In: Finance
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).
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