ECONOMICS AND FINANCE

Economics and Finance

Economics and Finance

Scenario 1

Bill Murray (the student) has been recently offered two jobs in Accounting. The first one has the option of joining his employer's pension scheme (defined contribution scheme) to which both Bill and his employer will contribute 5% of his salary (total contribution of 10%). The other is a job is a Government agency and has a defined benefit scheme based on 60ths. Bill will need to contribute 6% of his salary. He also wants to know how much he will need as a pension pot to secure an annual retirement income of £20,000 if he were to retire at the age of 65 Bill wants to know the importance of contributing to a pension and needs some advice as to how each scheme works and which one is better. Bill is also interested in being aware of any changes proposed by the Government on Pension and why.

Scenario Analysis

Assumptions

Discount rate = 5%

Bill Murray age = 25years

Basic Salary (Annual) = £48000 and per month = £4000

Pension scheme

Employer contribution (48000 x 5%) = 2400

Bill Contribution = 2400

Total contribution = 4800

Bill will retire at the age of 65, so this amount will accumulate for 45 years. Therefore, after 45 years Bill will get:

Future Value = PMT [((1 + i)n-1)/i]

Future value of pension plan = £766,560

Bill will need as a pension pot to secure an annual retirement income of £20,000 if he were to retire at the age of 65.

Perpetuity = PMT/rate

Pension pot required = £400000

Annual retirement income = 766,560 x 5% = £38,328

Benefit Scheme

Bill contribution (48000 x .06) = 2880

His total contribution up to retirement = £612,701

Annual retirement income = 612,701 x 5% = £30,635.07

Decision and justification

Base on above analysis, Bill should go for pension plan. Bill will need 400000 to secure an annual retirement income of £20,000 if he were to retire at the age of 65. Therefore, he would have at least that much amount to meet his retirement needs. Pension plan will accumulate £766,560 pension pot that is more than his requirement and this pension pot can generate £38,328 annual retirement income for him which is more than his requirement £20000. On the other hand, Government benefit scheme will provide him with a benefit of £20000 at the cost of £612,701 that is not a good deal. With £612,701, Bill can generate £30,635 rather £20000. Therefore, on cost and benefit analysis, Bill should avail option of pension plan.

Scenario 2

Anne Murray is planning to buy a flat costing £225,000 in Oxford for renting purposes. She has a savings of £80,000 which she will use as a deposit, but will need to borrow the remaining amount for the purchase. She requests you to find a suitable buy-to-let mortgage for her (real product) and advise whether the buying of the flat is a worthwhile investment. Local agents have estimated that the monthly rent may be £1,800 per month. Your answer needs to be supported by some valid computations and estimations in renting the ...