UK pension changes in 2015: some mathematical considerations

Abstract

This paper presents a mathematical treatment of some of the changes made to pension arrangements by the UK government in 2015. A mathematical model of a pension fund is developed based on three variables: life expectancy of pensioner, interest rates on investments and rates of inflation. The model enables a prospective pensioner to decide, at point of retirement and on the basis of predicted income streams, whether to opt for, (i) a (life) annuity or a draw down scheme, (ii) an inflation proofed (index linked) income or a fixed income and (iii) an immediate income or a deferred income. Numerical examples are provided to add clarity to the financial options available at retirement. On the basis of the numerical examples given, the paper concludes by urging caution on the part of the pensioner before taking an annuity rather than a draw down scheme, an index linked rather than a fixed income and a deferred rather than an immediate pension income. UK pension changes in 2015: some mathematical considerations.