EddScott

A payment of £100 per month over 25 years is a total of £30,000


There is a figure of £507,000 at a growth rate of 8.5%

Is there any way of calculating how much the £100 per month should increase every year to provide the figure of £507,000 at 8.5%?

In the form of a % ?

Midlife......

iTrader: (2)

Crikey this takes me back a bit.........I'll have a look later but the word Amortization seems to ring a bell .......

Shaun

dunx

iTrader: (3)

3.2% annual Maybe...

dunx

markjmd

iTrader: (11)

My maths is generally pretty good, but I don't understand what the OP means by this:

Dingdongler

Edd, as mark says the question isn't very clear

Pink_Floyd

So are you asking if £507,000 has been accumulated at a growth rate of 8.5% and your first payment would have been £100 how much each month would the £100 have to increase by to grow to £507,000

i.e. Month 1 £100 Month 2 £1xx ????

decepticon

to achieve £507000 after 25 years with £100 monthly payments the interest rate would need to be approx 19%-good luck at getting that!
failing that you will need to increase the monthly payments to approx £525 at 8.5%
to answer your slightly strangely worded question it would be an approx 525% increase on your £100 monthly payments
trying to sort out your pension by any chance?
cheers

EddScott

Its hard to explain.

The £507,000 has grown over 25 years at an annual growth rate of 8.5%

The £100 a month doesn't have to achieve £507,000 it has to provide the fund enough money to grow to £507,000 over 25 years at 8.5%.

Theres also one caveat that the rate of the monthly payment can't be higher than 8.5%

http://www.actuaries.org.uk/sites/al...ustrations.pdf

Look here - on page 39 and 40. The growth rate is 8.5% and shows the fund being nearly half a million. The premiums on page 40 are assumed to increase by 5.5%.

I think its close to 5.5%.

It's not my pension. I'm dealing with a complaint and want a complicated formula to run past the ombudsman - the pension provider in question claims its actuarial department can't work it out.

markjmd

iTrader: (11)

Edd
No easy way to say this, but that really makes no mathematical sense at all.

Is £100 the amount you start off paying into the fund, and if not, what is it?

billythekid

No idea, but if you can find me a pension that I pay £100 a month into and it turns into 1/2mil then let me know! I will even go 50/50 with you at the end!

daviee

My take on this is, say the £100 a month at 8.5 will get you without bonuses approx £120,000, because the pension trustees have everyones money to invest, the bonuses are higher as they usually invest in the blue chip companys with high growth.

The fund would maybe approx say £250,000 ie double growth. Then when the pension matures, they say pay you £300 a week the remaining money in the fund is still making approx 14% growth on a deminishing £250,000 and a projected life expectency of 85 years, the fund could be worth in total £400,000.

I have been paying in to a pension for 29 years and will be job permitting a other 19 years multiply that by say my company 1000 employees with maybe 20 people retireing a year and new employees starting ie apprentices paying for a pension for 49 years.

The money in these funds are massive thats where the big growth comes from. As the OP says its about having the big funds to invest ie 1000 people for the 20 retireing. Again my take on it could be wrong tho, engineer not a pension advisor.

TonyBurns

iTrader: (3)

Daviee, i think thats why big companies have big pension defecits it becomes unworkable in the end

Having a little play about (though im not in pensions or finance, just a mere engineer ) the 25 years, or £30000 invested would end up with an annual 8.5% increase (no bonuses etc) of £102425 ish, to achieve 500000 quid it would take all your working life, and a bit more for an investment of 56400 quid, its not bad work

I think the thing we all have to remember is that nothing grows at an alarming rate, the 80's proved that, great growth, then it went pair shaped and all those pensions/endownment policies that needed high interest to mature, ended up being a stone weight around peoples necks

Get someone in finance to have a look, a financial advisor would be my recommendation, but even my works pension at 500 quid a month for the next 20+ years wont give me a huge return, and thats a very good pension scheme (but including the states pension, I do have 4 )

Tony

Trout

iTrader: (1)

I still don't get what you are trying to prove!!

I am not surprised the actuaries can't work it out!

fast bloke

Do an excel SS with starting balance of £100.00 in A1.
A2 is A1 * growth /12
B1 is A2 + £100
B2 is B1 * growth /12

Grab A1, A2, B1, B2 and drag it for 300 rows. You need to fix the £100.

That will give you cumulative figures on a month by month basis. If you make growth a variable pulled in from another cell you can vary the growth rate to see what you need to get the 507k after 300 months.

p.s. - If you can turn 30k of contributions into 500k of capital in 25 years, can you let us know exatly what drugs it is that you are dealing?

