old_bloke said:
...would like to know (in real terms that I can understand) how much the pension increases when you get to 55 and the past inflation rates cut in.
old_bloke,
This is the way in which I would calculate the uplift in your pension at 55 years of age. First of all, you need the data on the Retail Price Index (RPI). The best series of this data I have found is here:
http://www.watsonwyatt.com/europe/pubs/statistics/render2.asp?ID=2
For the purposes of this exercise, I will assume that you retired on your 40th birthday in July 1990 and your pension is Â£10,000. In effect, your pension has been stuck at Â£10,000 for the last 15 years but will increase on your 55th birthday in Jul 2005.
The RPI for Jul 2005 was 192.2.
The RPI for Jul 1990 was 126.8.
The calculation of the increase in your pension is therefore Â£10,000 * 192.2/126.8 which equals Â£15,157.73 which is a 51% increase. I note that someone else wrote that a WOâs pension had doubled â it may have done in previous decades, but not recently! We are in a comparatively low inflation environment and I note that the RPI for this calendar year is likely to come in at about 3%.
Taking your figure of Â£400/mth and assuming the same period and RPI figures, that will be Â£4,800 * 192.2/126.8 which equals Â£7275.71 or Â£606.31/mth.
I note that Gordon will take 22% of that sum! I also note that if you could buy 1000 pints of beer in 1990 for that sum, then you will, again, be able to buy 1000 pints of beer in 2005, assuming that the price of beer is stable in inflationary terms.
But that is the historical calculation and you also wanted to look forward. There are various ways of doing that with varying degrees of accuracy but I was asleep during the lessons on compound interest, so for most people (and me), I suggest that the easiest way is to use a spreadsheet:
A1=your annual pension paid in yr 1
A2=A1*1.03 (this is the theoretical value of your pension in yr 2 assuming that it was index-linked)
A3=A2*1.03 and so on until A15 (that is copy the contents of A2 from A3 to A15)
A15 now contains the estimated value of your future pension assuming inflation of 3% pa.
Enjoy!
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