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FT,can I ask,how does the GILTS market view teh public sector pensions laibility.When you mention public sector net detb,it's not included is it?It strikes me as strange that such a large off balance sheet liability is rarely mentioned when it could be worht up to a trillion.

It's impossible to say exactly, but my view hasn't wavered over the past few years – the fact that gilt yields don't reflect the contingent liability from public sector pensions tells us that professional investors don't believe they will ever be paid.

It's not seen as a real liability for the UK public finances.

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June's UK Public Sector Net Borrowing came in at £13.0bn, somewhat better than forecast, and both April and May's numbers were revised down. However the gilts market just gave a weary shrug.

Cumulative borrowing for the first three months of the current fiscal year is £41.2bn. The full-year budget forecast for 2009/10 is £175bn.

Public sector net debt rose to £798.8bn at end-June (56.6% of GDP). Excluding financial sector interventions, net debt is £657.5bn (46.6% of GDP).

psnb0609.gif

that chart stops at 200

gonna need a new chart next year

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It's impossible to say exactly, but my view hasn't wavered over the past few years – the fact that gilt yields don't reflect the contingent liability from public sector pensions tells us that professional investors don't believe they will ever be paid.

It's not seen as a real liability for the UK public finances.

makes me feel all warm and fuzzy inside although I have to ask why not?

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makes me feel all warm and fuzzy inside although I have to ask why not?

Because the state can't afford to pay them (in full). So it won't.

Also at some point it will be spelled out to the general public how much these pensions are costing on an individual basis rather than some nebulous aggregate figure. Most people have very little conception of how much it costs to fund an index-linked pension of say £25,000 p.a. for someone retiring at 60.

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Did you quote a figure of 500K for that a (fair) few posts back?

I think that was for £30K, but certainly it would be somewhere approaching £400K. Add in something such as widow's benefit protection and the figure would be even higher.

The retirement age makes a dramatic difference too. I haven't got the exact figs in front of me, but the latest retiree in the fund I run only had 50% of his pension index-linked, with a two-thirds widow's benefit. He retired at 55 with an initial pension of £25,000 p.a. plus his lump sum. IIRC the effective present day value in the actuarial report was c. £650K.

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Because the state can't afford to pay them (in full). So it won't.

Also at some point it will be spelled out to the general public how much these pensions are costing on an individual basis rather than some nebulous aggregate figure. Most people have very little conception of how much it costs to fund an index-linked pension of say £25,000 p.a. for someone retiring at 60.

I guess people will start to save more for themselves then.

That will have consequences.

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Because the state can't afford to pay them (in full). So it won't.

Also at some point it will be spelled out to the general public how much these pensions are costing on an individual basis rather than some nebulous aggregate figure. Most people have very little conception of how much it costs to fund an index-linked pension of say £25,000 p.a. for someone retiring at 60.

I was going to ask what happens to the economy and the value of sterling when this happens because it would be like the government finally admitting that the country is broke. Having thought about it though, I suspect that Cameron will have a major public sector cull and should he explain the costs of pensions to the public then he will have nothing but support to reduce them.

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Did you quote a figure of 500K for that a (fair) few posts back?

Actually, just having a quick look at some annuity rates, the best RPI-linked pension annuity to get you £25,000 p.a for a male aged 60 would cost £660,000. So even I'm guilty of underestimating the true cost in the present era of ultra-low interest rates.

For a female aged 60 it would cost £710,000.

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Actually, just having a quick look at some annuity rates, the best RPI-linked pension annuity to get you £25,000 p.a for a male aged 60 would cost £660,000. So even I'm guilty of underestimating the true cost in the present era of ultra-low interest rates.

For a female aged 60 it would cost £710,000.

Do the actuarial tables tell you what percentage of a median salary you have to save over 40 years to amass £700K? I'm sure that they don't, since you'd have to make quite a few assumptions to do a calculation like that. I suppose what I mean is, what percentage of the average salary would have to be saved to give you an average pension?

Peter.

