Pension - Level Paying or Escalation - Best Option?

TurningGreen

Registered User
Messages
49
Hi, I would appreciate any input on the following. I have an option to purchase
one of the following

(1) A level paying pension of €3,452 per annum

If I add escalation of 2.5%

(2) Pension starting at €2,127 per annum with escalation of 2.5% per annum compound thereafter

Anybody any help/suggestion on the best option to take?

Thanks
 
You need to provide more information, such as the age at which you are being offered the benefits below.

For example, the escalation option is much more advantageous for someone taking early retirement at 50 than it is for someone retiring at state pension age - because the annual pension payments would be expected to be rising over a much longer timescale.

A €2,127 pension escalating at 2.5% per annum would surpass a level paying pension of €3,452 after 20 years. The payments would reach €4,352 after 30 years.

It's worth noting that the value of the €2,127 pension is likely to remain the same over the years due to inflation, i.e. you'd be receiving €4,352 after 30 years but could only expect to buy the same amount of goods as you'd buy today with €2,127 (assuming 2.5% inflation).

At the same inflation rate, a level paying pension of €3,452 would probably be worth €1,686 in todays money after 30 years.

Therefore, it's a gamble. If you expect to live longer than 20 years, you should probably choose the escalating option.

 
Thanks Ronaldo. Nice precise answer, just the info I was looking for. I have just turned fifty so please god I do hope to live another 20 plus years.
 
Thanks Ronaldo. Nice precise answer, just the info I was looking for. I have just turned fifty so please god I do hope to live another 20 plus years.

At 50, I would almost certainly be choosing the escalating option. The only exception would be if I had a real need for the additional money during the first decade or so of retirement.

An example of when it might make sense to choose the level paying option would be if you were retiring 5-10 years before the end of your mortgage term and needed the extra funds at the start to help pay your mortgage.

From a purely financial point of view, the escalating option is likely to work out better for the average 50 year old.
 
After 38 years, you will have received €131,176 from the level pension and €132,357 from the indexed one, so you'll be 88 years of age when you are in a better position financially from the indexed option.

You can always go level and save the difference, spending it in future years.

Steven
www.bluewaterfp.ie
 
One final issue to consider is your state of health and family history. Whilst at age 50 you might have an "average" life expectancy of circa 33 years, you need to consider whether you have a better or worse chance of living that long.
If the family history is that of living long, then the odds favour the indexed annuity. However if family history is poor, you may favour the level annuity.
 
It's a personal choice, and a personal view on things.
I would take the same view as S Barrett.

For me, I would not touch the indexation, as it takes 38 years before you even get level with the non indexed payment. Factor in the value of money now, v's in 38 years time and it's a no brainer.
And this is if we assume, you live to 88.

A wiser move would be to take the level payment, but be diciplined(very diciplined), and squirrel away x amount, maybe 20% of the level payment(690 p.a.). This would still leave you with 2,762 or, 30% more than the indexed annuity.
 
TG,

If you haven't done so already, make sure you get the best annuity rate on the 'open market' for your investment. Don't accept the annuity rate from the holding company as being the best. Shop around.
 
Conan's point is very important re considering your likely longevity - if your family are generally long-lived, you should seriously consider escalation. Being realistic, how many people will be disciplined enough to save a portion of the amount each month to subsidise a non-escalating pension in later years.

Another important point to consider is when you would prefer to be short of money - now, age 50, when you can supplement your income working or when you are 80 when your employment opportunities will be limited?

As an aside, do you HAVE to buy an annuity now (or at all)? If you are still working now or intend to again, can you leave your pension in its fund until 60/65 when you will get a larger pension amount?
 
Back
Top