Dingdongler

But its not clear from the question that he is asking that is it? Not to me anyway. Whats this 8.5% figure he mentions then?

TonyBurns

iTrader: (3)

The document dates from the mid/late 80's when you had 15% interest rates, 8.5 was an average I think, then it went pair shaped and ended up as 2-3%

Tony

EddScott

A high street bank financial adviser gave a letter (Not an illustration - a letter) to a client that states clearly that you pay £100 gross and at 8.5% it will be £507,000. Its complete utter cobblers but was the driving force that made the client buy the pension.

They even came back to him 8 years later and sold him another pension - not topping up his existing one - another one.

They also claim that at no point could their adviser give fund advice so the client was given a brochure and told to choose the funds (this is direct from the final response from their compliance dept)

They ALSO say "our regulator allows us to not look at policies over 6 years old" - WHAT!!! They are authorised and regulated by the Financial Services Authority - the same body that refuses to give advisers a "long stop" on advice.

Anyway Their response is rubbish and I think we have a reasonable case. What I need is what do we want from the ombudsman that will provide satisfaction.

I can't say I want the £507,000 that was stated because that value was dependant on fund performance which I accept was/is terribly poor.

The mistake is that the client wasn't advised that his premiums would need to increase over the years to provide the pension with enough input that it could potentially reach the £507,000.

Its not turning £100 into 507,000. Its how much and what rate would the £100 need to increase to provide the fund with enough money that the "POT" would grow to £507,000 IF it grew at 8.5%.

There was also a rule at the time that the quoted rate of increase in the premiums could not exceed the quoted rate of the fund.

If you started off at day 1 with about £65,000 over 25 years at 8.5% compound would give you the 500K ish. But thats not right.

chris-boris

iTrader: (7)

Sounds like you are talking about a projection based on the customers contributions and salary at the time (many years ago) then revalued up until NRD using a set of factors and assumptions about future pay and career progression / interest rates etc etc etc

I presume it was a DC pension forecast/projection and not a DB as the two are totally different.........

dunx

iTrader: (3)

Excel said that for annually paid interest, it's a 14.4% premium increase per annum !

Some simplification used.

dunx

EddScott

How did you get to 14.4% Dunx?

Think that might be asking to much for the ombudsman to agree to

dunx

iTrader: (3)

Create a row across the spread sheet for the annual payment in, £1200, £1200+14.4%, etc

Then calculate the balance each year, down one column, and you get a final answer...

I tried googling incremented contributions and compound interest, but I'm an engineer not a mathematician... you should allow for the average sum in the accountover each year, but it's a fair approximation...

dunx

Messy cut'n'paste. to follow...

row 1 in pounds:- 1200 1372.8 1570.4832 1796.632781 2055.347901 2351.317999 2689.907791 3077.254513 3520.379163 4027.313762 4607.246944 5270.690504 6029.669936 6897.942407 7891.246114 9027.585554 10327.55787 11814.72621 13516.04678 15462.35752 17688.937 20236.14393 23150.14865 26483.77006 30297.43295

then end of year totals :- using 1.085= 8.5% & 1.144=14.4%
1302
2674.8
4606.132272
6947.000082
9767.547562
13148.96913
17185.18146
21984.74303
27673.05758
34394.90291
42317.33259
51633.00506
62564.00237
75366.21008
90334.33997
107807.6892
128176.7431
151890.7442
179466.3682
211497.6674
248667.4658
291760.4165
341677.9632
399455.4806
466281.9112
505915.8736 <> Ta Da ! Infact, given it's only an approximation, it could be higher still !

fast bloke

Edd - I have seen a few of these and I know where the problem lies. The standard sales procedure in the 80's was to set up a pension where you would increase your contributions in line with inflation every year. If you start in the early 80's (before 83) inflation was running at around 10%. After 83 this dropped to an average of 3%. If you took a pension of £100 a month in 1980, and increased contributions at 10% a year until retirement, you would easily have 500k in the pot now using an inflation projection of 10%. Taking 10% a year over 30 years, starting in 1980,contributions would be

100
110
121
133
146
160
176
193
212
233
256
281
309
340
374
411 - 1995 now- By 2010 contributions would be in the region of 1700 a month. If you take 8% growth and 10% contribution increase since 1980, it isn't that hard to get a
500k pot. However, when you are taking the claim, be careful. If we had suffered 10% inflation since 1980, 500k would get you a pint of milk and a loaf of bread, and maybe a quid or two left for treats. Both growth and inflation have been lower. If you take a case to the FO based on actual loss compared to forecast, the FO will also consider actual loss compared to reality. Depending on the year the pension was taken out, you might get a serious kicking

speedking

I reckon 15.02%. In the 25th year the contributions are £2900 / month!

