Question 1
Janet has been in a defined-contribution pension scheme since she was 40 and will retire in one year’s time at age 66. Her salary is currently £62,000. Throughout her enrolment in the scheme, she has paid in 4% 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 £9000 per year.
1.1 If Janet puts her whole pension fund into a drawdown scheme (with annual income at 33% of her pre-retirement gross income), how much income will she receive in her first year?
1.2 If, instead, Janet retires by opting to use her whole pension fund to buy an annuity, how much income would she have available to spend in her first year of retirement?
1.3 Briefly explain why this annuity income will rise if she delays retirement (and annuity purchase) for another two years, to age 68.
1.4 Why does the drawdown option become less attractive if Janet expects to stay in good health, and live a long time into retirement?
1.5 Comment on the certainty or otherwise over the size of Janet’s pension, when she reaches retirement age, if her pension scheme had been defined-benefit instead of defined-contribution?
Question 2
Ada and Steve are a couple with a one-year-old child, Abela. Ada has been on maternity leave and is due to go back to work full time as an antique book publisher. Steve is employed full time as a gardener. Both parents are below the state pension age and live in the Eden district, in Cumbria. They are looking into arranging Abela’s childcare once Ada starts work again.
Abela can attend a local nursery full time nearby from Monday to Friday, at a cost of £225 per week. Ada also receives child benefit for Abela, equating to £1094.60 per year.
2.1 Steve has the option to work flexibly by halving his hours from 40 to 20 for the next three years. Under this arrangement his monthly gross pay will also halve to £760.
Steve says that if he takes this option, his financial sacrifice might be more than just the £760 per month in lost income over this three-year period. Identify two factors that might cause Steve to have a much larger financial loss over his lifetime if he takes this option of going part-time.
2.2 Ada earns a gross annual income of £20,400 per year, working 40 hours per week. Her employer introduces changes to working practices that will also allow her to reduce her hours and her pay by up to 50%. The household is discussing the short-term opportunity costs of Ada taking the part-time (50%) working option, rather than Steve.
With respect to gross earnings, briefly explain the short-term opportunity cost of Ada going part-time as opposed to Steve.
2.3 If Steve decides to take the part-time option, this would reduce his net annual income to £9,120. Ada would continue to receive her full-time earnings, which equate to £17,512 per year after tax and National Insurance contributions. Abela would then only attend nursery on a part-time basis at a cost of £113 per week.
Using the Tax credit calculator (which I have provided) where appropriate, calculate the couple’s total tax credit entitlement and their net household income after childcare costs.
2.4 The household is also considering a second option, whether Steve should stay in full-time employment, with Abela going to nursery full time.
Using the Tax credit calculator where appropriate, work out their tax credit entitlements and net household income after childcare under this option, and compare the short-term financial situation of the household with the previous option (i.e. Steve going part time; see your answer to Question 2.3).
Question 3
Read the extract (Extract 1), which is about the implementation of Spain’s guaranteed minimum income in the summer of 2020. Then answer the following three questions.
3.1 Define what is meant by a universal basic income and explain why the Spanish minimum income described in Extract 1 is not a universal basic income.
3.2 Outline two advantages and one disadvantage of a truly universal basic income compared to the Spanish system, for supporting financial well-being.
3.3 Outline what is meant by universal basic services and set out how this differs from a universal basic income.
