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UK pension changes in 2015: some mathematical considerations

Published online by Cambridge University Press:  14 June 2016

John Stubbs  and
Jacob Adetunji
John Stubbs
Affiliation:
Department of Geography, University of Derby, Kedleston Road, DerbyDE22 1GB e-mail: [email protected]
Jacob Adetunji
Affiliation:
Department of Natural Sciences, University of Derby, Kedleston Road, DerbyDE22 1GB e-mail: [email protected]
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Extract

Since April 2015 there has been no legal requirement in the UK to purchase an annuity with pension savings [1] while for those who reach state pension age on or after 6th April 2016 the UK Government changed the state pension deferral arrangements [2]. The latter refers to an arrangement whereby a pensioner can receive an enhanced state pension by deferring its uptake for an arbitrary number of years. These two changes raise certain questions for prospective pensioners which are worthy of some mathematical consideration.

An annuity is a guaranteed income for life in exchange for a certain sum of money: the pension pot. An alternative to the annuity since April 2015 is a ‘draw down scheme’ in which the pension pot can be used almost like an ordinary bank account and money periodically withdrawn. These two choices arise from ‘defined contribution’ pension arrangements. By contrast ‘defined benefit’ work-based (company) pensions allow no such choice and are not considered further here apart from the special case of the UK state pension. With an annuity a further option to consider, and one which predates the 2015 changes, is whether to take payments that are fixed or index-linked to inflation. Only the UK state pension offers a late retirement enhanced pension if its uptake is deferred.

Type
Research Article
Information
The Mathematical Gazette , Volume 100 , Issue 548 , July 2016 , pp. 193 - 202
Copyright
Copyright © Mathematical Association 2016 

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References

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