Reference no: EM133161407
Question - Alice has been in a defined-contribution pension scheme since she was 35 and will retire in one year's time at age 66. Her salary is currently £55,000. Throughout her enrolment in the scheme, she has paid in 8% of salary, and this has been topped up by employer contributions and tax relief worth 4% of salary. She will also qualify for a state pension of £9,000 per year.
Required -
1. If Alice uses her whole pension fund to buy an index-linked annuity, how much income will she receive in her first year of retirement?
2. Briefly explain why this annuity income will rise if she delays retirement (and annuity purchase) for another four years, to age 70.
3. If, instead, Alice retires (at age 66) by putting her whole pension fund in a drawdown scheme (with annual income at 33% of her pre-retirement gross income), how much income would she have available to spend in her first year of retirement?
4. Why does the drawdown option become less attractive if Alice expects to stay in good health, and live a long time into retirement?
5. Comment on the certainty or otherwise over the size of Alice's pension, when she reaches retirement age, if her pension scheme had been defined-benefit instead of defined-contribution?
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