Use excel, e.g.

Year 1 £100/month = £1200/year. Growth (8.5% = £102)
Year 2 £1302 + £115.02 x 12 = £2682.29 Growth = £227.99
Year 3 £2910.28 + £132.31 x 12 = £4497.95 Growth = £382.33
etc.
Year 25 £432,758.12 + £2876.92 x 12 = £467,281.11 Growth = £39,718.89
= £507,000

HTH

markjmd

iTrader: (11)

Edd
By my calculations, if you assume a consistent fund growth rate of 8.5% pa, you would need to increase the amount of your own capital that you pay in by an extra £4.30 each month. So your first payment would be £100, the next month's would be £104.30, the next after that £108.60, and so on. Your last monthly payment you'd make at the end of 25 years £1384.20.

Working out the additional extra to pay in each month as a percentage doesn't make a lot of sense to me, because people just don't think of money in those terms (unless they're accountants or actuaries, maybe), but if you do it that way you'd need to increase your payments by 1.1825% month on month. The final month's payment then would be £3361.

PM me if you want copies of the spreadsheets I used.

Cheers
Mark

markjmd

iTrader: (11)

Yearly fund balances using percent method:
1289.7 2874.64 4817.81 7183.52 10046.69 13494.5 17628.34 22566.07 28444.57 35422.75 43684.99 53445.1 64950.95 78489.7 94393.98 113048.89 134900.16 160463.5 190335.42 225205.73 265871.87 313255.51 368421.68 432600.77 507213.95

Yearly fund balances using fixed extra monthly amount:
1491.97 3720.74 6757.43 10670.72 15535.12 21431.48 28447.5 36678.37 46227.34 57206.46 69737.28 83951.7 99992.82 118015.92 138189.46 160696.24 185734.57 213519.63 244284.91 278283.72 315790.91 357104.68 402548.61 452473.76 507261.01

EddScott

Can't thank you all enough for the input here!


This is where I'm stuck. I'm quite sure there is a claim in here somewhere but when I spoke to the FO they will need to know what "we" want as recompense. They were very helpful on the phone.

fast bloke

Your recompense should be what your client was led to believe they might get. The problem is that if the forecast used 10% growth and contribution increase as a calculation, there is probably zero chance that your client maintained 10% year on year contribution increase through the term. If the forecast is based on the assumption that this would be maintained and it wasn't because of the clients personal choice, the pension company would probably argue that the clients personal decisions were beyond their control through the duration of the contract. The FO will try to be fair, and are always helpful in giving you a steer towards getting a win against an insurer, but in this case the insurer is holding all the cards

"We forecast 10% inflation. That hasn't happened for the past 25 years, therefore the buying power of the pension pot would have been substantially greater if the client had maintained 10% contribution increase YOY, as they agreed to do in 1981" - You can argue deflation of pound cost averaging against forecast, but if your client didn't increase contributions at the inflatoin rate forecast in the illustrations, there is a fair chance that there is no way the FO can find in your favour. On the bright side, ask for the documentation of the person who sold the pension. If they can't produce signed copies of the forecasts and the inflation figures, your client will be more than likely to be awarded what they were led to believe to pot might be worth. (This is a double ended sword - if your client can prove what they were led to believe, this will probably include the inflation and contribution figures)

Terminator X

iTrader: (7)

Surely you / the client can only recover what's been "lost" which must be the premium paid or the fund total whatever is higher? They'll not be entitled to £500k even if that was the promised outcome ...

TX.

fast bloke

No - If you have been induced to invest at a guaranteed rate of return, you can recover the enire amount of the promised return. I think that is fair. Otherwise we could 'guarantee' everyone an increase of eleventy squillion percent a year with no comeback?

EddScott

He didn't know and was never told that premiums would need to increase to provide the amount given in the letter.

That is the complaint. The complaint isn't fund performance which is why we are not just asking for the 507K we were promised. That would be easy.

I need to come up with a justifiable calculation rather than just some random figure as I think this will strengthen the case.

I'd like to avoid that line of complaint because the client did want a pension. So he wasn't miss-sold and should have been sold a savings plan or whatever was around at the time.

Its all down to the premium not increasing which it should have done.



EDIT - although having said that, it could be a reasonable argument that although the client did want a pension his reasons for choosing this one was down to poor advice. Had he been given full advice and been made aware of the assumptions his decision would have been different.

Asking for his total premiums paid returned to him might work - at least its a justifiable reason. Also, the client needs money now not an amount of money dumped into a rubbish pension.