Planit:UK Defined Benefit Pension Plans Exercise Answer Key

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This case study is specific to financial planning in the United Kingdom, so has fixed values rather than indices by country. For a similar case study applicable to other countries, please see Planit:Calculating and Entering Defined Benefit Pension Plans Exercise, Planit:Malaysian Civil Servant Pension Exercise or Planit:Entering Other Revenues Exercise.


Contents

Question One:

Miss Mary Joe is a 40-year old secretary, who will receive a Defined Benefit Pension Plan upon retirement. She has been working there for 10 years, currently earning £25,000 annually, and plans to retire in another 25 years.

Her assumed inflation is 3.0%, and she plans to take out the maximum possible lump sum on retirement to fund some travel goals. There is a straight 1/60th accrual rate and a 12:1 commutation factor. What is the value of Mary Joe’s maximum lump sum and reduced pension benefit?


Answer:

You will have to use the UK Defined Benefit Pension Calculator to calculate the annual benefit and maximum lump sum pension available for Mary Joe.

  1. In the Current Age field enter her age of 40.
  2. Her Current Salary is £25,000
  3. Set the Retirement Age to 65 (her current age of 40 plus 25 years until retirement).
  4. For % Inflation enter the inflation assumption of 3.0%
  5. Even though the Accrual Rate is 1:60, simply enter the 60 within the field.
  6. The Current Years of Service with Employer is ten (10) as Mary Joe told you.
  7. Enter Today’s Date in the form MM/DD/YYYY
  8. You can enter the Commutation Factor as 12.

On rows 17 and 19 of the calculator, the value of the Maximum Lump Sum and Annual Pension After Lump Sum will be displayed.


Question Two:

Sally Barber, currently age 56, expects to receive a pension when she retires at age 61. Sally has been working at her place of business for 29 years and wants to have the full amount of her annual benefit, not reduced by a lump sum. Her inflation assumption is 3%, and the accrual rate is 1/60. Input this data into the Pensions and Other Revenues screen for the client. What did you enter for the following data entry fields?

  • Amount Per Year: £ ____________
  • From Year: _________
  • To Year: __________
  • Percent Taxable: _______%
  • Amount on Death: _______%
  • Model As: ______________________


Answer:

Open the UK Defined Benefit Pension Calculator.

  1. In the Current Age field, enter her age of 56.
  2. Her Current Salary is £35,000
  3. Set the Retirement Age to 61.
  4. For % Inflation enter the inflation assumption of 3.0%
  5. Even though the Accrual Rate is 1:60, simply enter the 60 within the field.
  6. The Current Years of Service with Employer is 29 as Sally told you.
  7. Enter Today’s Date in the form MM/DD/YYYY
  8. You can enter the Commutation Factor as 12.

On row 13 of the calculator, the value of the Annual Pension Without Lump Sum will be displayed. It should be £22,992.

Go directly to the Pensions and Other Revenues screen. Click Add above the existing revenues.

  • Amount Per Year: £22,992
  • From Year: 5 years from the current year (year Sally starts her retirement)
  • To Year: 34 years from the current year (Year Sally is assumed to die at age 90)
  • Percent Taxable: 100%
  • Amount on Death: 0%
  • Model As: Start During Retirement (the start year of the pension will be pushed back if Sally delays retirement, but not the end year).

There will still be some remaining data entry fields that need to be entered before the pension is complete: Owner: Spouse; Index Rate: 0% (inflation has already been accounted for in the pension calculator and the annual benefit does not increase over time); Amount on Disability: 100%; Additional Increase: can be estimated at 2.0% or another well-reasoned value, or calculated based on accrual rate and salary increase.

Click Save.

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