Question 2 : Accounting Related Task

1. Debbie is a 30-year old self-employed accountant. Thus far she has not started to make any savings for retirement. Briefly provide two behavioural factors that may explain Debbie’s failure to start a pension scheme. (6 marks)

1. Debbie’s friend Nick works for an accountancy firm and has been automatically enrolled in the National Employment Savings Trust (NEST), his workplace pension scheme. Talking to Nick makes Debbie think about starting a pension. It transpires that Debbie is eligible to join NEST because it accepts self-employed workers as well as employees; but she is also considering a self-invested personal pension (SIPP). Key differences between the two schemes are summarised in Table 1.

Assume that inflation will average 2% a year. Debbie and Nick are both basic-rate taxpayers, earning £2,900 per month before deductions. They each contribute 4% of these earnings to their pension schemes, and their contribution will be topped up by basic-rate tax relief. Nick is covered by the standard automatic enrolment rules that apply to workplace pension schemes. Work through the following steps.

1. Calculate the total monthly contributions that will go first into Debbie’s pension pot and second into Nick’s NEST pension pot, including the tax relief and any other amounts, but before deducting any charges (give your answer to the nearest penny).

1. Calculate the real value (i.e. in today’s prices), net of charges, of Debbie’s retirement fund after 38 years if she chooses the SIPP and achieves a nominal investment return of 7% a year before charges, credited monthly.

1. Calculate Nick’s total monthly contribution to NEST after deducting the up-front charge (give your answer to the nearest penny).

1. Calculate the real value (i.e. in today’s prices), net of charges, of Nick’s retirement fund in NEST after 38 years if he achieves a nominal investment return of 5% a year before charges, credited monthly.

Explain the reasoning behind the numbers you calculate. (8 marks)

1. Using your answers to 2b(ii) and 2b(iv), compare the value of Debbie’s and Nick’s pension pots after 38 years and explain the reasons for any difference between the value of these pension pots. What actions could Debbie take to increase her future pension pot? (10 marks)

1. Identify and explain two risks that may mean Debbie and Nick end up not having enough income to live comfortably in retirement, despite saving through their pension schemes. (6 marks)

Table 1 SIPP and NEST compared