inexplicably exclude redistributive state actions such as pensions and other benefits.

One way to value a pension entitlement is to reverse engineer the computation you might do to determine the income from a lump sum using the 4% safe withdrawal rate rule. On that basis your state pension is worth 25 times your current annual pension payout estimate.

In my case that is £175 a week, or £9,100 a year. That values my pension at £9,100 times 25, or £227,500. A tidy sum but I'm not sure that would make me a one-percenter if there was nothing else.

I'm not sure I'd trust Oxfam on this topic. It always seems to be banging the drum of inequality rather than helping to alleviate famine. And whilst there are pockets of poverty and hunger in the UK, I don't think anyone believes we suffer from famine. Historically Oxfam looked overseas for its good-doing. I am with Jack here in that, if you focus on alleged inequality then you end up opposing a class of people and seeing them as the problem, AKA "the rich". So Oxfam has become political, straying from its core focus on charitable work.

Per Scottish Widows the cost of buying an indexed linked pension of £9,100 for a 67 year old woman is £330,000

Posted: **August 31st, 2020, 5:16 pm**

Lootman wrote:One way to value a pension entitlement is to reverse engineer the computation you might do to determine the income from a lump sum using the 4% safe withdrawal rate rule. On that basis your state pension is worth 25 times your current annual pension payout estimate.

In my case that is £175 a week, or £9,100 a year. That values my pension at £9,100 times 25, or £227,500. A tidy sum but I'm not sure that would make me a one-percenter if there was nothing else.

It allows you to ascribe a value to it, but it is not a value that you can realise, which also applies to an annuity or a defined benefit pension. My pensions have now been paid for 22 years. How do I value them? Indeed, is there any point in valuing them? My life expectancy, according to https://www.ons.gov.uk/peoplepopulation ... 2019-06-07 is 5 years, but could be any number.

Do I work out an NPV on life expectancy? What rate of interest do I use? 0.1%? Or do I take the average life expectancy and use the annual amount multiplied by that, assuming 0% bank interest?

I say again, is there any point in such an exercise?

TJH

Posted: **August 31st, 2020, 5:57 pm**

scrumpyjack wrote:Per Scottish Widows the cost of buying an indexed linked pension of £9,100 for a 67 year old woman is £330,000

Indeed. An index-linked annuity doesn't have the "triple-lock", but is the nearest equivalent with a monetary value.

OK, my back-of-envelope commentary on Oxfam's comments is a few years old, but I think the principle still stands (and the cost of an annuity to rival the pension has risen a lot further even since then).

https://bahumbug.wordpress.com/2015/01/20/dodgy-data/ wrote:Oxfam grabs a headline with a report telling us the richest 1% will own half the world’s wealth in 2016.

As with many reports coming from lobbying organisations, this one provokes scepticism. Not outright dismissal, but a “really“, and a need to know what they’re actually measuring before I can treat it as meaningful. It also provokes mild curiosity: how rich do you have to be to be in that 1% (not least because I have a sneaking suspicion it includes a great many people who our chattering classes don’t consider at all rich).

The Oxfam report itself is a mere twelve pages and disappointingly light on data. If there’s any attempt to substantiate the headline claim then I missed it. But googling “World Wealth” finds this report, which tells me total world wealth is projected to be $64.3 trillion in 2016. OK, that’ll do for a ballpark calculation. $64.3 trillion between 7 billion people is an average of about $9k per head. If the top 1% own half of it, that’s $32.15 trillion between 70 million people: an average of $459k per head within that top 1%.

That’s £300k. There must be a millions in Blighty with that much in housing wealth alone (and others correspondingly locked out). Not to mention in other high-cost countries around Europe, America, Asia, and I expect even a few in the third world. All above the average of that fabled top 1%.

But of course housing isn’t our only asset. In Blighty and around the developed world, a big chunk of our wealth takes the form of Entitlements. One such in the UK is the Basic State Pension, which is worth £200k, and even the poorest Brit is entitled to it. It seems you can be in that top 1% without being rich enough to buy a house in Blighty!

Hmmm. Oh dear. Maybe Oxfam’s spin isn’t really very meaningful at all. Except perhaps to highlight how incredibly egalitarian we are within Blighty – and probably all developed countries – once you include the effect of government actions.

Posted: **August 31st, 2020, 6:10 pm**

Lootman wrote:I'm not sure I'd trust Oxfam on this topic. It always seems to be banging the drum of inequality rather than helping to alleviate famine.

Oxfam's work on inequality and poverty in the UK is laughable. Almost as bad as Piketty's boring book which they often cite.

Like Piketty, Oxfam places no value on welfare and social security benefits. These aren't just cash payments; there's subsided rents, free healthcare, etc. Doing so is ignorant. Or deliberate, so that they can make themselves appear more relevant.

Their "1% owns 50%, or 90%, etc." type of arguments are invariably flawed. Given that they consistently make such massive errors, why should we assume that the rest of their work is accurate?

Piketty makes other big mistakes, such as ignoring depreciation, but that's off-topic for this thread.

Posted: **August 31st, 2020, 6:54 pm**

Oh well, at least the Oxfam staff busy writing this tripe won't be f******* children in Haiti!

https://www.independent.co.uk/news/uk/h ... 53566.html

The Lemon Fool

The use of wealth in retirement

The use of wealth in retirement

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