Adult Disadvantage (Hansard, 20 March 2003)

§ Mr. McCartney

The information requested is in the following tables.

In the answer I gave to the hon. Member on 4 December, Official Report, column 918W, data in the final column was in 2000 earnings terms, but was mis-labelled as being in 2001 earnings terms. The column heading has now been corrected. Also, the table headings have been revised so as to, in each case, correctly describe the contents in the tables.

Table 1, includes the data underlying the graph on page 19 of "Modernising Annuities" published by Inland Revenue and the Department for Work and Pensions in February, 2001. Although a stylised model, it is the data in this table that we believe best characterises the investment strategy of many pension funds.

Table 1: Pension entitlement assuming the fund switches from equities to gilts over the last 10 years of growth—an extra 10 per cent. is invested in gilts in each successive year
Year started contributing	Retire at end of year	Years of contribution	Lump sum built up ( cash terms) (£)	Lump sum in 2000 earnings terms (£)	Annuity rate in last year of contribution (Percentage)	Pension at retirement (nominal terms, weekly) (£)	Pension at retirement (2000 earnings terms, weekly) (£)
1956	1986	31	17,683	38,722	14.1	48	105
1957	1987	31	21,067	42,817	14.0	57	115
1958	1988	31	23,846	44,535	13.7	63	117
1959	1989	31	25,579	43,824	14.0	69	118
1960	1990	31	27,868	43,492	15.2	82	128
1961	1991	31	34,245	49,645	14.6	96	140
1962	1992	31	41,172	56,338	13.2	105	143
1963	1993	31	53,669	71,320	11.7	121	161
1964	1994	31	47,500	60,909	11.6	106	135
1965	1995	31	57,037	70,945	11.3	124	155

912W

Given recent falls in the stock markets, table 3 (funds invested 100 per cent. in equities in all years) shows the largest fall in pension income when comparing the results for 2001 with 2002. However, it is highly unlikely that an individual fund will actually follow this particular investment strategy.

Investors will also be interested in expected pension income throughout their retirement and not just the income in the first year. The information does not give an indication of how this first figure may have increased for successive cohorts of pensioners due to increased life expectancy.

Some of the results for 2001 are marginally different to those presented in my previous answer. This is because the FTSE 30 and gilts indices for 2001 have since been revised.

The assumptions involved in the current model are the same as those in my previous answer, and re-stated as follows: A person contributes to a pension fund for 31 years; Contributions are made at 10 per cent. of gross earnings; Earnings in each year are £20,000 in 2000 earnings terms. The earnings growth index was supplied by the Office for National Statistics: 50 per cent. of each year's contributions are made at the start of each year and 50 per cent. at the end of each year;

The return on equities is in line with the FTSE 30. The same figures were used in the answer I gave to the hon. Member on 27 June 2002, Official Report, column 387, to enable consistency with that answer. The use of the FTSE 30 price index, however, may underestimate the returns on investing in equities, as this index takes account of capital gains/losses but excludes dividend payments.

The return on gilts is in line with the Barclays Capital Total Return Index. The same figures were used in the answer I gave to the hon. Member on 27 June 2002, Official Report, column 387, to enable consistency with that answer.

A 1 per cent. fee is deducted at the end of each year

Upon retirement on 31 December of the given year, an annuity is purchased at the prevailing rate in that year, and as indicated in the tables. The source of this is Annuity Direct.

913W

Table 1: Pension entitlement assuming the fund switches from equities to gilts over the last 10 years of growth—an extra 10 per cent. is invested in gilts in each successive year
Year started contributing	Retire at end of year	Years of contribution	Lump sum built up (cash terms) (£)	Lump sum in 2000 earnings terms (£)	Annuity rate in last year of contribution (Percentage)	Pension at retirement (nominal terms, weekly) (£)	Pension at retirement ( 2000 earnings terms, weekly) ( £)
1966	1996	31	60,722	72,903	11.0	129	155
1967	1997	31	71,045	81,816	10.4	141	163
1968	1998	31	85,603	93,818	9.4	155	169
1969	1999	31	80,173	83,817	8.9	138	144
1970	2000	31	85,445	85,445	9.1	149	149
1971	2001	31	83,563	80,050	8.9	142	136
1972	2002	31	87,400	80,836	7.5	126	117

Table 2: Pension entitlement assuming that 50 per cent. of the fund is invested in gilts in each of the last five years of growth
Year started contributing	Retire at end of year	Years of contribution	Lump sum built up (cash terms) (£)	Lump sum in 2000 earnings terms (£)	Annuity rate in last year of contribution ( Percentage)	Pension at retirement (nominal terms, weekly) (£)	Pension at retirement ( 2000 earnings terms, weekly) (£)
1956	1986	31	19,211	42,068	14.1	52	114
1957	1987	31	20,988	42,656	14.0	56	115
1958	1988	31	21,805	40,723	13.7	57	107
1959	1989	31	26,912	46,107	14.0	72	124
1960	1990	31	28,668	44,740	15.2	84	131
1961	1991	31	35,407	51,329	14.6	99	144
1962	1992	31	40,732	55,736	13.2	104	142
1963	1993	31	46,843	62,248	11.7	106	140
1964	1994	31	49,105	62,967	11.6	109	140
1965	1995	31	53,293	66,287	11.3	116	144
1966	1996	31	56,814	68,211	11.0	120	145
1967	1997	31	61,249	70,535	10.4	122	140
1968	1998	31	71,334	78,179	9.4	129	141
1969	1999	31	79,662	83,284	8.9	137	143
1970	2000	31	75,952	75,952	9.1	133	133
1971	2001	31	71,305	68,308	8.9	122	116
1972	2002	31	62,786	58,071	7.5	91	84

Table 3: Pension entitlement assuming the fund remains in equities in all years
Year started contributing	Retire at end of year	Years of contribution	Lump sum built up ( cash terms) (£)	Lump sum in 2000 earnings terms (£)	Annuity rate in last year of contribution ( Percentage)	Pension at retirement (nominal terms, weekly) (£)	Pension at retirement ( 2000 earnings terms, weekly) (£)
1956	1986	31	20,111	44,039	14.1	54	119
1957	1987	31	25,477	51,779	14.0	68	139
1958	1988	31	23,489	43,868	13.7	62	116
1959	1989	31	29,434	50,428	14.0	79	136
1960	1990	31	29,462	45,980	15.2	86	135
1961	1991	31	33,097	47,981	14.6	93	135
1962	1992	31	34,377	47,039	13.2	87	120
1963	1993	31	41,058	54,562	11.7	92	123
1964	1994	31	44,526	57,095	11.6	99	127
1965	1995	31	46,353	57,656	11.3	101	126
1966	1996	31	52,049	62,490	11.0	110	132
1967	1997	31	57,522	66,242	10.4	114	132
1968	1998	31	67,342	73,804	9.4	122	133
1969	1999	31	74,254	77,629	8.9	128	133
1970	2000	31	69,934	69,934	9.1	122	122
1971	2001	31	58,700	56,232	8.9	100	96
1972	2002	31	43,036	39,804	7.5	62	58

914W