Question

In: Finance

John is 53 years old and he has never been a member of a pension scheme....

John is 53 years old and he has never been a member of a pension scheme. He gets a new job in a supermarket and he is automatically enrolled into a workplace pension. His gross earnings are £17,500. The pension scheme works on a defined-contribution basis; he pays in 5% of his earnings, which rises to 9% with tax relief and contributions from his employer.

At retirement, John also expects to get a state pension worth £8700 (before tax) in today’s money.

1.1 Using the Pension calculator, work out how much disposable income John will have in the first year of retirement if he retires at age 67 and uses the whole of his pension fund to buy an annuity (which in the calculator is an index-linked annuity).

Solutions

Expert Solution

I have attached the Screenshot of the solution for your quick reference

Answer is $51,839.82 = disposable income John will have in the first year of retirement

John Age 53 Years
Retirement Age 67 Years
Time until retirement 14 Years NPER 14
Gross Earnings $17,500.00
Defined Contribution Pension 5% of earnings = $875 PMT $875.00
Return 9% RATE 9%
Present Value of State Pension (Before Tax) $8,700 PV $8,700
Retirement Corpus (Disposable income to buy an annuity) Future Value at Retirement
Future Value at Retirement FV
We will calculate FV using TVM calculator of Excel (FV Function) $51,839.82

Please Note: The Future value function is used to calculate the value at retirement

All the inputs required are shown in the above calculation

You can also use TVM function of a financial calculator for solving this, all the inputs are given in the above solution

I hope you find this useful


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