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Outwith a pension scheme, £1,000,000 invested directly in Index-linked Gilts would get you an index-linked income of about £25,000 p.a. and also allow you to leave the (index-linked) capital to your heirs, subject to Inheritance Tax.

Build it up within a stocks-and-shares ISA for tax-free income.

(and pray that the UK State does not default on its debt or fiddle the RPI too much)

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Actually, just having a quick look at some annuity rates, the best RPI-linked pension annuity to get you £25,000 p.a for a male aged 60 would cost £660,000. So even I'm guilty of underestimating the true cost in the present era of ultra-low interest rates.

For a female aged 60 it would cost £710,000.

My dad has a pension of 23K taken at 55, which rises by "3% or RPI, whichever is lower". I don't think he has any idea of how fortunate he is.

He worked for a bank for over 20 years ;-) and was not at board level, but was on nodding terms with board-level folk. He wasn't highly paid, and def didn't get bonuses. He did have a cheap mortgage fixed at 5% though.

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Do the actuarial tables tell you what percentage of a median salary you have to save over 40 years to amass £700K? I'm sure that they don't, since you'd have to make quite a few assumptions to do a calculation like that. I suppose what I mean is, what percentage of the average salary would have to be saved to give you an average pension?

It primarily depends what assumption you make about real returns. Looking at the Pru's pension calculator they use a projected gross return of 7% with 2.5% inflation, i.e. 4.5% real. On that basis you would need to save £5,232 p.a. from age 20 to give you a pension of £25,000 p.a. at age 60 (40 years).

4.5% real return is not particularly realistic these days as I think many pension companies would privately admit. Just punching the numbers into Excel (which gives me the same results as the Pru) you need to save £7,440 p.a. if the real return is 3%. With 2% real return you need to save £9,280 p.a. That's for 40 years remember, right from the age of 20 (the figs would be different with higher rate tax relief of course).

A female who wants to start saving at 25 and retire at 55 on a pension of £25,000 p.a. would need to save £9,564 p.a. - and that's using the Pru's calculator with its rosy 4.5% real return.

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It primarily depends what assumption you make about real returns.

Cheers. So for a very rough figure (and assuming something like an average wage for the whole of your working life), it's something like 20 - 40% of your gross salary that you'd need to be putting away? :blink:

Peter.

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It primarily depends what assumption you make about real returns. Looking at the Pru's pension calculator they use a projected gross return of 7% with 2.5% inflation, i.e. 4.5% real. On that basis you would need to save £5,232 p.a. from age 20 to give you a pension of £25,000 p.a. at age 60 (40 years).

4.5% real return is not particularly realistic these days as I think many pension companies would privately admit. Just punching the numbers into Excel (which gives me the same results as the Pru) you need to save £7,440 p.a. if the real return is 3%. With 2% real return you need to save £9,280 p.a. That's for 40 years remember, right from the age of 20 (the figs would be different with higher rate tax relief of course).

A female who wants to start saving at 25 and retire at 55 on a pension of £25,000 p.a. would need to save £9,564 p.a. - and that's using the Pru's calculator with its rosy 4.5% real return.

That is scary. However, £25k pa is quite a big pension, imo. I suppose it depends what you expect when you get there. If I had a house bought and paid for, I'd be happy if there was enough for food,clothing and bit more to get out a little. For such modest needs, £12k pa (adjusted) would be plenty, surely?

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My dad has a pension of 23K taken at 55, which rises by "3% or RPI, whichever is lower". I don't think he has any idea of how fortunate he is.

He worked for a bank for over 20 years ;-) and was not at board level, but was on nodding terms with board-level folk. He wasn't highly paid, and def didn't get bonuses. He did have a cheap mortgage fixed at 5% though.

Yes, it's ironic really – if most people in your dad's situation were actually given a cheque so they could go out and buy their pension, they'd think they'd won the lottery when they saw the sum involved.

Strangely, this enormous cost on an individual basis in the public sector is something that the MSM don't seem to have targeted yet. It would be highly emotive if it was presented in such a form.

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Cheers. So for a very rough figure (and assuming something like an average wage for the whole of your working life), it's something like 20 - 40% of your gross salary that you'd need to be putting away? :blink:

Peter.

