Anybody good at maths

Horsesandzebras · 2022-12-02T12:23:20+00:00

Help! I'm being offered a lump sum payout for a private income protection policy It will last until my 67th Birthday so 27 more years I currently get 20k per annum net in the bank It goes up 4% each year How do you calculate the fair lump sum payment? 🤔 Can you show me how to do the calculations or if you're a specialist in this area give me some good advice? 👍

Ciri · 02/12/2022 12:29

It’s not about the basic maths.

you need to ignore the increase since you’ll be getting interest. In addition there will be a discount applied for “accelerated receipt”. This is because you’ll have say £300k sitting in the bank immediately earning interest rather than £20k ish per year.

Surely they have given you an offer

MadeForThis · 02/12/2022 12:41

What have they offered?

Original poster

Horsesandzebras · 02/12/2022 12:42

£201k offered in full and final settlement

OP posts:

Ciri · 02/12/2022 12:44

Do you need more than you’re currently getting each year?

snowlaser · 02/12/2022 12:44

I disagree a bit with the first answer.

I think the interest that you would get from the bank effectively is the reason WHY there is what they describe as a "discount for accelerated receipt". In other words, by having the money early you get to invest it with interest, so it's fair to give you less now (as by the end of the 27 years you would have a similar amount, including the interest).

I therefore think that the 4%pa increase you are getting is something to factor in ON TOP of that as it makes it a lot more valuable than just a fixed £20k a year. In 27 years time it would have gone up to £58k with those increases!

Assuming 4% pa increases and interest in the bank at 3% pa I get a value now of something like £615k.

This is arrived at using some quite complicated maths, but the "common sense" check on it would be

Total payments you will get will be 20k x 27 = 540k
However, there are 4%pa increases! Actually you will get between 20k and 58k, so 39k on average. 39k x 27 = £1,053k
But also you can invest it for interest over all 27 years whereas if it had been given gradually you would only have had an average of 13.5 years, so the fair value now would be lower. Assuming 3% interest for 13.5 extra years that reduces the value to more like 600-700k

titchy · 02/12/2022 12:45

Wow £200k seems paltry to me! But I know nothing of this so nothing constructive to add.

snowlaser · 02/12/2022 12:47

Horsesandzebras · 02/12/2022 12:42

£201k offered in full and final settlement

To make that break even you'd have to earn about 10% pa interest on the money over the next 27 years.

I can't advise you what to do, because there may be circumstances about your life and health and other income and tax situation that only a financial adviser could advise you properly about.

But it looks like a low offer to me.

Ciri · 02/12/2022 12:50

The four percent is effectively taken out since it increases by four percent but you could get that in interest.

the accelerated receipt discount is because you don’t have £20k each year earning 4% and then dropping down to zero as it is used, you have £300k earning 4% right from day 1. It’s much more.

but personally I’d keep the annual payments unless they increase the offer.

snowlaser · 02/12/2022 12:50

Horsesandzebras · 02/12/2022 12:42

£201k offered in full and final settlement

Indeed even without doing any complex maths you can clearly see that this represents about 10 years worth of the 20k pa WITHOUT EVEN ALLOWING FOR THE 4%pa increases, when you'd be giving up 27 years worth....

Original poster

Horsesandzebras · 02/12/2022 12:53

No. I'd just prefer to not be having regular medical reviews for something that is deemed permanent unless science finds a cure. I feel like a burden and I'd rather not. A lump sum would free me from feeling like I' getting hand outs every month. It's primarily a psychological benefit why I'd consider a lump sum. But I'm not in a position, due to ill health, to be doing anything hands on with it. I'd just need a regular income.

OP posts:

CountdownCat · 02/12/2022 12:58

If the regular income is what you need and value I'd stick with the current situation if I was in your position

snowlaser · 02/12/2022 13:02

Horsesandzebras · 02/12/2022 12:53

No. I'd just prefer to not be having regular medical reviews for something that is deemed permanent unless science finds a cure. I feel like a burden and I'd rather not. A lump sum would free me from feeling like I' getting hand outs every month. It's primarily a psychological benefit why I'd consider a lump sum. But I'm not in a position, due to ill health, to be doing anything hands on with it. I'd just need a regular income.

