For the new Pension Savings Credit, to be introduced in October, capital exceeding 6,000 "will be assumed to produce an income of 1 per week for every 500 or part of 500 over the 6000"
I intend to write to DWP for details of this remarkable investment, but I was curious about the rate of return.
If the income were paid annually (i.e. every 52.2 weeks) then the return would be 10.44%. However, weekly payment means a greater return - is this a "future value" calculation?
If, instead of squandering this 1 a week, you re-invested it in the same place, what would be the rate of return?
I think not. The assumption of how much income "capital up to £6000" produces will have been stated elsewhere. The quoted statement only relates to the excess, so interpreting that as a marginal 0.2%pw is quite correct, if you disregard the complication of "or part of", whereby £6001 is assumed to earn as much as £6500.
Yes it does. The statement may have been misquoted, but as quoted it says that each £500 over £6000 is assumed to earn £1pw, and it says nothing about how much the initial £6000 is assumed to earn.
The statement (with original quote marks) was " capital exceeding £6,000 "will be assumed to produce an income of £1 per week for every £500 or part of £500 over the £6000"
To me that says
if total capital >= £6k
then income produced from capital = ((integer ((Total capital - £6k)/500))+1)*52/(total capital)
else nil
please pardon my amateur maths/logic and i'm sure i've gone quite wrong with the brackets. If I have, here are a few more to put in where necessary. ()()))((())).
Do you have inside information about what the statement was originally supposed to mean, which is helping you to interpret it in the way intended? I can see how it *could* be interpreted both in the way you understood it and the way I did. It is therefore ambiguous, or at least not phrased in the optimal way to minimise the likelihood of being misinterpreted.
[by the way, your the division by (total capital) at the end doesn't make sense, since you claim to be calculating the income, which should be an annual pound sum, not an annual rate of return]
The original statement wasn't mis-quoted. This is social security benefits we're talking about...( the new savings credit to retirement pension)....the first 6000 of your capital is ignored, additional capital will reduce the credit, on the assumption that every 500 will produce an income of 1 a week.
My questions were :
1) what is the annual equivalent of the weekly return
2) If the 1 a week were re-invested, what would be the annual return.
In that context, you have to ignore the first 6000, or the return would be variable.
Presumably since benefits are paid weekly, then the credit would be added weekly, but reduced by the assumed weekly income, so the annual equivalent is of limited relevance, since the income produced by the capital would be assumed to get spent each week, not added to the capital.
Chances are it would simply be N times the weekly income, but what N would be is anyone's guess. It could either be 52 or 53 (depending on how many weeks any given year would be deemed to contain, income from a year-straddling week being allocated wholly to the old year or the new), or it could be 365/7 or 366/7 (depending on whether the year in question contains a leap day) or it could be 365.25/7 or maybe even 365.2425/7.
That's a tricky one. Normally, a return of £1 per week per £500, i.e.
0.2%pw would be equivalent to between 10.95% and 11.17% depending on which N you use.
On the other hand, if you apply the same income assumption rules, then if your capital is between £6001 and £6448, it will "generate" income of £1 each week even if you reinvest it each week, and you'd end up with £6500, a return of £52 on anywhere between £1 and £448, being between 11.6% and 5200%. But if you started with, say, £6474, this would be assumed to earn £1 for each of the first 26 weeks and £2 for each of the other 26 weeks. That'd be roughly equivalent to a return of £78 on £474, nearly 16.5%.
I think you just have to accept that the return *is* variable, if only because of the obviously crazy 5200%.
Having now read the gov web site, I can see that whilst my original assertion wasnt quite right, in essence it was in so far as the whilst the calculation ignores the first £6000, in coming to the conclusion that each £500 over the £6k provides £1 per week then :-
They are taking the assumed 'income' from the first £6k into account and assuming income from £6.5k
AND/OR they are assuming that you are cutting into capital, just like an annuity would.
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.