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Post by nashmills on Aug 12, 2015 14:23:19 GMT
I would like to seek advice from the wise men and women who frequent this forum.
I am 66 and about to retire and would like to boost my income. I have looked into the Government's pension top-up scheme and have found that it would cost me £21,775 to buy an inflation-linked £25 per week for the rest of my life. I have no spouse who would continue to benefit after my death.
Do you think it would be better to put a similar amount in RateSetter's 5 year market with repayments reinvested in the same market? Assuming long term rates averaged say 5.5% and I live to reach 90, would I be able to draw a greater income this way? I am also assuming that the fund would be exhausted by my 90th year.
If anyone is able to advise it would be much appreciated.
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mv
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Post by mv on Aug 12, 2015 15:44:00 GMT
I'm not quite clever enough to work out have many £x increasing with projected inflation could be extracted per week such that 22k compounding at 5.5% will be exhausted in 24 years.
Is the £25 per week extra pension subject to income tax btw?
Clearly the main advantages of keeping the money, investing it and gradually running it down are 1. You still have a lump sum to fall back on in emergencies, 2. If you drop down dead at 67 (hopefully not!) the money remains in your estate.
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Post by nashmills on Aug 12, 2015 15:56:23 GMT
I'm not quite clever enough to work out have many £x increasing with projected inflation could be extracted per week such that 22k compounding at 5.5% will be exhausted in 24 years. Is the £25 per week extra pension subject to income tax btw? Clearly the main advantages of keeping the money, investing it and gradually running it down are 1. You still have a lump sum to fall back on in emergencies, 2. If you drop down dead at 67 (hopefully not!) the money remains in your estate. My mind was completely boggled by the maths! Yes, the £25 is taxable. The emergency fund and the value to my estate should I die earlier are useful tips. Thank you.
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arbster
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Post by arbster on Aug 12, 2015 16:07:08 GMT
I haven't done any proper maths on this, but if you invested at 6% and reinvested the capital in the same market at the same rate, you'd get about the same £25 per week as the government is offering you, but it wouldn't be index-linked. Of course, if Ratesetter's markets ever return to any semblance of normality, you would expect the prevailing rate also to be broadly index-linked.
Frankly, the way things are at the moment, and the apparent desire of Ratesetter to manipulate the rate rather than for it to be set by the market, I wouldn't want to entrust any part of the retirement income to it.
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pikestaff
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Post by pikestaff on Aug 12, 2015 17:24:26 GMT
nashmills If you assume the RS rate is constant at 5.5% pa and inflation is 2% pa (the B of E target rate) and you take out an index-linked £25 per week, monthly in arrears, I reckon you will run out of cash a month after your 91st birthday (see attached, E&OE). This assumes no dead time on RS, which is optimistic. With dead time you will run out sooner. Also it ignores tax. Which choice is better after tax will depend on your tax position, including future governments' policy on the taxation of savings income. If you expect to pay tax on the pension but not on the interest income then RS will look a lot better. However, that does not necessarily mean that you should go for RS, for a number of reasons including: 1. As p2p investments go, RS is relatively safe but it is not guaranteed and we have not seen how it will perform when the credit cycle turns bad. 2. RS is a new business. Will it still be here in 25 years? 3. Both inflation and RS interest rates are variable. If inflation goes up faster than RS rates you will lose out by choosing RS. The differential could go the other way, but which worries you more? 4. My personal view is that RS rates will drop sharply when p2p ISAs are available. Only you can decide, but if this is your only nest egg I would think twice. Thank you for the question! It's made me think about whether I should be paying to top up my state pension... Attachments:RS for nashmills.xlsx (37.99 KB)
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ikorodu
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Post by ikorodu on Aug 12, 2015 18:04:21 GMT
Thanks for The very useful spread sheet!
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Post by contangoandcash on Aug 12, 2015 18:54:17 GMT
The older you are the safer you need your investments to be in general. Pikestaff's point number 2 is very relevant, will RS be around in 25 years time? Hopefully, but it's riskier than something government backed.. Regardless of sums (looks like some folks are doing a great job there), I wouldn't put many eggs in RS with your objective, a small amount perhaps.. but with that length of time horizon it becomes more and more a straight bet on platform risk I'd imagine. All or potentially.. nothing. That's my 2p anyway..
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Post by nashmills on Aug 12, 2015 19:56:33 GMT
Wow! Thank you Pikestaff, that's a lot of extremely useful information.
Reading what you have to say I'm now inclined to go with the safer option - my kids will get the house at least! Hopefully I live long enough to beat your spreadsheet!
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Post by rarrar on Aug 12, 2015 20:04:37 GMT
Thanks for the heads up on this top up scheme , wasnt aware of it and will have to think about it for my wife.
The issues as I see it are:
Will the £20k ( or whatever amount you may use) reduce your cash reserves seriously ?
You may well pay tax on the extra pension but will not pay tax on the first £1000 of savings income - but this may change in the future .
You dont, at present, have a spouse so lose out on this benefit which is factored into the scheme.
How important to you is maximising the amount passed onto your estate .
One of the papers calculates that you have to live past 82 to benefit or past 87 if you will be paying tax on it.
Personally I would consider it as part of my portfolio if I have plenty of spare cash and a younger spouse both in good health.
I dont think you can compare Pension Top up against P2P lending.
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ramblin rose
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“Some people grumble that roses have thorns; I am grateful that thorns have roses.” — Alphonse Karr
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Post by ramblin rose on Sept 6, 2015 13:49:27 GMT
Another thing that might be considered is one's ability or inclination to be managing p2p accounts online in later old age. Some will be both keen and able whereas, it must be faced, many will not. If there is somebody you could trust and who would be willing to take that on for you at a later stage if necessary, then it could work out very well. Something we might perhaps all consider.
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webwiz
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Post by webwiz on Sept 6, 2015 14:04:53 GMT
One option not mentioned is to defer your state pension and live off your savings in the meantime. This is the route recommended in today's Sunday Telegraph. You might find it online.
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Post by yorkman on Sept 9, 2015 7:54:50 GMT
One option not mentioned is to defer your state pension and live off your savings in the meantime. This is the route recommended in today's Sunday Telegraph. You might find it online. Fine until the government decides to change the rules in the future and bring deferred pensions in line with standard pensions. They will give the process a fancy name to hide behind and confuse and make it sound 'fairer', but they have made so many changes to pension entitlement just lately i wouldn't trust them not to continue their tinkering.
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