Pensions and the RPI

Discussion in 'Finance, Property, Law' started by old_bloke, Sep 22, 2005.

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  1. With regards to the new pension. I'm staying on 75 but 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.

    Any Older_gits out there who could shed some light on this?

    Say your on 400 quid a month , after your 55 how much does it increase?

  2. It goes back to (or should) approximately the same value as when you started to recieve it. Thus @ age 40 if your pension bought you a crate of buckie and a massage then when the RPI increases are added at 55 you should be able to afford that crate of buckie and the massage again!
  3. Currently the pension increases are based on the rate of inflation for the September of each year, this figure being the percentage that it goes up.
    Having left in '92 at age 45 the rate of inflation each year afterwards was apprcx 2.5 to 3 percent a year so a very rough figure to use ten years later was 10 x 2.5 giving a rise of 25% in the pension.
    If you are near reaching 55 then try to retrieve the annual rates of inflation for the years you are interested in from the web page of the Office for National Statistics, if you have the rate for September each year you can get a very accurate figure.
  4. Having spoken to an ex WO in my Office who has just turned 55 and left the Army on full pension at 40. It would appear that based on his experience the pension approximately doubles. Hope this helps.
  5. Is this correct? Should this not be compounded?

    ie (assuming 2.5% inflation)

    year 1 - pension + 2.5%
    year 2 - (pension + 2.5%) * 1.025
    year 3 - ((pension + 2.5%) * 1.0250) * 1.025

    Otherwise you do not get true inflation proofing. Appreciate if someone in the know could confirm.
  6. oldbaldy

    oldbaldy LE Moderator Good Egg (charities)
    1. Battlefield Tours

    Yes you are correct it is compounded. Would be worth 2.5% of sod all if it wasn't :D

  7. Please note my statement in bold.

    The difference between multiplying 2.5% by ten and compounding it for a figure of £1000 over ten years is £30.05.

    As I said, a rough figure.

    As I also said in my post, if you want a very accurate figure go to the Office of National Statistics and retrieve the September inflation rates for the years you are concerned with. Then you can compound the increases to find the ultimate answer.
  8. 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:

    For the purposes of this exercise, I will assume that you retired on your 40th birthday in July 1990 and your pension is £10,000. In effect, your pension has been stuck at £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 £10,000 * 192.2/126.8 which equals £15,157.73 which is a 51% increase. I note that someone else wrote that a WO’s pension had doubled – 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 £400/mth and assuming the same period and RPI figures, that will be £4,800 * 192.2/126.8 which equals £7275.71 or £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.