I do about 17% now, and plan to up it to nigh on 100% when the kids leave home.

I believe Shell contribute 23%, as that ensures some reasonable proportion of salary pension thingy at the end of your career.

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Yes, it's ironic really – if most people in your dad's situation were actually given a cheque so they could go out and buy their pension, they'd think they'd won the lottery when they saw the sum involved.

Strangely, this enormous cost on an individual basis in the public sector is something that the MSM don't seem to have targeted yet. It would be highly emotive if it was presented in such a form.

i know a teacher who's planning to retire in mid-50's on a full salary pension, current salary is well over 40k per annum.

How's that for a decent retirement, and there are those on similar packages who got out of day-to-day teaching years ago but are still employed on teacher contracts.

to be fair they have had years putting up with oiks in the classroom, and they've paid a fair wedge of their salary but i agree about if the msm were to focus on individual renumeration it would cause some resentment partly becuase of what people are experiencing right now.

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Yes, it's ironic really – if most people in your dad's situation were actually given a cheque so they could go out and buy their pension, they'd think they'd won the lottery when they saw the sum involved.

Strangely, this enormous cost on an individual basis in the public sector is something that the MSM don't seem to have targeted yet. It would be highly emotive if it was presented in such a form.

it would have to be done by someone that understands the figures and could lead a journalist through them, you ever thought of calling the daily mail? they would love this.

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That is scary. However, £25k pa is quite a big pension, imo. I suppose it depends what you expect when you get there. If I had a house bought and paid for, I'd be happy if there was enough for food,clothing and bit more to get out a little. For such modest needs, £12k pa (adjusted) would be plenty, surely?

Not really if you are renting or have mortgage outstanding.

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That is scary. However, £25k pa is quite a big pension, imo. I suppose it depends what you expect when you get there. If I had a house bought and paid for, I'd be happy if there was enough for food,clothing and bit more to get out a little. For such modest needs, £12k pa (adjusted) would be plenty, surely?

It's certainly the case that many people find that they don't have anything like the outgoings they used to once they retire (unless they have an expensive hobby). Also it's the index-linking which makes the pension so expensive. For the same cost you can have a non-indexed-linked pension of £44,000 p.a. (male, aged 60).

However, the discussion point arose with regards to public sector pensions. I don't know how common or rare a £25,000 p.a. pension is within the public sector. The impression I get is that such a pension wouldn't be unusual for (say) a retired police officer. Maybe someone who has the numbers could enlighten us, and also how much the employee will have contributed to the pension.

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it would have to be done by someone that understands the figures and could lead a journalist through them, you ever thought of calling the daily mail? they would love this.

They know it already. And occasionally comment on it in a kind of tangential way but I suspect they are keeping their powder dry until there is someone in power with the cajones to confront the public sector unions - and that will never in a million years be a party that is funded for the most part by.........................the public sector unions.

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Not really if you are renting or have mortgage outstanding.

Yes, true, but I'm assuming most people pay off their mortgage before they retire if they are a home owner (surely!?). With inflation, most people I know who are near retirement have tiny mortgages (not BTL types, of course).

For those without their own, paid up, home, they will certainly need a bigger pension or be prepared to live somewhere cheaper, to have a comfortable life.

It's certainly the case that many people find that they don't have anything like the outgoings they used to once they retire (unless they have an expensive hobby). Also it's the index-linking which makes the pension so expensive. For the same cost you can have a non-indexed-linked pension of £44,000 p.a. (male, aged 60).

However, the discussion point arose with regards to public sector pensions. I don't know how common or rare a £25,000 p.a. pension is within the public sector. The impression I get is that such a pension wouldn't be unusual for (say) a retired police officer. Maybe someone who has the numbers could enlighten us, and also how much the employee will have contributed to the pension.

Yes, very true. I suppose I was just reflecting from someone not in the public sector. I was trying to reassure myself that I wouldn't need that much to save for.

It is a staggeringly large figure for the government (well, tax payers) to cover though... :unsure:

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