I'm sorry to hear that you feel like that. I can imagine that the medical reviews are not very nice.

You aren't a burden at all, even though you feel like it - the only reason we have these income protection schemes at all is for exactly your situation. Just like any kind of insurance - fire insurance etc - they are exactly there to pay the people that most need them, like you do.

If this is something you really depend upon for your income you need to be very careful not to short-change yourself by taking 201k now and then really struggling for money as you get into your 50s and 60s.

SkylightSkylight · 02/12/2022 13:02

@Horsesandzebras

just £ for £ you'll be way worse off to take that lump sum!

however, it depends on a lot of factors.

can you still work, earn an income?

do you have, can you get a mortgage?

if it was me, I'd get the monthly payments, because it's more money long term and I already have a mortgage that I can pay off before retirement.

I have an Aunt & Uncle in their 60's who would like to retire but are not yet due a pension & even when they are, will struggle because they'll still need to pay rent. It's tough.

Original poster

Horsesandzebras · 02/12/2022 13:18

SkylightSkylight · 02/12/2022 13:02

@Horsesandzebras

just £ for £ you'll be way worse off to take that lump sum!

however, it depends on a lot of factors.

can you still work, earn an income?

do you have, can you get a mortgage?

if it was me, I'd get the monthly payments, because it's more money long term and I already have a mortgage that I can pay off before retirement.

I have an Aunt & Uncle in their 60's who would like to retire but are not yet due a pension & even when they are, will struggle because they'll still need to pay rent. It's tough.

I can't undertake any real gainful work, part time or otherwise. My health is so poor.

I have a mortgage, but can pay it off.

I will be comfortable on the monthly payments with no mortgage. I can't go out much so my spending is relatively low.

There is other benefits that need to be considered by taking a lump sum. I'd be forfeiting 27 years of company pension contributions at 6%, private health insurance and company shares.

I know it makes my brain hurt. I don't know about yours!

Maybe its best to stay as is and hope for a cure.

OP posts:

MadeForThis · 02/12/2022 13:43

I would stay with monthly payments.

Original poster

Horsesandzebras · 02/12/2022 17:56

snowlaser · 02/12/2022 12:44

I disagree a bit with the first answer.

I think the interest that you would get from the bank effectively is the reason WHY there is what they describe as a "discount for accelerated receipt". In other words, by having the money early you get to invest it with interest, so it's fair to give you less now (as by the end of the 27 years you would have a similar amount, including the interest).

I therefore think that the 4%pa increase you are getting is something to factor in ON TOP of that as it makes it a lot more valuable than just a fixed £20k a year. In 27 years time it would have gone up to £58k with those increases!

Assuming 4% pa increases and interest in the bank at 3% pa I get a value now of something like £615k.

This is arrived at using some quite complicated maths, but the "common sense" check on it would be

Total payments you will get will be 20k x 27 = 540k
However, there are 4%pa increases! Actually you will get between 20k and 58k, so 39k on average. 39k x 27 = £1,053k
But also you can invest it for interest over all 27 years whereas if it had been given gradually you would only have had an average of 13.5 years, so the fair value now would be lower. Assuming 3% interest for 13.5 extra years that reduces the value to more like 600-700k

Thank you for taking the time to do this for me. Are you an actuary?

OP posts:

BarbaraofSeville · 03/12/2022 08:12

Agree that you don't need to do any 'complicated maths' to see that £201k is very low.

It's 10 years worth of money without the 4% increase.

Just by adding up £20k + (£20k x 1.04) + (£20k x 1.04 x 1.04)...... <sets up spreadsheet> you exceed £201k after around 9 years, OK there's interest to consider and CBA working that out, but even including interest, your break even point is around 10 years.

If it ran to 20 years <goes back to spreadsheet> in year 20, your annual payment will be over £40k and you would have received nearly £600k in total.

£400k is quite a lot to give up to avoid the need to have 'regular' medical reviews, which are only likely to be annually? or even less?

And I've just seen that going with the ongoing payments option means that you will also get pension contributions, private health insurance and shares on top.

£201k in full and final settlement isn't even a serious offer, keeping things as they are probably adds up to not far off £1M in total.