The Gross Replacement Rate ( Grr )

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The Gross Replacement Rate (GRR) The Replacement Rate is a way of investigating whether pre- retirement savings will be adequate to provide for retirement. The GRR expresses one’s projected income (pension) at retirement as a percentage of his final salary before income tax and pension deductions. The GRR is obtained using the following formula: GRR= (PoAFR+PoAA)/PrE (1) PoAFR = Post-retirement Annual Flat rate benefit PoAA = Post-retirement annual Annuity income PrE = Pre-retirement earning It is difficult to establish a fixed benchmark replacement rates for all individuals in a society as its adequacy depends on individual earnings and needs after retirement. In this report we will consider the…show more content…
Using the proposed model under all the assumptions and equation (1) sated above, the Replacement Rates under the 3 scenarios for each employee is obtained and shown in table 1 below. TABLE 1: The Gross Replacement Ratio for different employees under the three selected scenarios Employee Projected salary at Retirement age £ Pension Fund value at Retirement £ Annual Annuity £ Replacement ratio Pension commission Benchmark Replacement rates Baseline scenario A 212,815 583,30.91 21,202.11 39% 67% B 148,970 457885.20 16,643.21 53% 70% C 78,032 288,435.94 7576.23 90% 80% Scenario 1 A 242,505 502,832.67 18,276.96 33% 67% B 169,756 427,871.17 15,552.26 46% 70% C 88,920 216,364.73 7,864.43 79% 80% Scenario 2 A 121,254 417,170.9 15,163.33 64% 70% B 84,878 269,605.27 9799,61 85% 80% C 44,460 99,106.43 3602,32 148% 80% Analysis: Table 1 above shows that under the basic scenario, the low income earner has the lowest pension fund value at retirement and will receive a low annuity income of £7576.23 compared to the middle and high income earners. However when determining the adequacy of their respective retirement incomes, the state single tier pension fund is added to each individual annuity quote before a replacement ratio is obtained. A low income earner has a replacement rate of 90%, largely above the minimum target set by the government and the Pension Commission Benchmark of 45% and 80% respectively. An average income earner has a

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