Vera has been in a defined-contribution pension scheme since she was 30 and will retire in one year’s time at age 65. Her salary is currently £44,000. Throughout her enrolment in the scheme, she has paid in 5% 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 £4500 per year.
1.1 If Vera uses her whole pension to buy an annuity immediately on retirement, how much income will she receive in her first year?
1.2 Briefly explain why this annuity income will rise if she delays retirement (and annuity purchase) for another two years, to age 67.
1.3 If, instead, Vera retires at 65 and puts the whole of her pension into a drawdown scheme [which fixes annual income at 33% of her pre-retirement gross income], what drawdown ‘income’ will she receive in the first year of retirement?
1.4 Why does the drawdown option become less attractive if Vera 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 Vera’s pension, when she reaches retirement age, if her pension scheme had been defined-benefit instead of defined-contribution?
Martin and Emma are a couple with a one-year-old child, Lola. Emma has been on maternity leave and is due to go back to work full time as a manager of a local primary school. Martin is employed full time as a call centre worker. Both parents are below the state pension age and live in Bristol. They are looking into arranging Lola’s childcare once Emma starts work again.
Lola can attend a local nursery near their Montpelier flat in Bristol from 8am–12pm (midday) from Monday to Friday, at a cost of £150 per week. She will be looked after at home for the rest of the day. Emma also receives child benefit for Lola, equating to £1094.60 per year.
2.1 Martin’s employer at the call centre will allow him to go part-time (working mornings shifts only) for the next three years, halving his hours from 40 to 20 per week, and being paid for 52 weeks per year. Under this arrangement his weekly gross pay will also halve to £218.
Martin says that if he takes this option, his financial sacrifice might be more than just the £218 per week in lost income over this three-year period. Identify two factors that might cause Martin to have a much larger financial loss over his lifetime if he takes this option of going part-time.
2.2 Emma earns a gross annual income of £26,100 per year, working 40 hours per week for 52 weeks per year. 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 Emma taking the part-time (50%) working option, rather than Martin.
With respect to gross earnings, briefly explain the short-term opportunity cost of Emma going part-time.
2.3 Martin decides to take the part-time option, which will reduce his net annual income to £11,115.68. Emma continues to receive her full-time earnings, which equate to £21,388 after tax and National Insurance contributions. The couple now want to work out their tax credits under this arrangement.
Using the Tax credit calculator, calculate the couple’s total tax credit entitlement and their net household income after childcare costs.
2.4 The household is now considering whether Martin should give up paid work entirely, so he can look after Lola full-time (i.e. with no weekly childcare costs) until she is ready to start school.
Using the Tax credit calculator, work out the net household income under this option and compare the short-term financial situation of the household with the previous option (i.e. Martin going part-time; see your answer to Question 2.3).
Read the extract (Extract 1), which is about an experiment with universal basic income in Finland between 2017 to 2018. Then answer the following three questions.
3.1 Define what is meant by a universal basic income and explain whether or not the Finnish trial strictly speaking trialled a universal basic income.
3.2 Outline two advantages and two disadvantages of a universal basic income over means tested benefits 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.
Extract 1: Finland’s ‘free cash’ experiment fails to boost employment
Europe’s first national government-backed experiment in giving citizens free cash failed to encourage its participants to work more as organisers had hoped – but it did improve their wellbeing.
Under Finland’s two-year basic income trial, which ended a month ago, a random sample of 2,000 unemployed people aged 25 to 58 were paid a monthly €560 (£475), with no requirement to seek or accept employment. Any recipients who took a job continued to receive the same amount
But the government had hoped it would shed light on major policy issues such as whether an unconditional payment might reduce anxiety among recipients, and allow authorities to simplify a complex social security system struggling to cope with a fast-moving and insecure labour market.
Surveying initial results from the trial, Finland’s minister of health and social affairs, Pirkko Mattila, said that based on the first year’s data the impact of the monthly cheque on employment ‘seems to have been minor’.
But according to the scheme’s chief researcher, Olli Kangas, participants were happier and healthier than the control group. ‘The basic income recipients of the test group reported better wellbeing in every way (than) the comparison group,’ he said.
Economist Ohto Kanniainen said the low impact on employment was not a surprise, given that many jobless people in Finland have few skills or struggle with difficult life situations or health concerns. ‘With unemployed people, financial incentives don’t work quite the way some people would expect them to,’ he said.
But people who took part in the trial were generally positive. Tuomas Muraja, a 45-year-old journalist and author, said the basic income had allowed him to concentrate on writing instead of form-filling or attending jobseekers’ courses.
He said the end of the two-year trial, during which he published two books, had made it difficult again for him to accept commissions, because ‘I … can earn only 300 euros per month without losing any benefits’.
Sini Marttinen, 36, had been unemployed for nearly a year before ‘winning the lottery’, as she described the trial. Her basic income gave her enough confidence to open a restaurant with two friends. ‘I think the effect was a lot psychological,’ the former IT consultant told Reuters.
Her income rose only by €50 a month compared with the jobless benefit she had been receiving, ‘but in an instant, you lose the bureaucracy, the reporting’, Marttinen said.
The idea of UBI – appealing both to the left, which hopes it can cut poverty and inequality, and to the right, which sees it as a possible route to a leaner, less bureaucratic welfare system – has gained widespread traction amid predictions that automation could threaten up to a third of jobs.
Part B (45% of the mark for this assignment)
Discuss the following statement:
Improving one’s own financial capability earlier on in the life course, especially for women, is the most important factor contributing to achieving financial well-being in later life.
Part C (10% of the mark for this assignment)
Select one skill (relating to studying, employability or financial capability) where you feel your ability and/or confidence has improved during your study of DB125. With reference to this skill, explain:
• a. the main aspect of your studies that has contributed to the improvement
• b. why this skill is important to the achievement of your goals in the future.